Orient Securities Company Limited has released a research report expressing optimism regarding the utilities sector. The firm contends that amid the restructuring of the international order and surging AI-driven energy demand, utilities, as critical tangible assets, are likely to undergo a value reassessment. Furthermore, to accommodate the absorption of a high proportion of renewable energy, China must advance its electricity market pricing reforms, progressively establishing comprehensive pricing for various attributes of electricity commodities—including energy value, regulation value, capacity value, and environmental value. Additionally, given the global order realignment and geopolitical conflicts, the trajectory of global energy prices is shifting upward, leading the firm to project that domestic electricity and natural gas prices could gradually embark on a new upward cycle.
During the second quarter of 2026, the thermal power sector experienced accelerated profit declines, though the most severe phase of earnings downgrades may have already passed. For sample thermal power companies, total operating revenue contracted by 3.6% year-on-year, while net profit attributable to parent companies plummeted by 37.4% year-on-year and 32.2% quarter-on-quarter. Operating cash flow declined by 11.4% year-on-year, and the gross margin fell by 3.9 percentage points to 13.8%, with the net margin down 3.8 percentage points to 6.9%. Of the 24 sample companies, only 7 saw net profit improvements year-on-year, while 17 recorded declines. The second-quarter earnings retreat was primarily driven by coal price hikes that raised fuel costs, alongside continued electricity price downward cycles in most regions, compressing margins from both cost and pricing sides. Performance divergence among companies was linked to regional differences in electricity price declines and variations in power generation mix.
Looking forward, given the persistent strength of market coal prices since the third quarter of 2026, the firm anticipates that year-on-year earnings growth for the thermal power sector in Q3 2026 may still struggle to show significant improvement over the second quarter, although the steepest phase of earnings declines is likely in the rear-view mirror. A recovery is expected in 2027 as electricity prices rise. The firm also believes that in the second half of the year, the stock price drivers for thermal power companies will increasingly shift toward 2027 electricity price expectations, and any further increases in market coal prices could positively influence sector share prices indirectly by bolstering long-term contract electricity price expectations for 2027.
In the second quarter of 2026, both the hydropower and nuclear power sectors faced earnings pressures, while new energy profitability continued its sharp decline. For sample hydropower companies, operating revenue fell 0.6% year-on-year, net profit decreased 1.6%, and operating cash flow dropped 7.7%. Considering the significant low-base effect from lower-than-usual water inflows in Q3 2025, coupled with ongoing savings in financial expenses—where 2026 first-half financial costs totaled 3.59 billion yuan, down 11.6% year-on-year—the firm projects that Q3 2026 hydropower earnings growth will likely rebound compared to Q2. For nuclear power sample companies, revenue contracted 13.1% year-on-year, while net profit rose 9.4%, and operating cash flow fell 6.4%. Growth rates varied across companies due to factors such as plant maintenance schedules and expense ratio fluctuations. The firm expects that with continued nuclear capacity expansion and the gradual refinement of provincial mechanism-based electricity pricing policies, industry profit growth is poised to gradually bottom out and recover.
Meanwhile, sample new energy companies saw second-quarter revenue rise 2.8% year-on-year, but net profit attributable to parent companies plunged 41.9% year-on-year and 26.8% quarter-on-quarter, while operating cash flow surged 37.9%. This was primarily attributable to rising curtailment rates for wind and solar power that suppressed generation volumes, compounded by electricity price pressures following the full market entry of new energy. The firm cautions that in Q3 2026, conditions for new energy utilization rates and market-based electricity prices are unlikely to improve, suggesting that renewable energy operators may continue to face earnings headwinds.
In terms of investment recommendations, the firm notes that natural gas price benchmarks could exceed market expectations amid geopolitical tensions, potentially benefiting domestic upstream gas asset owners. Hydropower's straightforward yet superior business model, characterized by the lowest per-kilowatt-hour cost among all power sources, warrants building positions in high-quality large hydropower assets during dips. In 2026, as coal-fired capacity compensation ratios continue to rise across provinces and spot markets expand nationwide, thermal power is gradually transitioning from baseload to flexible peaking roles. Early signs of business model improvement are emerging, and both the capacity and willingness to distribute dividends within the thermal power industry are likely to strengthen over time. With strong long-term growth certainty for nuclear capacity additions and the most challenging period for market-based electricity price declines behind us, the sector presents attractive prospects. Given the ample room for electricity volume growth under carbon neutrality expectations, the firm recommends awaiting the industry's earnings inflection point and favoring leading companies with higher wind power exposure.
Risks to watch include a significant surge in curtailment rates for wind and solar, substantial coal price escalations, and market electricity prices falling below expectations.
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