2023 earnings missed. CPID (the "Company") reported 2023 earnings of RMB2,660 mn, missing our expectation, primarily due to asset amortisation of RMB650 mn and loss of RMB 826 mn booked by the hydro segment, both higher than our estimates. The Company announced 2023 DPS of RMB0.13 (vs. RMB0.11 in 2022). CPID raised 2023 payout ratio to 61% (up from 55% in 2022) with a DPS of RMB0.13 (up from RMB0.11 in 2022). This, in our view, reflects management's confidence over 2024 earnings growth and its intention to smooth out dividend payments.
　　Thermal power segment as the cash cow: In 2023, CPID's thermal power segment was turned around with strong earnings of RMB1,315 mn (vs. loss of RMB1,391 mn in 2022). In 2023, the average dark spread improved from RMB82/MWh in 2022 to RMB111/MWh, driven by more rapid decline in unit fuel costs. For 2024, CPID's management believes dark spreads could improve further, primarily driven by 3-5% further decline in unit fuel costs. Following the turnaround, CPID's thermal segment should be able to act as a cash cow for both new energy expansion and dividend payout.
　　Prudent yet solid expansion in renewables: In 2023, CPID added a total of 13.4GW of renewable capacities (including 7.5GW from asset injection). The Company targets 7GW of organic new energy capacity growth in 2024, implying that 78.7% of its total generation capacity by the year end will be clean energy. 2024 capex budget is set within RMB30 bn, flat yoy, benefiting from declining new energy equipment costs. CPID's management remains committed to the green transformation plan, which aims to have over 90% of the Company's total consolidated capacity in clean energy by 2025.
　　Hydro power showed signs of improvement in 1Q24. Due to consistently low level of rainfall in the river basins where the Company's hydropower plants are located, the Company's hydro segment recorded loss of RMB826 mn in 2023. We currently see chances of normalisation for the Company's hydro business in 2024. In 1-2M24, the Company's hydro power sold rebounded strongly by 83% yoy, thanks to considerable improvement in water flows.
　　Maintain "Buy": We cut our 2024-2025 earnings estimates by 9% and 14% to RMB5,518 mn and RMB7,078 mn, respectively, on more prudent expansion of new energy business and downward pressure for renewable tariffs. We introduce our 2026 earnings estimate of RMB8,844 mn. We reduce our SOTP-derived TP from HK$4.10 to HK$3.70 (thermal:1.2x 2024F PB; new energy: 8.5x 2024F PE; hydro: 12.0x 2024F PE). Downside risks: Extreme weather conditions; lower-than-expected tariffs; delay in project roll-out.