Social security equity investment accelerates the development of clean energy and enhances capital market stability. SDIC Electric Power is a comprehensive power producer under the China Development Investment Group and shares hydropower development rights in the Yalong River Basin with Sichuan Investment Energy (52% shareholding). As of 24Q3, the company was operating 42.54 million kilowatts of installed capacity, of which 21.3/13.2/8.03 million kilowatts of water/fire/scenery were respectively. The company achieved net profit of 6.7/6.6 billion yuan to mother on 2023/24Q1-3, and YOY 64%/9%. The company signed a strategic cooperation agreement with the Social Security Fund in September '24 to raise 7 billion yuan from social security with 12.72 yuan/share, corresponding to issuing 0.55 billion shares, accounting for 7.4% of the total share capital before issuance.

The integrated water and landscape layout of the Yalong River is being accelerated. As of 24Q3, the company's hydropower sector/Yalong River feed-in electricity volume was 79.9/71.5 billion degrees, YOY 15.6%/16.1%; feed-in tariffs were 0.292/0.303 yuan/kilowatt hour, YOY -2.2%/-1.9%. The decline in electricity prices was mainly due to changes in electricity structure during the flood season and the impact of spot prices in Gansu.

We believe that as market-based transactions advance, the rise in prices due to tight supply and demand is expected to slow the decline in hydropower revenue during the dry season, thereby enhancing performance stability. According to Xinhua News Agency, on October 25, the Lianghekou Reservoir was first stored at a normal water storage level, which is of great significance in enhancing Sichuan's power supply capacity this winter and spring, and enhancing the comprehensive benefits of electricity generation and flood control at the Yalong River Cascade Power Station. According to the National Energy Administration, the Yalong River Scenic Area is planned to have an installed capacity of 78 million kilowatts, of which 39 million kilowatts of hydropower+storage and 39 million kilowatts of scenery. Currently, construction of the Yagen Level 1, Kara, Mengdigou hydropower stations, and the two estuaries mixed storage projects is progressing steadily. We estimate the net profit of the hydropower sector to mother in 24-26 of 5.2/5.5/5.8 billion yuan.

Thermal power focuses on the construction of clean and efficient large-scale units. The company's million-kilowatt units account for 64% of the thermal power supply, and the location advantage is obvious; since Qinzhou Phase III units 1 and 2 were put into operation at 23.12 and 24.4, construction of Zhoushan Gas Engine Power Generation and Qinzhou Units 3 and 4 began, and the Meizhou Bay Phase III thermal power project was approved. Capacity electricity prices support profit stability in the thermal power sector, and the net electricity profit of the 24H1/2023 thermal power sector is estimated at 0.03/0.04 yuan.

New energy targets are strong, and we are blessed with resources. According to the company's “14th Five-Year Plan”, the installed capacity of new energy will reach 17 million kilowatts in 2025, and there is still an installed target of nearly 10 million kilowatts to be achieved. We believe that in developing clean energy, the company can effectively utilize the advantages of integrated water and landscape regulation of the Yalong River and the ability to regulate existing thermal power assets, and the profitability and stability of the project are guaranteed. We estimate that the performance of the new energy sector contributed 1.1/1.4/1.7 billion yuan in 24-26.

Profit forecasting and valuation. According to the company's shareholder return plan, the profit distributed in cash every year 2024-26 is, in principle, not less than 55% of the profit that can be distributed in the consolidated statement achieved in the current year. The company is expected to achieve net profit of 7.5/8.5/9.5 billion yuan in 24-26, and the corresponding EPS is 1.00/1.14/1.28 yuan (if social security increases are taken into account, the corresponding EPS is 0.93/1.06/1.19 yuan, with a 24-year dividend rate of 3.2%). Refer to the comparable company's 25-year 18-fold PE valuation, consider subsequent fixed increases and dilution, and give the company 15-17 times PE in 25 years, corresponding to a reasonable value range of 17.10-19.38 yuan. The first coverage is superior to the market rating.

Risk warning. Risk of incoming water exhaustion; risk of feed-in tariff fluctuations; risk of coal price; risk of consumption of new energy sources.