2Q24 results are in line with our expectations

Changjiang Electric Power announced 2Q24 results: revenue of 19.2 billion yuan, +23% year over year, and net profit of 7.4 billion yuan to mother, +40% year over year. The performance is in line with our expectations. 1H24's revenue was 34.8 billion yuan, +12% year over year, and net profit to mother was 11.4 billion yuan, +28% year over year.

Incoming water improved during the flood season, and 2Q24 power generation was +42.5% year-on-year, driving a reversal in performance. 1H24 incoming water from Wudongde Reservoir was 11.4% higher year on year, while incoming water from Three Gorges Reservoir was 19.7% higher year over year. The 2Q24 Wudongde/Baihetan power station generated +33%/+46% year-on-year, and the Xiluodu/Xiangjiaba power station generated +69%/+57% year-on-year. The growth rate increased significantly from month to month. In terms of electricity prices, according to the company's public results meeting, electricity prices increased year-on-year in 2Q24 because outbound electricity prices remained high after negotiations. However, due to the high share of overseas business, revenue growth in 2Q24 was slower than electricity. In terms of cost, 2Q24's operating costs were +6.9% year-on-year, mainly due to increased depreciation expenses; gross margin reached 56%, +6ppt year over year.

With the acquisition of a new wind power project in Peru, international business is steadily expanding. The company 1H24 consolidated the control of Peru's Luther Company, completed the merger and acquisition of Peru's Sapphire wind power project, formed a pattern of complementary water and landscape, source network load storage with the Santa Teresa I hydropower plant and Arrow photovoltaic project, and built a distribution, distribution and sales industry chain.

1H24's investment income was +8.8% year-on-year, and the revenue contribution of participating hydropower companies increased. Among 1H24 investment income, long-term equity investment income was +21%, accounting for relatively high investment income contributions of SDIC Electric Power and Hubei Energy, respectively, +13%/+63% year-on-year due to improvements in incoming water in Sichuan and Hubei.

2Q24 financial expenses were -11% year-on-year, reducing pressure; free cash flow was abundant. 1H24's operating cash flow was -8% year-on-year to 23 billion yuan, but capital expenditure was low, and free cash flow reached 19.5 billion yuan, which is sufficient compared to the industry's cash flow.

Development trends

The savings business has made positive progress, starting a second phase of growth. 1H24 fully took over the storage operation and maintenance of Changlong Mountain in Zhejiang, Zhejiang Tiantai began production preparations, Chongqing Fengjie Rapeseed Dam completed the investment decision, and Guanghanping, Youxian County, Hunan completed the voting. In terms of photovoltaics, it has taken over the operation and maintenance of 4 photovoltaic stations at the Jinxia base, and has taken over a total of 21 photovoltaic stations, with an installed capacity of 2.65 million kilowatts. The company promises a dividend of no less than 70% of the net profit for the year 2024-2025. We expect the 2024E/2025E dividend rate to be about 3.5% to 3.7%. Against the backdrop of declining US bond interest rates and falling domestic risk-free interest rates, the company's dividend value is prominent.

Profit forecasting and valuation

Keep profit forecasts unchanged. Due to the upward trend in hydropower stock valuation, we raised our target price by 21.2% to 31.5 yuan, which is 6% higher than the current share price increase. Maintaining the “outperforming industry” rating, the current stock price is trading at 2024E/2025E 21.4x/20.6x P/E, and the target price corresponds to 2024E/2025E 22.6x/21.8xP/E.

risks

The incoming water for the third quarter fell short of expectations.