The injection of thermal power is expected to see both profit and valuation increases. For the first time, the company that gave a “buy” rating was the only listed platform under Gansu Electric Power Investment Group, holding 1.7/1.84 million kilowatts of hydropower/new energy installed capacity by the end of 2023. The company's net profit for NEV reached 0.15 yuan in 2023, a short-term decline or relatively manageable; at the depreciation maturity level, we estimate that the stock of hydropower in 2031 is expected to release 1.8 points compared to 2023. Changle's 4GW+ coal power under construction will soon be injected. The net profit for 2023 is 7 points, which is comparable to the profit level of integrated coal and electricity companies. We estimate that considering only issuing shares to buy Changle assets, it is expected to increase the company's EPS by 15%/15%/12% in 2024-2026. After the injection of thermal power, the company's “water, fire, and scenery” combined, and it is expected to usher in a double increase in profit valuation. We expect the company's 2024-2026 net profit to be 0.69/0.71/0.77 billion yuan, corresponding EPS of 0.43/0.44/0.48. Referring to the comparable company's 2024E PE, the wind consensus forecast is 16.3x, giving the company 16.3x 2024E PE, corresponding to a target price of 6.97 yuan, which is covered for the first time to give a “buy” rating.

There is plenty of room for restoration of existing hydropower profits. The potential growth space for new energy production capacity was 3.8 times higher. From January to May 2024, the number of hydropower utilization hours in Gansu Province was +15% to 1,278 hours, and incoming water dried up compared to the previous three years and began to be repaired. We estimate that the company's annual hydropower depreciation in 2026/2031 will be 0.023/0.102 billion yuan lower than 2023/2025 (0.492 billion yuan in 2023), respectively. Under the “15th Five-Year Plan” hydropower equipment depreciation period, the decline in hydropower depreciation by 2031 is expected to increase the net profit of electricity by 1.8 points (compared to 2023). Thanks to the company's high wind power usage hours and electricity prices, the company's net profit for new energy power reached 0.15 yuan in 2023, which is the highest among operators. We believe that the decline in the profitability of the company's wind power is either relatively manageable due to high peak electricity prices+UHV operation in the evening to ease consumption pressure. The company has a 7GW new energy target, which has 3.8 times the potential for growth compared to the current production capacity.

The Group's high-quality thermal power assets are being injected soon. After the injection, it is expected to bring a double rise in profit valuation. Changle's injection has already started. The net profit for electricity in 2023 is 7 points, which is comparable to that of integrated coal and electricity companies. In 2024-2026, the first phase of Changle uses an hourly contract to guarantee no less than 5,000 hours. Hunan Province is an energy recipient and terminal. High coal prices support the margins of thermal power prices, and the national coal price center is expected to continue to decline 7% in 2024, and the profit for the first phase is considerable. The second phase will be put into operation by the end of 2025. It will be consumed within the province and the peak will be adjusted nearby. We estimate that if Changle injections increase the company's net profit from 2024-2026 by 109%/109%/103%, Changle Dudeng's net profit can still maintain 6/6/5 points in 2024-2026, corresponding to ROE 19%/20%/20%. According to the Group's interindustry competition commitments, the Wuwei/Zhangye Power Plant (2023 net profit 0.039/0.112 billion yuan) is expected to be injected before the end of 2025.

Risk warning: Incoming water falls short of expectations, asset injection falls short of expectations, UHV construction falls short of expectations, and coal prices have exceeded expectations.