GF Securities has released a research report indicating that, based on interim earnings reports and profit alerts, hydropower companies have delivered strong results. In contrast, thermal power firms faced pressure in the second quarter due to declining electricity prices and rising coal costs. Renewable energy companies have generally seen a drop in earnings, while the gas sector has maintained stable performance. The power sector is approaching a turning point in supply and demand, with high coal prices and improving market balance potentially leading to a rebound in electricity prices and a recovery in industry profits. As the direction of electricity prices shifts, the power sector offers both stable earnings and high dividends, along with the performance elasticity from a price recovery, making it a balanced defensive and offensive investment.
Interim earnings season is underway, with hydropower outperforming while thermal and renewable energy face headwinds.
Reviewing electricity sector interim reports and profit alerts, hydropower companies have shown strong performance. Sichuan Chuantou Energy Co., Ltd. saw its net profit decline by only 10.7% in the second quarter despite a 32% drop in electricity generation from the Yalong River Hydropower Project, a result that exceeded expectations, likely due to higher electricity prices and lower costs. In the second quarter, ample water inflow in southern China led to significant profit surges for Guangxi Guiguan Electric Power Co., Ltd., Guizhou Qianyuan Power Co., Ltd., China Southern Power Grid Energy Storage Co., Ltd., and Chongqing Three Gorges Water Conservancy and Electric Power Co., Ltd.. Thermal power companies faced pressure in the second quarter, primarily due to falling electricity prices and rising coal costs. Zhejiang Zheneng Electric Power Co., Ltd. reported a 73% to 84% year-on-year decline in net profit for the second quarter, while Guangdong Electric Power Development Co., Ltd. and Datang Huayin Electric Power Co., Ltd. swung from profit to loss. The focus is now on the potential earnings turnaround as electricity prices bottom out. Renewable energy companies have generally seen a broad decline in profits. In the first half of the year, net profits for China Three Gorges Renewables (Group) Co., Ltd., Jinkang New Energy Co., Ltd., Jiangsu New Energy Co., Ltd., and Lvfa Power all dropped by more than 50%, while Jinko Energy Technology Co., Ltd. turned from profit to loss. The renewable energy sector is under pressure from falling electricity prices and higher curtailment rates for wind and solar power. The gas sector has performed steadily, with Jiu Feng Energy Co., Ltd. exceeding expectations with a 45.4% year-on-year profit increase in the second quarter, and Foshan Energy Group Co., Ltd. reporting an 8% rise in net profit.
Following the interim earnings season, the key focus is on evaluating the earnings inflection point driven by a rebound in electricity prices. Recently, rising electricity demand, increased coal consumption, and declining coal inventories have driven coal prices higher. Electricity loads have reached new highs, while the growth of power generation capacity in the 15th Five-Year Plan period is slowing. The power sector faces a turning point in supply and demand, with high coal prices and improving market conditions leading to a bottom and recovery in electricity prices, potentially triggering a turnaround in industry profits. By segment, thermal power companies are expected to see earnings declines after the second quarter due to lower electricity prices and higher coal costs. After the interim results are released, more attention will be on the earnings improvement from the expected electricity price recovery next year. Hydropower companies have benefited from abundant water inflows this year, showing strong performance. The Yalong River and other southwestern river basins are expected to resume year-on-year growth in the second half of the year. The ongoing El Ni帽o pattern is favorable for water inflows in southern China, and with the expected recovery in electricity prices, the hydropower sector is entering a cycle of volume and price growth. In the nuclear power sector, profits have been under pressure for the past two years due to declining electricity prices. With the risk of price declines fading, the outlook for capacity additions is strong, offering good growth prospects. The renewable energy sector continues to see declining earnings, but a recovery in electricity prices will bring marginal improvements. Accelerated subsidy payments will improve cash flow, making the sector's earnings turnaround a key focus. In the gas sector, as margins continue to recover, the focus is on growth in sales volume. The sector has a stronger pro-cyclical nature, with high dividend yields and prominent value.
Fund holdings have declined sequentially, highlighting the undervalued and underweighted nature of high-dividend stocks in the sector, offering strong allocation value. (1) The profitability of the public utilities sector continues to strengthen, with the sector maintaining a profit level of around 50 billion yuan for 9 consecutive quarters, excluding the fourth quarter, since 2023. (2) In 2025, net operating cash flow stood at 775.3 billion yuan, a year-on-year increase of 15.0%, while net investment cash flow was 737.1 billion yuan, down 8.0% year-on-year. Free cash flow has turned positive, with capital expenditure contracting in thermal power and wind and solar sectors, leading to continuous improvements in cash flow. (3) Strengthened market value management and enhanced dividend payouts saw the sector's dividend payout ratio rise to 51% in 2025. (4) Fund holdings are at a low level, with public funds holding a 0.21% weight in the sector at the end of the second quarter, far below the sector's 2.43% market capitalization weight. The trend in electricity prices is reversing, and the power sector not only offers stable earnings and high dividends but also benefits from performance elasticity due to the price recovery, making it a balanced defensive and offensive play.
Focus on the expected improvement in electricity prices for earnings elasticity in thermal, hydro, and nuclear power.
1. Thermal power: High-dividend and coal-power integrated thermal power companies: Huaneng Power International, Inc., Huadian Power International Corporation Limited, GD Power Development Co., Ltd., Shanghai Shengeng Co., Ltd., and Huaneng Mengdong Energy Co., Ltd..
2. Hydropower: Companies benefiting from recovering electricity prices and abundant water inflows: Sichuan Chuantou Energy Co., Ltd. and China Yangtze Power Co., Ltd..
3. Nuclear power: Companies with an expected reversal in electricity price trends: China National Nuclear Power Co., Ltd..
4. Gas: Companies with diversified gas sources: Jiu Feng Energy Co., Ltd. and Foshan Energy Group Co., Ltd..
Risk warning: Reforms may not meet expectations; coal prices may rise excessively; fluctuations in utilization hours may exceed expectations.
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