Key points of investment:

The company released its 2023 annual report and 2024 quarterly report. In 2023, we achieved net profit of 7.638 billion yuan, an increase of 5.58% over the previous year (as stated), which is basically in line with our expectations. The company plans to distribute a dividend of 0.18 yuan/share, with a dividend ratio of about 42.42%. In the first quarter of 2024, we achieved net profit of 1,065 billion yuan, an increase of 8.25% over the previous year (as stated), slightly exceeding our previous expectations.

Incoming water from the Lancang River Basin improved in the second half of 2023, and feed-in electricity declined again in 1Q24 due to spring droughts and water storage tasks. The company's feed-in electricity volume for the whole year was 106.235 billion kilowatts, a year-on-year decrease of 4.05%. Among them, the amount of electricity fed to hydropower was 104.463 billion kilowatts, a year-on-year decrease of 5.21%. This is mainly due to low water storage in early 2023 combined with poor water consumption throughout the year. Specifically, the overall incoming water in the Lancang River Basin showed a trend of low to high levels in the first half of the year. In the first half of the year, power generation decreased by 25.44% year on year. Although power generation increased 27% in the third quarter as incoming water from the Lancang River was high 4-7, due to grid scheduling arrangements, Xiaowan and Nuozadu were transferred to water storage operation, and some incoming water was not completely released, leading to a year-on-year decline in annual power generation and feed-in electricity. In 1Q24, incoming water from the Lancang River basin dried up again. At a low base, it was basically the same year on year. Against the backdrop of a high increase in thermal power and new energy generation, hydropower generation space was squeezed out, causing the company's feed-in electricity volume to drop 7.25% year-on-year to 16.058 billion kilowatts in the first quarter.

The supply and demand pattern is tightening, and rising electricity prices are driving up performance. In 2023, the company's feed-in price was 221.11 yuan/megawatt-hour, of which the feed-in price for hydropower was 218.85 yuan/megawatt-hour, an increase of 4.25% over 209.93 yuan/megawatt-hour in 2022. 1Q24's performance increased 8.25% even though the amount of feed-in electricity was reduced. We believe that in 2023 and 1Q24, when incoming water consumption is less than the same period, the rise in electricity prices due to tightening regional electricity supply and demand is the most important reason for the company's performance to exceed expectations. Yunnan Province is one of the provinces with the highest degree of marketization of hydropower in China. At the end of the 13th Five-Year Plan period, with the continuous migration of energy-intensive industries and the end of a wave of large-scale hydropower development, the electricity supply and demand pattern in Yunnan Province gradually became strained from relaxation. I am optimistic that the company's feed-in tariffs will continue to rise, driving the company's performance to continue to rise.

Financial expenses continued to fall, helping to marginally improve performance. The company's financial expenses for the full year of 2022 were 2,730 million yuan, a year-on-year decrease of 450 million yuan; 1Q24 financial expenses were 682 million yuan, a decrease of 42 million yuan from 1Q23. In 2023, the company actively promoted stock loan replacement, and financing costs were reduced by 60 basis points to 3.07%. In 2023, China's LPR for a period of 5 years or more fell by 10BP, and in 2024, LPR fell by another 25BP. The company is expected to continue to reduce financial expenses and enhance the company's performance.

Construction of the Lancang River upstream power station is accelerating, and new energy sources continue to contribute to the increase in power generation. According to the company's 2024 quarterly report, the Toba hydropower plant has already begun to store water, and we expect the Toba hydropower plant to be put into operation within this year. Currently, the Jiaolangbao and Rumei hydropower stations are under construction, and the development of hydropower stations in the Lancang River basin is expected to continue to accelerate. The company is one of the few hydropower companies in China that still has installed capacity growth. In the long run, the Tibet section in the upper reaches of the Lancang River still has great potential for development, and growth enhances the company's investment value. By the end of 2023, the installed capacity of new energy reached 1.9281 million kilowatts. As the construction of a multi-energy complementary base for water and landscape in the Lancang River Basin accelerates, with abundant hydropower resources, the consumption and storage capacity of renewable energy is expected to increase, ensuring the profitability of new energy project development. With the rapid growth of the company's new energy installed capacity, the scale of the company's power generation and feed-in electricity is expected to increase further.

Profit forecast and valuation: Based on the incoming water situation in the first quarter of 2024 and the upward trend in electricity prices, and considering that Toba Power Station is expected to increase the company's performance during the year, we raised the company's net profit forecast for 2024-2025 to 86.52 billion yuan and 9.637 billion yuan (original values were 83.40 and 88.43) billion yuan, and the net profit forecast for 2026 was 10.134 billion yuan. The price-earnings ratio corresponding to the current stock price is 20, 18, and 17 times, respectively. The company promises that the profit distributed in cash every year from 2024-2026 will not be less than 50% of the distributable profit achieved in that year. The stable dividend policy highlights the company's development confidence and investment value, and maintains a “buy” rating.

Risk warning: The incoming water fell short of expectations, and the electricity price policy changed adversely.