CITIC SEC: Profit elasticity in the public utilities sector continues to be released, with hydropower and thermal power expected to continue the trend of performance growth.

CITIC SEC has released a research report stating that, based on the operating conditions of the A-share utilities industry in 2024 and Q1 2025, the overall profitability of the industry continues to improve. With the high growth rate of electricity consumption, performance has continued to grow in the past few years. However, the impact of a new round of supply growth on electricity prices and utilization hours is beginning to show, and performance among various sectors may begin to diverge. Looking ahead, the bank predicts that the profitability of sectors such as hydropower, which benefits from continuous improvement in water supply, low costs, strong environmental friendliness, and strong regulatory capabilities, as well as thermal power benefiting from cost improvements and continuous optimization of profit structure, and gas sectors experiencing demand growth and continuous price increases for residential consumers, will continue to improve, driving further release of profitability elasticity in the utilities industry and continued improvement in ROE. The main points from CITIC SEC are as follows: Profitability has returned to historical norms, with divergence among sectors due to supply shocks. In 2024, the A-share utilities industry's revenue decreased by 0.1% year-on-year, mainly due to the decline in fuel costs driving down market electricity prices. Benefiting from the decline in coal-fired fuel prices and the recovery of hydropower utilization hours, the industry's net profit attributable to shareholders increased by 11.3% year-on-year, with ROE increasing by 0.4 percentage points to 8.6% year-on-year. Profits have returned to historical normal levels. In Q1 2025, although the long-term electricity price reduction led to a decrease in revenue, further declines in coal prices have improved the cost of thermal power, and improvements in water supply and energy storage have released electricity elasticity, driving a 5.8% year-on-year increase in the industry's single-season net profit attributable to shareholders, while nuclear power and new energy sectors have come under pressure due to the decline in market electricity prices. In 2024, the industry's investment enthusiasm remains high, with capital expenditures increasing by 20.8% year-on-year. With excellent cash flow generation capabilities, industry leaders continue to optimize their debt structures, with the debt-to-asset ratio decreasing by 0.5 percentage points to 64.4% year-on-year. Thermal power: Supply growth impacts electricity prices, but cost decreases have a more significant effect. In 2024, the domestic thermal coal price fell by 11.4% year-on-year, driving improvements in profitability for thermal power companies. In Q1 2025, although supply shocks led to a decline in market electricity prices, further declines in fuel costs have pushed thermal power profits to increase year-on-year. The bank predicts that thermal power profits may continue to improve slightly in 2025 as thermal coal prices fall. Hydropower: Water recovery drives performance growth, with elasticity expected to continue to be released. In 2024, national hydropower utilization hours increased by more than 200 hours year-on-year under low base levels, driving a 17.4% year-on-year increase in industry profitability. However, water supply has not yet recovered to historic average levels, providing a foundation for further release of electricity elasticity in 2025. In Q1 2025, improvements in water supply and energy storage drove a 28.2% year-on-year increase in single-season profits for the industry. The bank predicts that in 2025, the release of electricity elasticity for major hydropower plants and limited impact of supply shocks on electricity prices will continue to drive profit growth. Nuclear power: New units are generating electricity, but market electricity prices are putting pressure on growth. In 2024, the commissioning of new units such as Fangchengang Unit 4 led to a 2.9% year-on-year increase in nuclear power generation. However, one-time tax payments by China National Nuclear Power in Q4 2024 led to a year-on-year decrease in industry net profits. In Q1 2025, nuclear power generation increased by 12.8% year-on-year. However, market electricity price declines and unfavorable trading rules in some provinces led to a 7.5% year-on-year decrease in single-season profits for the nuclear power industry. New energy: Grid integration issues are on the rise, putting pressure on operator profits. In 2024, total investment in Shanxi Guoxin Energy Corporation increased by 12.5% year-on-year to 754.5 billion yuan, driving continued growth in installed capacity. However, delays in resource adjustment & transmission channel construction have led to rising grid integration issues, with a significant expansion of market-based trading affecting grid prices and profits. Net profits attributable to shareholders for the new energy sector in 2024 and Q1 2025 decreased by 14.3% and 7.3% year-on-year, respectively. Natural gas: Steady growth in gas demand, with performance improving throughout the year. In 2024, the gas industry saw steady growth in gas volume and continued decline in gas prices, leading to improvements in operational factors. However, due to individual company factors, the industry saw a slight decline in overall performance. In Q1 2025, a brief warm winter suppressed consumption, but declining gas prices and continued price increases for residential consumers helped improve sector profits, with the industry expected to show a trend of steady improvement in profits throughout 2025. Risk factors: Electricity consumption growth slows more than expected; water supply falls short of expectations; significant increases in coal prices; unexpected downward adjustments in grid prices; rising costs of wind and solar power and lower-than-expected returns; slower-than-expected growth in gas consumption; significant increases in gas prices.