China Electric Power is a comprehensive clean energy listing platform under China Power Investment Group. 1H24's net profit to mother was +53% to 2.57 billion yuan, and the TTM dividend ratio was as high as 6.42%. However, as of the close of December 12, the company's PB (MRQ) was only 0.64x, and the current valuation was outstanding. China Electric Power will use 63% of Wuling Electric Power's shares and 64.93% of Changzhou Hydropower's shares (indirectly held by China Power Investment Guangxi Company) as consideration to subscribe for new shares to be distributed by Yuanda Environmental Protection, which is conducive to reducing the balance ratio. At the same time, the higher valuation of A-share hydropower is expected to raise the valuation level of China Electric Power. Maintain “buy-in.”

In Q3, the year-on-year growth of coal-fired electricity was accelerated. The slowdown in the growth rate of new energy electricity in October was mainly due to the fact that the 3Q24 hydropower intake rate decreased year-on-year compared to 2Q24, and coal power output increased during peak summer. The company's 3Q24 coal-fired electricity sales volume was +4.6% year-on-year to 15.7 billion kilowatt-hours, which was higher than 0.4% of 1H24. Due to the Group's injection of about 7.5GW of clean energy into operation in October 2023, the company's wind/photovoltaic sales volume in October 2024 was +39.9%/+12.8% year-on-year, which is a slowdown from 59.4%/90.8% of 1-9M24.

The proposed Red Chip A-share hydropower listing platform is conducive to promoting energy transformation goals, and China Electric Power plans to use 63% of Wuling Electric Power's and 64.93% shares of Changzhou Hydropower as consideration to subscribe for new shares to be distributed by Yuanda Environmental Protection to achieve Red Chip Holdings A shares. Yuanda Environmental's current stock issuance price for China Electric Power was 6.55 yuan (2023 BPS after interest adjustment), which is a 32%-36% premium over the 20/60/120 day average price before the benchmark date. Since the announcement of the trading intention on 9/30, China Electric Power's stock price has accumulated -15.9%, and the market may worry that its shareholding ratio in hydropower assets has been diluted. However, China Electric Power's announcement mentioned that this restructuring will promote the injection of high-quality projects by the China Power Investment Group and accelerate the achievement of the company's strategic goals. We believe that the company's shareholding ratio in hydropower may decline, but the growth in the company's assets/profit scale is expected to accelerate.

Target price of HK$3.92, maintaining “Buy” rating

Considering that 1H24 added 3.3 GW of new energy installed, the progress is slower than the annual forecast of 9 GW, and the share of new energy market-based transactions is constantly increasing. The company lowered 33/9/ 0% of new energy installed capacity, 0/4/5% of wind power prices, and 2/4/4% of photovoltaic electricity prices in 2024-2026, thereby reducing the company's net profit to mother by 2/8/ 14% to 5/5.6/6.2 billion yuan. Based on the forecast of the company's 2025E net profit/thermal power to mother net assets/hydropower net assets of 4.267/13.999/8.749 billion yuan, referring to the company Wind's consistent expectation of 2025E PE/PB/PB to be 6/0.8/2.5x, respectively, considering that the company's 14th Five-Year New Energy Development Goals are larger. The Company's valuation includes new energy expectations, and hydropower profitability and power generation stability are weaker than comparable companies, giving the company 10/0.5/1.2x 2025E PE/PB/PB, the company's target market value is $44.8 billion (HK$48.5 billion) after deducting perpetual debt and equity of 15.319 billion yuan, and the target price is HK$3.92 (previous value: HK$4.51, based on 11/0.55/1.4x 2024EPE/PB/PB) for new energy/thermal power/hydropower, maintaining a “buy” rating.

Risk warning: Fee-in prices/new energy development/incoming water/usage hours fell short of expectations, coal prices exceeded expectations, asset restructuring fell short of expectations (transaction not completed, profit forecast/valuation is not considered for the time being).