Evaluating the Future of Yangtze Power: Is It a Secure Investment or a Risky Gamble?

In this article, we delve into the topic of Yangtze Power, exploring its strengths and future prospects. We will discuss three main points: 1) the value logic of Yangtze Power, 2) its inherent advantages, and 3) potential challenges and opportunities ahead.

During an internal address, Liu Qiangdong stated, “The net profit margin of JD’s delivery service should not exceed 5%.” This comment likely pertains to net profit rate, which in many years, even without the delivery service, JD’s overall net profit margin does not exceed 5%. This may seem commendable, but many companies, despite having a net profit margin below 5%, have achieved market capitalizations in the hundreds of billions or even trillions. This is because shareholders are not solely focused on net profit margins; they are more concerned with the return on investment.

The process of a company generating profits can be simplified into several steps: investment leads to assets, assets generate revenue, and revenue results in profit. For Yangtze Power, the main inputs are shareholder investments and debt, while the assets consist of dams and equipment. Revenue comes from electricity sales, and profit is the remainder after costs. Shareholders are primarily interested in the process from their investments to net output, rather than the production output itself.

This is where the concept of Return on Equity (ROE) comes into play. The value of a company often correlates with its ROE. If investors demand a return of 5% in the market and a company’s ROE is also 5%, the company’s value would equal the net assets reflected on its balance sheet. Conversely, if the ROE is 10%, the company’s value could be twice that of its net assets, creating a specific metric known as the Price-to-Book Ratio (PB).

Analyzing Yangtze Power’s performance over the past five years, we observe fluctuations in both ROE and PB. While ROE has varied, its changes have not been as significant as those seen in PB, likely due to shifting market return expectations. In 2021, for instance, investors might have favored high-growth stocks, leading to lower interest in dividend-paying stocks like Yangtze Power.

Additionally, the amount of water flow and rainfall significantly affects the electricity produced by Yangtze Power. This industry often faces the unpredictability of weather, as seen in the annual variations in water flow over the past decade. Yangtze Power’s ability to adapt to these changes is crucial for maintaining profitability.

Furthermore, the pricing mechanisms for electricity generated by Yangtze Power involve three primary methods: cost-plus pricing, reverse pricing, and market-based pricing. The current market participation level for Yangtze Power is around 38.6%, indicating that a significant portion of their pricing is still influenced by traditional coal energy competition.

Looking ahead, the integration of renewable energy sources like solar and wind is expected to alter the electricity pricing landscape further. With the rising share of renewable energy generation, market prices may decline, potentially impacting Yangtze Power’s earnings.

While Yangtze Power’s electricity generation has been on a controllable upward trend, the future stability of their ROE will depend on various factors including generation capacity, water availability, and market pricing dynamics. The company’s strategy will need to adapt to these evolving market conditions to maintain its competitive edge.

In summary, Yangtze Power’s continued success hinges on managing its operational efficiency, market participation, and adaptation to renewable energy trends. While past performance has shown relative stability, future developments will require keen attention to both internal operations and external market influences.