The year-on-year decline in financial expenses drove 1Q24 net profit to growth of 781.1/27.24 billion yuan in 2023, +13.4%/+14.8% YoY (adjusted caliber); 1Q24's revenue/net profit to mother +1.6%/+9.8% YoY to 156.4/3.97 billion yuan, mainly due to financial expenses of 300 million yuan year-on-year. In 2023, the company's DPS was 0.82 yuan, with a dividend ratio of 73.66%. Raising the company's R&D expenditure forecast, we expect the company's net profit to be 332/361/37.3 billion yuan in 2024-2026 (previous value: 340/365/100 million yuan), corresponding EPS of 1.36/1.47/1.52 yuan.

Referring to comparable company Wind's average PE17.3x in 2024, we are optimistic that the company's six banks and the upstream Longpan (not in production) /two hekou reservoirs will bring electricity generation effects and integrated development of downstream water scenery storage to the company's downstream hydropower station, giving the company a target PE 23.0x for 2024, with a target price of 31.19 yuan (previous value: 29.21 yuan), “buy”.

In 2023, power generation capacity was +5.3% year over year, 1Q24 power generation capacity -5.1%. In 2023, the company's total incoming water from Wudongde/Three Gorges Reservoir was 5.5%/0.7% year-on-year, and the power generation capacity of the company's six hydropower stations was +5.3% year over year, of which Wudongde/Baihetan/Xiluodu/Xiangjiaba/Three Gorge/Gezhouba power generation was -4.6%/+43.1%/-5.0%/-1.3%/+1.9%/+1.5%. Due to the relatively high feed-in tariff for the Wudongde/Baihetan Hydropower Station in 2023, the company's average feed-in tariff in 2023 (excluding tax) increased 1.5 percent year-on-year to 0.25 yuan/kilowatt-hour. In 1Q24, the total amount of incoming water from the Wudongde/Three Gorges Reservoir dried up, but due to the year-on-year increase in reservoir energy storage, the power generation capacity of Wudongde/Three Gorge/Gezhouba was still +3.5%/+15.8%/+8.9%; Baihetan/Xiluodu/Xiangjiaba power generation declined year-on-year, and the company's power generation capacity was -5.1% year-on-year to 52.75 billion kilowatt-hours.

R&D expenses increased sharply year on year in 2023. Financial expenses for 1Q24 were 300 million yuan year on year. The company's R&D expenses in 2023 were 790 million yuan, a sharp increase of 700 million yuan over the previous year. The main reason was that the company increased R&D investment, which reached 2,068 billion yuan during the year, driving the company's transformation from a traditional power producer to a world-leading innovative clean energy enterprise. In 1Q24, the company's net profit to mother bucked the trend of +9.8% with a year-on-year power generation capacity of -5.1%. Thanks to financial expenses of 300 million yuan year-on-year, we think it is mainly due to the company actively replacing the high-cost liabilities of the Wudongde/Baihetan Power Station. In 2023, the company's six-bank joint transfer enabled cascade power plants to save 12.13 billion kilowatt-hours of water and increase power generation capacity throughout the year, +41.1% over the same period last year. Considering the completion of the company's water storage tasks in 2023, the total amount of water available reached 41 billion cubic meters, an increase of more than 16 billion cubic meters over the previous year. I am optimistic that the company's additional efficiency will expand further by 2024.

Risk warning: Policy uncertainty puts pressure on electricity prices, restricts electricity volume due to incoming water or flood control, etc., falls in profits of participating companies, investment returns fall short of expectations, and undue improvements in joint scheduling fall short of expectations.