The company is the only platform for hydropower integration for Huaneng Group. The company's predecessor, the Yunnan Xiaowan Hydropower Project Preparation Office, was established in 1999. Since its establishment, the company has focused on hydropower business, developing hydropower plants upstream from the lower reaches of the Lancang River. In 2021, the company's strategy was adjusted to place equal emphasis on hydropower and new energy sources. The actual controller of the company is the State Council's State-owned Assets Administration Commission, and the controlling shareholder is China Huaneng Group Co., Ltd., an important state-owned enterprise. In July 2017, Huaneng Group positioned the company as “the only platform for the final integration of Huaneng Group's hydropower business”, responsible for the development of hydropower and new energy resources in the Lancang River. By the end of 2023, the company had put into production an installed capacity of 27.53 million kilowatts, of which the total installed hydropower capacity was 25.6 million kilowatts.

The commissioning of hydropower brings short-term flexibility, and new energy provides long-term momentum

By the end of 2023, the installed capacity of the hydropower plants developed and put into operation by the company reached 25.6 million kilowatts. Among them, the installed capacity of hydropower plants developed and put into operation in the Lancang River Basin reached 20 million kilowatts, and the installed hydropower capacity to be developed by the Lancang River Basin Company was more than 12 million kilowatts, and the company's hydropower installations still had room for growth of about 50%. Currently, the company continues to develop hydropower plants in the Yunnan and Tibet sections of the upper reaches of the Lancang River. The Toba Hydropower Station began operation in June 2024; the RuMei Hydropower Station was approved in April 2023, and Banda, Bondo, Guxue, and Gushui are also carrying out preliminary work, which is expected to continue to add impetus to the company's installed capacity growth. By the end of 2023, the capital for the Jiaoliangbao Hydropower Project in the Dadu River Basin was close to 64%, and it is expected that production will begin from the end of 2024 to the beginning of 2025.

In 2021, along with changes in the new energy development situation and the adjustment of the national energy strategy, the company's development strategy changed to place equal emphasis on hydropower and new energy. By the end of 2023, the company's new energy installed capacity reached 1.93 million kilowatts. The surrounding area of the Tibet section of the upper reaches of the Lancang River has good solar resources and forms a certain complementarity with hydropower. The company plans to build a double 10 million kilowatt clean energy base where water and light complement each other. Construction began gradually during the “14th Five-Year Plan” period. It is expected that electricity transmission will begin in 2030, and all will be completed in 2035. As of the end of March 2024, the company's main photovoltaic projects totaled 1.59 million kilowatts; the proposed wind power generation project was 7 million kilowatts. The company plans to put into operation an additional 3.09 million kilowatts of new energy projects in 2024. From a long-term perspective, the “469” clean energy development goals proposed by the company — 40 million installed capacity by 2025, 60 million installed capacity by 2030, and 90 million by 2035, point out the long-term direction for the development of the company's clean energy business.

Tight electricity supply and demand support the rise in electricity prices, and cost optimization is expected to increase profits. The Lancang River Main Stream Hydropower Station is the main force in the “West Power to East Transmission” of the Yunnan Power Grid. All of the power generation generated by the company's Lanshang Yunnan section of the hydropower station is sent to Guangdong. Most of the electricity is insured, and the profit level is relatively stable. In 2023, the company's market-traded electricity volume was 63.94 billion kilowatt-hours, accounting for 60.2%. In 2022, the Yunnan Provincial Development and Reform Commission issued the “Implementation Plan for the Market-based Reform of Coal-fired Power Generation in Yunnan Province (Trial)”. During the trial period, the annual monthly electricity price weighted average electricity price for hydropower and new energy sources was formed within a range of 10% fluctuating up and down the average annual market price for the previous 3 years. After entering the “14th Five-Year Plan” period, with the deepening of electricity reform and changes in the electricity supply and demand situation, the electricity price traded in the Yunnan electricity market continued to rise. In 2023, the average price of electricity settled by the company increased by 2.96% year-on-year. The seasonal tightness of electricity supply and demand in Yunnan Province is expected to continue to drive up the company's comprehensive electricity prices.

The units of the Nuozhadu and Longkaikou hydropower stations belonging to the company will be depreciated one after another in 2024-2025, which is expected to reduce the pressure on depreciation costs brought about by the commissioning of new power plants. In the past two years, as interest rates and corporate debt ratios declined, the company's financial expense ratio continued to decline. In 2021-2023, it was 16.71%, 13.90%, and 11.64%, respectively. Macro interest rates declined in 2024. As the company's debt-side structure and financing costs continue to be optimized, the company's financial expense ratio is expected to decline further and increase the company's profits.

Profit forecasts and investment advice

Important assumptions: It is expected that Toba and Hardbeam will be put into operation from 2024 to 2025. Assuming that the PV power plant will be put into operation by 3.1, 5, and 2 million kilowatts from 2024 to 2026; assuming that the market-based portion of the power generation of the Lanshang hydroelectric power unit is discounted by 4 points, the comprehensive electricity price price for other hydropower units will rise 2% per year, and the ratio between the benchmark electricity price portion of coal power plants will be implemented in 2024, and the ratio of the market-based electricity price portion to the market-based portion of coal power generation will be 6:4, 25, and 26; considering that the new power plants will incur depreciation costs and nuozha, the depreciation of the Longkaikou Hydropower Station unit expires, Assuming that depreciation expenses of 0.36, 1.19, and 0.74 billion yuan will be added in 2024-2026; assuming stable sales, management, and R&D expenses, the financial expense ratio will decline steadily.

Investment advice: The company is a leading hydropower enterprise and has the right to develop water energy and new energy resources in the main stream of the Lancang River. In the short term, the successive commissioning of the Toba, Jiaoliangbao hydropower plant and photovoltaic projects is expected to bring flexibility to the company's short-term performance; in the long run, the Lansang Hydropower Station is expected to open up room for long-term growth by continuing to develop superimposed integrated landscape and water storage development strategies. The hydropower business brings high-quality cash flow and is expected to continue to support the company's large capital expenses. The company's net profit for 2024/2025/2026 is estimated to be 9.21/9.9/10.78 billion yuan, a year-on-year growth rate of 20.6%/7.5%/8.9%; as of the close of trading on September 6, the company's current stock price corresponding to PE is 21.3/19.8/18.2 times, respectively. Maintain the company's “gain” rating.

Risk warning

Risk of incoming water falling short of expectations; risk of project progress falling short of expectations; risk of falling market electricity prices; risk of changes in industry policies.