3Q24 results are in line with our expectations

Huaneng Hydropower announced 3Q24 results: operating income of 7.54 billion yuan, -1.3% year-on-year, and net profit to mother of 3.06 billion yuan, or -7.4% year-on-year. The results are in line with our expectations. 1-3Q24's revenue was 19.4 billion yuan, +7.1% YoY, and net profit to mother was 7.22 billion yuan, +7% YoY.

Due to the year-on-year change in incoming water from the Lancang River in August 9, hydropower generation was -5.9% year-on-year in 3Q24, and the rise in electricity prices partially made up for the impact of the decline in electricity consumption. According to the company's public results conference, the Lancang River basin changed from a year-on-year abundance of incoming water in July to mild in August/September, and the downstream Xiaowan and Nuozhadu incoming water was about 20% lower than the year-on-year average, and about 10% lower than the average for many years. In 3Q24, the total power generation capacity of the five plants in Lanshang was -13% year-on-year, while Xiaowan/Nuozadu power generation capacity was -6.7%/-7.3%, respectively. Due to the year-on-year increase in the company's 3Q24 market-based electricity prices for hydropower, the comprehensive feed-in tariff for hydropower was +7 percent per degree year on year, partially compensating for the impact of the decline in electricity volume.

3Q24 financial costs were -5.5% year-on-year, resulting in pressure reduction; thanks to 1-3Q24 incoming water restoration, 9M24 operating cash flow was +11.9% year-on-year. Due to 1-3Q24's cumulative hydropower generation +3.8% year-on-year, the company's operating cash flow reached 14.3 billion yuan, laying a good foundation for annual dividends.

The company and Huaneng International jointly funded the construction of the Yuwang Phase II coal power project to explore joint ventures between coal power and new energy sources. The company plans to invest 1.45 billion yuan in the registered capital of Huaneng Yunnan Yuwang Phase II, holding 49% of the shares and 51% of Huaneng International's shares. Yunnan Yuwang Power Plant expands a 2×1 million kilowatt coal power project to solve the shortage of electricity in Yunnan. According to the company's public results meeting, the company actively communicates and negotiates the project's electricity price mechanism to guarantee revenue levels, and will also apply for more new energy construction targets based on the project.

Development trends

Incoming water from the Lancang River in the fourth quarter may have dried up compared to the same period. According to the company's public results meeting, incoming water from the Lancang River in October continued the year-on-year dry trend of incoming water in the third quarter. Among them, the Xiaowan and Nuozadu sections were basically 30% to 40% year-on-year. The company expects that the total decline in October-December may be about 20% year-on-year. The installed capacity of new energy has reached 3GW, and production will be accelerated in the fourth quarter. By the end of the third quarter, the company's new energy installed capacity had reached 3GW, and the 1-3Q24 had put into operation a total of 1.12 million kilowatts of new energy. According to the company's public results conference, the company is expected to continue to increase the production of new energy in the fourth quarter, and can start production on a scale of about 2 GW.

Profit forecasting and valuation

Keep profit forecasts unchanged. Maintain a “outperform the industry” rating and a target price of $10.4. There is 5.7% upside compared to the current stock price. The company's current stock price is trading at 2024E/2025E 19.9x/18xP/E, and the target price corresponds to 2024E/2025E 21x/19x P/E.

risks

Hydropower generation fell short of expectations.