Orient's public utility industry's 2025 annual report and 2026 first quarter report summary: Thermal power performance better than expected, hydropower steadily growing.

Orient's research report states that it is optimistic about the public utility sector. It believes that: 1) Against the backdrop of the reconstruction of the international order, public utilities as important physical assets are expected to be revalued; 2) In order to accommodate a high proportion of new energy electricity, China needs to further promote market-oriented price reforms in the electricity sector. In the future, the electricity market will gradually give full pricing to various attributes of electric commodities (electric energy value, regulation value, capacity value, environmental value, etc.). Orient's main viewpoints are as follows: 1Q26 profit of the thermal power sector remains high, internal differentiation intensifies The gross profit margin of the thermal power and transformation sector in 1Q26 was 16.0%, up 0.3/2.2 percentage points year-on-year/quarter-on-quarter; net profit margin was 9.4%, up 0.1/7.4 percentage points year-on-year/quarter-on-quarter. The total operating income in 1Q26 was 276.5 billion yuan, down 0.6%/5.2% year-on-year/quarter-on-quarter; the total net profit attributable to the parent company was 19.3 billion yuan, up 0.8% year-on-year and 523% quarter-on-quarter; operating cash flow was 62.1 billion yuan, down 20.0%/9.2% year-on-year/quarter-on-quarter. Among the 24 sample companies, 14 saw an improvement in performance compared to the previous year, while 10 saw a deterioration in performance. The bank speculates that the internal differentiation of performance is related to differences in electricity price regional declines, the impact of changes in fuel prices on costs, and differences in electricity structure. The bank expects that the profit between different thermal power companies will continue to show a trend of differentiation in 2026, with companies with excellent asset quality taking the lead. Steady growth in hydropower, performance pressure on new energy and nuclear power In 2025, the total operating income of the sample companies in the new energy sector was 151.1 billion yuan, down 4.5% year-on-year; the total net profit attributable to the parent company was 21.6 billion yuan, down 25.2% year-on-year. The total operating income in 1Q26 was 39.3 billion yuan, down 5.4% year-on-year; the total net profit attributable to the parent company was 6.57 billion yuan, down 36.0% year-on-year. In the first quarter of March, wind and photovoltaic installed capacity nationwide was 15.8/41.2GW, up 0.8GW/-18.5GW year-on-year, with photovoltaic installed capacity possibly entering a slowing stage. The bank predicts that the utilization rate of new energy and market-based electricity price issues in 2026 are unlikely to improve, and the performance of sample companies may continue to be under pressure. The total net profit attributable to the parent company of the hydropower sample companies in 2025 was 59 billion yuan, up 8.4% year-on-year. This is mainly due to cost savings and improved water conditions. The performance of the nuclear power sample companies is under pressure, mainly due to the deepening of electricity market reforms leading to a year-on-year decline in comprehensive nuclear power electricity prices. The bank predicts that with the continuous growth of nuclear power installations and the gradual improvement of nuclear power mechanism electricity pricing policies in various provinces, the industry's profitability growth rate is expected to bottom out and rebound. 1Q26 public utility fund holdings level increased quarter-on-quarter As of the end of 1Q26, the proportion of public utilities (electricity, heat, gas, and water production and supply) in the total market value of stock investments of all funds increased to 1.31%, up 0.06 percentage points quarter-on-quarter. In terms of fund categories, as of the end of 1Q26, the top ten holdings fund products in the industry were mainly passive index funds; the bank calculated that the proportion of passive funds (passive index and enhanced index funds) / active funds (remaining funds excluding passive funds) in the total market value of stock investments of all funds was 0.96%/0.35%. As of the end of 1Q26, the underweighting of public utilities in fund holdings was 2.32%, with the underweighting expanding by 0.29 percentage points quarter-on-quarter, higher than the historical average level (an average underweighting of 2.02% in public utilities fund holdings since 2016). Investment recommendations and investment targets Gas: With the reconstruction of the global order and geopolitical conflicts, the central price of natural gas may exceed market expectations. Domestic upstream gas assets are expected to benefit. Relevant targets: Sino Prima Gas Technology, Xinjiang Xintai Natural Gas. Thermal power: In 2026, the compensation ratio for coal power capacity in various provinces in China will continue to increase, coupled with the full rollout of the spot market nationwide. Thermal power will gradually transition from base load power sources to regulation power sources, and its business model is already showing signs of improvement. The bank expects that the dividend-paying ability and willingness of the thermal power industry in 2026 will continue to increase, with recommended targets: HCIG Energy Investment, Huadian Power International Corporation, GD Power Development, Huaneng Power International Inc., An Hui Wenergy; related targets: Henan Yuneng Holdings. Hydropower: A simple and excellent business model, with the lowest cost per kilowatt-hour among all power sources. It is recommended to layout high-quality large hydropower projects on dips. Related targets: China Yangtze Power, SDIC Power Holdings, Guangxi Guiguan Electric Power. Nuclear Power: Strong certainty in long-term installed capacity growth, the time period with the greatest downward pressure on market-based electricity prices has passed. Related targets: CGN Power Co., Ltd. Wind and solar power: With expectations of carbon neutrality, there is still high growth potential in electricity demand. It is prudent to wait for the industry's profitability to reach its trough before selecting leading companies with a high proportion of wind power. Related targets: China Longyuan Power Group Corporation. Risk warnings: Sharp increase in wind and solar abandonment rates, significant rise in coal prices, market electricity prices lower than expected, etc.