Introduction to this report:

The company's first mid-term dividend highlights the importance attached to shareholder returns, and the relative value of stable dividends is expected to continue to rise in a low interest rate environment.

Key investment points:

Maintain the “Overweight” rating: Maintain the 2024-2026 EPS of 1.43/1.51/1.60 yuan. Considering the company's valuation premium as a hydropower leader with a high dividend ratio, the target price was maintained at 34.32 yuan, and the “increase” rating was maintained.

Incident: The company announced the 2024 mid-term profit distribution plan. It plans to pay a cash dividend of 5.14 billion yuan (corresponding to a cash dividend of 0.21 yuan per share), accounting for about 45.2% of 1H24's net profit to mother.

Daishui has abundant cash flow, and its first mid-term dividend focuses on shareholder returns. The company's interim dividend is the first mid-term dividend since listing. We believe this move continues to show that the company attaches importance to shareholder returns. The company's articles of association clearly promise that the profit distribution for each year from 2021 to 2025 will be cash dividends at no less than 70% of the net profit achieved in that year. We believe that one of the core values of large hydropower is that dividend predictability is high: 1) the order of hydropower generation takes precedence over thermal power, and joint scheduling is expected to further weaken the disturbance of incoming water fluctuations in power generation volume, which is naturally resilient to risks; 2) From 1 to 3Q24, the company's net operating cash flow was 47.6 billion yuan, +31.0% over the same period. Supported by abundant cash flow, short-term fluctuations in incoming water have a low impact on the company's cash dividend capacity (the company has the ability to smooth the dividend amount by adjusting the dividend ratio). We estimated the average outbound flow of the Three Gorges Reservoir from October 1, 2024 to December 14, 2024, at 7037 m3/s, compared to -38.3% over the same period. According to the company's official WeChat account, as of December 14, 2024, the overall energy storage of the company's cascade reservoirs was about 3.2 billion kilowatt-hours higher than the previous year. We expect good water storage conditions to guarantee the company's electricity during the peak winter season.

In an environment of low interest rates, the dividend value is prominent. We believe that the steady increase in the company's dividend amount is invaluable. Against the backdrop of investors demanding a decline in return, the relative value of the company's stable dividend is expected to increase. Investors' “required dividend rate” for a company can be composed of a risk-free interest rate and a requirement for risk compensation. Currently, the risk-free interest rate is still on a downward channel (the 10-year/30-year Treasury bond maturity yield of 1.78%/2.01% as of December 14, 2024, compared to -78.3/-83.7 bp at the beginning of 2024), and in the future, investors' risk compensation requirements are also expected to decline (we believe that the market's expectations for the stability of the company's dividend amount will increase), and investors' “required dividend rate” for the company is still on a downward path.

Risk warning: Incoming water falls short of expectations, electricity prices fall short of expectations, investment returns fall short of expectations, etc.