Orient Securities has released a research report expressing a bullish view on the utility sector, according to Zhitong Finance APP.
The brokerage believes that: 1) against the backdrop of global order restructuring and intensifying geopolitical conflicts, the global energy price center is shifting upward, and China's electricity and natural gas prices are expected to gradually enter a new upward cycle; 2) with both market risk appetite and domestic risk-free interest rates declining, utilities as important defensive real assets are expected to attract incremental capital allocation.
In 2026, the compensation ratio for coal power capacity prices across Chinese provinces will continue to rise, and with the spot market being rolled out nationwide, thermal power will gradually transition from baseload power to regulating power, with improvements in its business model already beginning to emerge.
Annual long-term contract electricity prices in 2027 are expected to rebound, and as electricity prices enter a new upward cycle, the dividend capacity and willingness of the thermal power industry are both expected to continue improving.
The key views of Orient Securities are as follows:
3Q26 Thermal Power Earnings Hit Bottom, Sector Trough Likely Passed
In 3Q26, sample thermal power companies recorded total revenue up 3.6% year-on-year, with net profit attributable to shareholders down 74.5% year-on-year and down 54.0% quarter-on-quarter, while operating cash flow fell 18.2% year-on-year; gross margin declined 9.0 percentage points year-on-year to 9.9%, and net margin fell 8.0 percentage points year-on-year to 3.4%. Among the 30 sample companies, only 3 saw year-on-year improvement in net profit attributable to shareholders, while 27 declined.
The third-quarter earnings decline was mainly driven by a year-on-year rise in coal prices that significantly pushed up fuel costs; on the electricity price side, although spot and monthly prices in some regions had already shown notable increases, overall settlement prices rose only modestly due to annual long-term contract price lock-ins and renewable energy market entry, making it difficult to offset the rise in unit fuel costs caused by the sharp coal price increase, resulting in a narrowing coal-electricity price spread and significantly compressed per-kilowatt-hour profit margins.
Performance divergence was related to differences in regional electricity price increases and power generation structure differences.
Looking ahead to 2027, the brokerage expects the thermal power sector to see earnings recovery as annual long-term contract electricity prices rise. If market coal prices remain at relatively high levels during the 2027 annual long-term contract signing window, combined with monthly and spot electricity prices in some coastal regions having already recovered first, annual long-term contract prices in 2027 are expected to achieve a relatively significant year-on-year increase, laying the foundation for thermal power earnings recovery.
3Q26 Nuclear Power Earnings Recovered Favorably, Hydropower and Renewables Under Pressure
In 3Q26, sample nuclear power companies recorded revenue up 3.7% year-on-year, net profit attributable to shareholders up 33.4% year-on-year, and operating cash flow up 52.0% year-on-year. Looking ahead to 2027, the brokerage expects nuclear power to continue its earnings recovery trend: 1) new units gradually coming into operation will provide incremental support for power generation growth; 2) market-based trading electricity prices in coastal regions are expected to recover, driving per-kilowatt-hour profit repair against a backdrop of relatively stable nuclear fuel costs, and combined with the nuclear power mechanism electricity price policy expected to be extended to more provinces, further enhancing the sector's earnings stability.
In 3Q26, sample hydropower companies recorded revenue down 2.8% year-on-year, net profit attributable to shareholders down 13.5% year-on-year, and operating cash flow down 7.9% year-on-year. Among the 7 sample companies, Huaneng Hydropower, Chuantou Energy, and Power Investment Hydropower saw year-on-year earnings improvement, while the other 4 including China Yangtze Power saw year-on-year declines.
Looking ahead to 2027, the brokerage expects favorable water inflow in the year following an El Nino event, providing support for hydropower utilization hours and power generation growth; considering that hydropower has low marginal generation costs and a high proportion of fixed costs, under stable electricity prices and consumption conditions, incremental power generation is expected to fully translate into profit elasticity; if the trend of financial expense savings continues, sector earnings will be further enhanced.
In 3Q26, sample renewable energy companies recorded revenue up 2.3% year-on-year, with net profit attributable to shareholders down 31.6% year-on-year and down 34.1% quarter-on-quarter. It is expected that in 2027, renewable energy consumption and market-based electricity price pressures will continue to constrain operator profitability, and a full recovery of sector earnings will still take time.
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