Xinyi Energy reported 1HFY23 revenue of HK$1.289bn （+2.4% YoY）， and profit attributable to shareholders of HK$0.567bn （-9.0% YoY）， lower than our expectations. The company intends to distribute an interim dividend of HK$0.034 per share.
　　Profitability declined in 1H23. In 1H23, the company achieved operating income of HK$1.289bn, part of the revenue growth was offset by the depreciation of the Rmb exchange rate. Particularly, the 520MW acquired in 2022 contributed HK$100mn. Gross profit margin was 70.2% （72.7% in 1H22）， mainly due to the allocation of some administrative expenses to the COGS. The net profit rate was 44% （49.5% in 1H22）， mainly due to the increase in bank loan interest. The company’s financing costs increased by 48% from HK$110mn in 1H22 to HK$163mn in 1H23, net debt ratio increased to 34.9% （24.5% in 1H22）， and cash in hand reached HK$780mn as of June 30th.
　　The project acquisition process is expected to accelerate. In 1H23, the company’s electricity sales reached 1,883.7 GWh （+26.1% YoY）。 In 1H23, the company acquired a project of 300MW. As of June 30th, the company has a total solar power plant capacity of 3314MW, of which parity projects accounted for 48%. In 1H23, the market-based trading power accounted for about 5% of the total power generation, and the average trading power price was 5% higher than the local desulfurized coal benchmark power price. The company maintained the acquisition guideline of 700-1000MW unchanged in 2023, and stated that the parent company Xinyi Solar （00968.HK-Buy） has reserve projects of about 2.1GW available for Xinyi Energy to acquire, of which 1.8GW are parity projects. Considering the sharp drop in PV module prices in 2Q23, and with the acceleration of the construction progress of the parent company, we believe that the company’s acquisition progress may accelerate in 2H23, and the newly acquired projects will ensure the stable growth of electricity sales in the future. According to the management’s disclosure, newly acquired power plants in 2023 will benefit from the decline in PV module prices, and the project IRR is expected to increase by 2-3 ppts compared with projects in 2022.
　　Dividend policy adjusted. The company announced the distribution of an interim dividend of HK$0.034 per share, with payout ratio dropping to 49%. For the first time, the dividend payout amount was less than 90% of the distributable income. The management stated that Xinyi Energy no longer maintain the dividend policy of 90-100% of the distributable income in the future, and the specific dividend will be determined by the BOD based on the operating conditions. Affected by factors such as slower than expected subsidy repayment speed and continuous increase in financing costs, the company plans to retain more cash for external acquisition of power stations and accelerate the development of its main business. In addition, the company is actively replacing existing debts to reduce financing costs. In 1H23, Chinese bank loans accounted for about 10% of the total loans, and the actual interest rate of bank loans reached 5.02% （overseas financing costs reached 6%）。 We believe that these measures are conducive to alleviating financial pressure and supporting the company’s long-term development.
　　Maintain Outperform. Considering the weakening of electricity price adjustment income in the future and the increasing financial costs, we revise down our net profit forecast from HK$1.115bn to HK$1.029bn in 23E, from HK$1.255bn to HK$1.214bn in 24E, and maintain net profit of HK$1.332bn in 25E, with EPS forecasts of HK$0.13 in 23E, HK$0.15 in 24E and HK$0.16 in 25E. We are optimistic about the stable returns brought by the company’s accelerated acquisition of power stations and the increase in the proportion of parity projects. Maintain Outperform rating.
　　Risks: Overseas interest rate hikes exceeds expectation. The project development speed may be not as fast as expected.