Xinyi Energy Earnings: Disappointing Results With Dividend Cut; Valuation Lowered by 23% to HKD 1.24

No-moat Xinyi Energy’s first-half 2024 net profit fell 30% year on year to HKD 394.5 million, in line with preliminary guidance of a 25%-35% drop. While the interim dividend was lowered by 32%, the payout ratio was stable at around 48%. The weak earnings are mainly attributable to the depreciation of the Chinese yuan, electricity curtailment loss due to grid constraints and higher volume of market-based electricity trading, which fully offset a 7% growth in electricity generation. After cutting our 2024-26 earnings forecasts by 29%-33% to factor in the poor results, we reduce our fair value estimate to HKD 1.24 per share from HKD 1.60. Although the firm is currently undervalued with a 2024 dividend yield of over 5%, we think share price performance will be weak in the near term as concerns about further curtailment, falling tariffs, and rising leverage linger. While we believe China’s increasing investment in the national grid is a positive to ease curtailment risks, we only forecast a turnaround in 2026.