According to the financial news app Zhitong Finance, GF Securities released a research report stating that the increase in water supply combined with a low base in Q2 indicates a significant year-on-year increase in power generation, suggesting high performance. The high head and high flow rate strategy has initially appeared, and the joint dispatching effect has entered the verification stage. The high head strategy will increase the power generation per ton of water under high head, improve power generation efficiency, increase energy storage, and store water in the flood season, reaching normal storage level. Less water is needed under high water level, which indirectly increases power generation, and fully storing water will provide guarantee for joint dispatching in the next year. In addition, in 2024, the first year of normal water supply after the Wubai and Lianghekou are put into operation, joint dispatching is expected to increase power generation.

Improved water supply combined with a low base has led to a significant year-on-year increase in power generation in Q2, with new calculations of power generation for Daduhe River. According to the hydrological websites of various provinces, the main basins' water supply has significantly improved in the first half of the year, with Xiluodu, Three Gorges, Jinping grade one, and Longtan's water supply increasing by 31.2%, 36.5%, 65.7%, and 117.5% respectively year-on-year. Coupled with the high energy storage at the beginning of the year, the power generation will see an increase. GF Securities estimated that in Q2 2024, Yangtze Power's power generation volume will be 69.095 billion kWh (actually 67.871 billion kWh, up 42.5% year-on-year); the estimated power generation volume for Yalong River Hydropower will be 19.589 billion kWh (up 45.1% year-on-year), and the power generation volume in H1 2024 will be 39.274 billion kWh (up 12.6% year-on-year). At the same time, GF Securities has innovatively added new calculations of power generation in the Daduhe River Basin, estimating that the power generation volume in Q2 2024 will be 12.656 billion kWh (up 61.2% year-on-year), and the power generation volume in H1 2024 will be 18.953 billion kWh (up 30.3% year-on-year). The high power generation indicates high performance growth.

The high head and high flow rate strategy has initially appeared, and the joint dispatching effect has entered the verification stage. Since June, there has been more precipitation in the south, and the water supply has returned to a historically normal level of abundant water. At the same time, most hydropower stations have entered a high head power generation state. At the end of June, the water level of Xiluodu, Jinping grade one, and Longtan were 13, 23, and 19 meters higher than the same period of the previous year, respectively. The high head strategy will bring three effects: (1) increase the power generation per ton of water under high head, improve power generation efficiency, (2) improve energy storage, GF Securities estimates that the energy storage of Yangtze Power and Yalong River Hydropower in 2023 will reach 8.899/11.004 billion kWh respectively (up 1.369/6.824 billion kWh year-on-year), which can be released during the flood season to directly increase power generation; (3) the flood end target of the hydropower station stores water to the normal storage level, and less water is needed under high water level, indirectly increasing power generation, and fully storing water will provide guarantee for joint dispatching in the next year. In 2024, the first year of normal water supply after the Wubai and Lianghekou are put into operation, joint dispatching is expected to increase power generation.

Low volatility, stable dividends, and long duration are expected to switch the valuation method of hydropower. Hydropower is currently priced based on dividend yield. Taking Yangtze Power as an example, the current dividend yield is about 3.4%, which is a reasonable level in the past five years. The valuation increase comes mainly from the increase in dividend payout ratio and the decrease in the target dividend yield. The former is related to corporate governance and commitments, while the latter is related to the decline in long-term interest rates, which reduces the dilution cost of funds (rather than a simultaneous decline in the yield of 10-year government bonds). It is more likely to be influenced by market sentiment in the short term, further pushing up short-term stock prices. From a long-term perspective, from the numerator, the decline in depreciation and financial expenses will increase profits, and the increase in dividend payout ratio is a high probability event. From the denominator perspective, the cost of funds is expected to gradually decrease in the long term, and after the dividend yield is gradually accepted by the market, GF Securities believes that Yangtze Power will also move towards the absolute valuation road of the DDM. In addition, GF Securities believes that the valuation system of hydropower contains long-duration value, which the market significantly ignores. Large hydropower stations can operate for more than 100 years, and asset profitability is highly predictable, with generally high-quality corporate governance, making it easier to value by the DDM/DCF, and the longer the duration, the higher the equivalent valuation.

Focus on the leading hydropower companies with stable dividends and growth potential, including Yangtze Power, GD Power Development, SDIC Power Holdings, Sichuan Chuantou Energy, Guangxi Guiguan Electric Power, and Huaneng Lancang River Hydropower Inc.

Risk warning: Water supply fluctuations, reservoir regulation capacity lower than expected, and the risk of power price adjustment.