Yangtze Power is the largest hydropower listed company in the world. Its main income is very simple, basically it is the current year’s power generation * the current year’s on-grid electricity price. As we all know, electricity is the infrastructure of modern society, and it is very difficult to increase the on-grid electricity price; the power generation of hydropower stations basically depends on the weather, and there may be fluctuations in special years, but in five years, it is basically Stable, we can look at the main business income in the past five years.
From the figure above, we can see that the main business income has been basically stable in the past five years, fluctuating by 5% around 53 billion yuan, and the most recent revenue in 2022 is 52 billion yuan. Here’s a look at the income statement:
From the figure above, we can see that the net profit in the past five years has also been basically stable, with a fluctuation of 10% centered on 24 billion. The most recent profit in 2022 is 21.4 billion.
From these two perspectives, if you buy Yangtze Power at the current price, regardless of asset injection, the dividend in the next few years will be stable between 3.5% and 4%. The company’s performance is stable but lacks growth. They are all like bonds. Compared with stocks such as expressway and Daqin Railway with the same debt attributes, the dividend rate is obviously lower.
Since the investment value of Yangtze Power is very low from the financial data, why is it sought after by many people? What is the reason?
First of all, accounting standards hide the real profit of Changdian
The accounting standard that has the greatest impact on Changdian’s profits is depreciation.
What is depreciation, non-financial personnel may not understand. To give a simple example, you expect the company to earn 1.5 million yuan this year, and you have to pay a lot of taxes. At the beginning of the year, you bought a car with 1 million yuan in the name of the company. By the end of the year, the profit of 1.5 million yuan will become 500,000 yuan. , the tax does not recognize. According to accounting standards, if a car bought in the name of a business is expected to be used for five years, it must be depreciated in five-year installments. Regardless of the residual value, it can only be depreciated by 200,000 yuan per year. In the first year, your actual profit is 500,000, and you must write 1.3 million profit on the financial statement. According to the tax payment of 1.3 million, the actual book cash inflow is 500,000; in the second year, you earn another 1.5 million. The profit on the financial statement can only be 1.3 million, and the tax is paid according to 1.3 million, and the actual cash inflow is 1.5 million.
Among the various infrastructures of the hydropower station, the dam is the most valuable, with a depreciation period of 45 years and other buildings with a depreciation period of 25 years. The dams of hydropower stations are all built according to the century-old project. It is impossible to use them for only 45 years. After 45 years, the profits hidden by depreciation will be released. The amount of this part of profits can be determined by a key indicator: operating cash flow.
For the extremely simple business model of hydropower, the operating cash flow is basically equivalent to the actual profit. The average value in recent years has been 38 billion. Assuming that the depreciation is completed now, the operating cash flow is the actual profit, the PE is 12 times, and the dividend rate is 6%. The above is not very attractive. In layman’s terms, if you buy Changjiang Power and hold it for retirement for life, you may only get less than 4% dividends, but your children and grandchildren can get at least 6% dividends.
The two indicators of Changjiang Power’s balance sheet and price-to-book ratio are meaningless, and the assets of Changjiang Power in the financial statements are seriously underestimated. Take the Three Gorges Dam as an example. According to accounting standards, the depreciation of the Three Gorges Dam will be completed in more than 20 years, and there will be a residual value in the assets of Yangtze Power, which is approximately equal to zero. This is obviously ridiculous.
Secondly, the reinvestment of surplus funds and the marketization of electricity prices will bring growth
There is a huge difference between Yangtze Power’s annual operating cash flow and dividends payable, and this part of the difference is retained in the company for reinvestment. Since the income of a single power station is basically constant, then use the money to buy new power station injection companies, which will not solve the problem of growth. The newly completed acquisition of the Three Gorges Jinsha River Yunchuan Hydropower has a consideration of more than 80 billion, which has increased the installed capacity by 57%, of which only a very small part is paid with equity, which will obviously lead to a revaluation of the value.
Although the price of electricity is difficult to rise, it does not mean that it will not rise. The market-oriented reform of electricity prices has been going on. As a long-term electricity price depression, hydropower is still worth looking forward to in the future.
Reinvestment of retained funds, with the help of accumulated experience in re-power, the company has deployed many new energy companies such as wind power, nuclear power, photovoltaics, and energy storage.
Finally, what kind of investor is suitable for Yangtze Power
The nature of Yangtze Power’s company determines the low volatility of its stock price. It is definitely not suitable for investors who want to obtain substantial returns in the A-share market. So who are they suitable for?
1. A financial company with low financing costs that borrows money to make money. A typical example is an insurance institution, especially life insurance. The financing cost of life insurance is extremely low. Buying Yangtze Power can enjoy the interest rate difference without risk on the one hand, and on the other hand can obtain additional income brought about by the rising stock price. Looking at the shareholder table of Yangtze Power, two life insurance companies appear in the top ten shareholders.
2. Pension layout of wealthy families or family trust investment
Recently, Liu Qiangdong said that his annual living expenses do not exceed one million. What does that mean? If you have a small asset, invest 20-30 million in Yangtze Power and hold it for a long time, and you can get the same quality of life as Liu Qiangdong. Secondly, after so many years of economic development in China, many first-generation founders have accumulated a lot of wealth, and the most worrying thing is the second-generation prodigal. This can set up a family trust with tens of millions to isolate risks and ensure that future generations will have no worries about food and clothing. Yangtze Power is one of the few stocks suitable for long-term holding by family trusts. Of course, there are many similar targets, such as China Mobile and so on.
3. Defensive positions
When you get huge profits in other sectors and don’t want to short positions, you can switch positions from high to low and transfer them to defensive stocks. Yangtze Power is a typical defensive stock. It often goes against the general trend. When everyone goes up, it goes down. When everyone goes down, it goes up.
The risk point of holding Yangtze Power for a long time
First, the risks brought about by technological upgrading. If there is a new energy technology that is cheaper than hydropower and can be applied on a large scale in the future, hydropower stations may be eliminated, and the company’s greatest value will disappear.
Second, the risk of sustainable operation. Natural disasters and military disasters have caused heavy losses in assets, threatening sustainable operations.
Of course, the probability of these two kinds of risks is extremely low, and the strategy of superimposing and diversifying investment can basically be ignored.
$Yangtze River Power (SH600900)$
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