Huayuan Securities: Profitability factors, quantitative changes trigger qualitative changes, bullish on the green power sector

The Zhitong Finance App learned that Huayuan Securities published a research report saying that from a valuation perspective, Green Power's 2020-2021 market is an echo of the double carbon promise. After meeting the two prerequisites of stable return on investment and broad market space, the effect of compound interest gives Green Power a sufficient definitive premium. In contrast, after 2022, the expectation of long-term stability in the return on new energy investment was shattered, and the sector investment logic changed from deterministic premiums to uncertain discounts under many favorable conditions, such as pressure on consumption rates, ahead of schedule in the spot market, and the central market game. At this point, although many pressures facing the green power industry exist objectively, more benefits are being accumulated and are accelerating. The factors that limit the absolute value and stability of green power's medium- to long-term yield are gradually being lifted, and the sector may be able to obtain significant valuation repairs.

Since China proposed the dual carbon strategy in September 2020, the entire new energy industry chain has ushered in a round of spectacular market conditions. However, time has changed, and in just a few years, the new energy industry chain has experienced a huge retreat. Judging from the underlying demand, under the hard constraints of the dual-carbon strategy, the scale of PV installations has repeatedly exceeded expectations, but the rise in installed capacity has not brought about a simultaneous increase in profits, and electricity prices, utilization rates, and yield from new energy sources are under simultaneous pressure. Huayuan Securities believes that the yield from new energy sources falls short of expectations as a result of a combination of factors, including but not limited to consumption problems caused by uneven progress in power grid construction, unsynchronized electricity-carbon market construction hindering the release of green power environmental value, central local games, and non-market-based intervention in electricity prices. At the stock price level, due to the continued decline in new energy prices and unstable expectations, the stock price trends of major new energy operators in the period from 2022 to 2024 were significantly weaker than the Shenwan Electric Power Industry Index.

However, from the perspective of the sustainable development of new power systems, the root cause of the current new energy dilemma is due to lack of mechanisms, or unsynchronized power system reforms. From the perspective of building a unified electricity market across the country, the so-called central-local game is not conducive to the optimal allocation of electricity elements in the country, and not to the steady and far-reaching development of the new energy industry. Policies have already begun to be corrected. Seen from a larger perspective, the current plight of new energy operators is only a phased phenomenon. As the most important part of China's dual-carbon strategy, there is no doubt that sustainable development is very important. Huayuan Securities believes that after years of digestion, the market has more fully reflected the current pressure on the green power sector.

Judging from marginal changes, from statements by decision makers to the establishment of relevant mechanisms, various policy shortcomings have been made up. Huayuan Securities analyzed whether the green power sector is expected to achieve a positive trend after three years of hibernation and re-enter an upward trend.

As the beginning of the Huayuan Securities Green Power series report, this article will outline the outline, systematically describe the valuation system and past and present life of Green Power, and focus more on valuation and marginal changes. The highlight of this article is the combination of theoretical deduction and realistic review. First, it starts with the underlying valuation theory, explores the most core factors affecting LVDC's valuation (that is, the expected IRR and discount rate of reinvestment) and its sensitivity; then reviews the 2020-2022 market in the Lvdian sector to refine the core driving forces of the previous round of market prices and the reasons for the stock price correction, and also tests the effectiveness of the theoretical model built by Huayuan Securities; finally, it summarizes the reasons for the stock price correction, combined with the latest marginal changes so far, to summarize the current optimistic LVD Securities market The core reason is, Form an investment framework that can be falsified.

Simply put, from a valuation perspective, Huayuan Securities believes that Green Power's 2020-2021 market is an echo of the double carbon promise. After meeting the two prerequisites of stable return on investment and broad market space, the effect of compound interest gives Green Power a sufficient definitive premium. In contrast, after 2022, the expectation of long-term stability in the return on new energy investment was shattered, and the sector investment logic changed from deterministic premiums to uncertain discounts under many favorable conditions, such as pressure on consumption rates, ahead of schedule in the spot market, and the central market game.

At this point, although many pressures on the green power industry are objectively present, more benefits are being accumulated and are accelerating. Huayuan Securities has summarized four marginal changes worth paying attention to: 1) Since July, decision makers and listed companies have made intensive statements, the dual-carbon strategy has returned to rationality, and power supply construction has gradually returned to rationality from “assault” development in the past, which is expected to drive a steady recovery in consumption rates and electricity prices. 2) The electricity price policy is preparing to be corrected, and the Guangxi government authorized the CFD model deserves attention. 3) Policies such as dual control of energy consumption and the carbon market are progressing rapidly. From not approving green certificates to placing green certificates at the core of energy saving and emission reduction, there have been substantial changes in the wording of key documents; 4) Subsidy distribution is expected to be accelerated to ease financial pressure on operators.

At this point, Huayuan Securities's analysis has gradually eliminated the factors that limit the absolute value and stability of Green Power's medium- to long-term yield. According to Huayuan Securities's valuation framework, as long as the certainty of Green Power's yield is guaranteed, the sector may obtain significant valuation repairs. Focus on recommending Hong Kong stocks undervalued Longyuan Electric Power (00916), Datang New Energy (01798), CGN New Energy (01811), and China Electric Power (02380). It is recommended to focus on Xintian Green Energy (00956). We recommend the A-share new energy operator Three Gorges Energy (600905.SH). It is recommended to focus on Yunnan Energy Investment (002053.SZ), Gansu Energy (000791.SZ), Jinkai New Energy (600821.SH), Xintian Green Energy (600956.SH), Jiaze Xinneng (), and Jingke Technology (USD). 601619.SH 601778.SH

Risk warning: New power system construction and electricity market-based reforms fall short of expectations, consumption of new energy sources falls short of expectations, and slow recovery of subsidies has led to pressure on cash flow and dividends.