Core views:

Incoming water improved, electricity consumption increased, and performance grew steadily. 2024H1 achieved net profit of 2.302 billion yuan (+9.74% YoY), of which Q2 net profit was 1.029 billion yuan (YoY +7.0%), mainly 24H1's investment income of 2.412 billion yuan (YoY +4.88%), of which Yalong River Hydropower contributed 2.113 billion yuan (accounting for 87.6%), Guoneng Dadu River, and CNNC HuiNeng contributed 0.147 and 0.099 billion yuan respectively. The company's main hydropower business increased 10.2% year-on-year due to improved incoming water and increased electricity volume. At the same time, due to convertible debt-for-equity swaps and falling interest rates, the company's 24H1 financial expenses decreased by 31.37% year on year, profits from its own business increased, and the balance ratio fell to 35%.

Electricity consumption increased and electricity prices fell, and profits in the Yalong River returned to normal in the second quarter. Incoming water improved in 24Q2. Hydropower generation in the Yalong River increased by 37.24% year on year, electricity prices decreased by 9.65% year on year, operating income increased 6.5% year on year, and achieved net profit of 1.83 billion yuan, which was basically the same as the previous year. The decline in electricity prices is mainly due to the impact of the electricity structure. The power generation volume was higher in April '23, while the electricity production was higher in June '24, the electricity price was lower in Sichuan, the electricity price was lower in June, and the impact of the reduction in market-based electricity prices after incoming water improved. The 24Q2 hydropower price was a historical normal value. The lower increase in revenue and profit is mainly due to the impact of the non-hydropower business. It is estimated that its revenue fell from 0.9 billion yuan in the same period last year to 0.24 billion yuan.

The water level is significantly higher than the previous year, and it is expected that the adjustment capacity will be fully released. Currently, the three major regulated reservoirs of the Yalong River Hydropower Station are close to full capacity. The increase in regulation capacity next year will further increase power generation, smooth the ratio of abundant and dry periods, and raise electricity prices. At the same time, the water landscape will become the main performance growth point for the Yalong River. The net profit of Dadu River 24H1 is estimated to be 0.74 billion yuan. The performance is impressive. At the same time, several hydropower plants under construction are about to be put into operation. Combined, wastewater treatment improves performance flexibility. The company built its own Yinjiang Hydropower Station to speed up construction and selected the Pingshan Pumped Storage Power Station (1.2GW).

Profit forecasting and investment advice. The company's net profit for 24-26 is estimated to be 5.1/5.5/6.2 billion yuan, respectively, and the PE corresponding to the latest closing price will be 17.6/16.2/14.4 times, respectively. The hydropower performance of the Yalong River is growing steadily, and the Dadu River will enter the peak of commissioning. Referring to peer valuation, the company was given a PE valuation of 20 times in 2024, corresponding to a reasonable value of 20.78 yuan/share, maintaining a “buy” rating.

Risk warning. Fluctuations in incoming water; risk of feed-in tariff adjustments; fluctuations in investment returns, etc.