GF SEC: The interim performance report period for utilities is approaching. Focus on high-performing stocks and performance inflection points.

GF SEC released a research report stating that power companies have shown excellent performance in their mid-year reports and earnings forecasts; hydropower companies performed well, while thermal power companies faced pressure on their second-quarter performance mainly due to falling electricity prices and rising coal prices. Green energy companies generally experienced a decline in performance, while the gas industry performed steadily. The electricity supply and demand is facing a turning point; with high coal prices and improvement in supply and demand, electricity prices have bottomed out and are beginning to rise, and the profitability of the power industry is also expected to see a turning point. The reversal of electricity price trends benefits the electricity sector, which, while maintaining stable profits and high dividends, also enjoys the performance elasticity brought about by rising electricity prices, marking a balance of offense and defense in the sector. GF SEC's main points are as follows: Mid-year performance reports are being released, with hydropower performing excellently and thermal and green energy under pressure. An analysis of the mid-year reports and earnings forecasts shows that hydropower companies have performed excellently. In Q2 2026, Sichuan Chuantou Energy's hydropower output in the Yalong River declined by 32% year-on-year, yet its performance only slipped by 10.7%, which may be attributed to rising electricity prices and a decrease in costs. In Q2 2026, Southern China generally experienced abundant water supply, with Guangxi Guiguan Electric Power, Guizhou Qianyuan Power, China Southern Power Grid Energy Storage, and Chongqing Three Gorges Water Conservancy and Electric Power all achieving significant performance growth. Thermal power companies faced pressure in the second quarter, mainly due to falling electricity prices and rising coal prices. Zhejiang Zheneng Electric Power reported a year-on-year net profit decline of 84% to 73%. Guangdong Electric Power and DaTang HuaYin Electric Power turned from profit to loss, with attention needed on the performance turnaround following the potential bottoming out of electricity prices. Green energy companies generally saw a decline in performance; in the first half of 2026, the net profits of Three Gorges Energy, NYOCOR, Jiangsu New Energy Development, and Green Development Electricity Group of Tianjin all fell by over 50%. Jinko Power Technology turned from profit to loss, with the green energy sector's profitability under pressure due to declining electricity prices and increased rates of wind and solar abandonment. The gas industry performed steadily, with Jiangxi Jovo Energy's Q2 2026 results significantly exceeding expectations with a year-on-year growth of 45.4%, and Foran Energy Group's net profit also rising by 8% year-on-year. After the mid-year performance period, focus on assessing the performance turning point brought about by rising electricity prices. Recently, the increase in electricity demand, daily coal consumption, and decreasing inventories have continued to drive up coal prices, while electricity loads have consistently reached new highs, and the growth rate of installed power capacity during the 14th Five-Year Plan has slowed. The electricity supply and demand is facing a turning point; with high coal prices and improvements in supply and demand, electricity prices have bottomed out and begun to rise, which is also expected to signal a turning point in the profitability of the power industry. In terms of sectors, thermal power is expected to see performance declines due to the anticipation of falling electricity prices and rising coal prices after the second quarter; after mid-year performance reports, more attention should be paid to the performance improvements expected from rising electricity prices next year. Hydropower has performed well this year benefitting from abundant water supply, and regions like Yalong River in the Southwest are also expected to recover year-on-year growth in the second half; with the ongoing El Nio phenomenon favoring water supply in the South, coupled with the expected rise in electricity prices, hydropower is entering a cycle of both volume and price growth. Nuclear power has faced profitability pressures in the past two years due to declining electricity prices. With electricity price risks dissipating, there is strong certainty in future installed capacity, suggesting good growth prospects. Green energy sector performance continues to decline, but rising electricity prices will lead to marginal improvements; accelerated subsidy distribution will improve cash flow, warranting attention on potential performance reversals in the green energy sector. The gas sector continues to recover, with a focus on gas sales growth, demonstrating strong cyclical attributes and high dividend value. Fund holdings have declined quarter-on-quarter, with the sector appearing undervalued and underallocated, highlighting strong capital allocation potential in high-dividend performers. (1) The earnings stability of the utility sector continues to strengthen, maintaining profit levels of around 50 billion yuan for 9 quarters so far in 2023, except for Q4; (2) The net operating cash flow in 2025 is projected to be 775.3 billion yuan, a year-on-year increase of 15.0%, while investment cash flow is expected to be 737.1 billion yuan, a year-on-year decrease of 8.0%. Free cash flow turns positive, with capital expenditure in thermal and wind-solar sectors contracting, leading to continuous cash flow improvement; (3) Market value management is reinforcing dividends with the sector's dividend payout ratio rising to 51% in 2025; (4) Fund holdings are at low levels, with the proportion of public fund holdings in the sector at 0.21% at the end of the second quarter, significantly lower than the sector's 2.43% market value proportion. The reversal of electricity price trends benefits the electricity sector, which, while maintaining stable profits and high dividends, also gains from the performance elasticity brought about by rising electricity prices, striking a balance between offense and defense in the sector. It is advisable to focus on the profit elasticity of thermal, hydropower, and nuclear sectors due to improved electricity price expectations. 1. Thermal power: High dividend and coal-electricity integration companies include HUANENG POWER, HUADIAN POWER, GD Power Development, Shenergy, and Inner Mongolia Mengdian Huaneng Thermal Power Corporation; 2. Hydropower: Sichuan Chuantou Energy and China Yangtze Power, benefiting from the recovery of electricity prices and abundant water supply; 3. Nuclear power: China National Nuclear Power, with a reversal in electricity price expectations; 4. Gas: Jiangxi Jovo Energy and Foran Energy Group, leveraging diversified gas sourcing. Risk warnings Reforms may fall short of expectations; coal prices may rise excessively; variations in usage hours may exceed expectations.