Orient Securities: Utility performance expectations are bottoming out, and electricity prices and natural gas prices are expected to gradually enter a new upward cycle
The Zhitong Finance App learned that Orient Securities released a research report stating that it is optimistic about the utilities sector. The bank believes that: 1) in the context of the restructuring of the international order and the high demand for AI energy use, utilities are expected to be revalued; 2) In order to serve a high proportion of new energy consumption, China needs to further promote market-based electricity price reform. In the future, the electricity market will gradually give full pricing to all attributes of electricity products (electric energy value, regulation value, capacity value, environmental value, etc.); 3) The global energy price center is moving upward in the context of global order restructuring and geographical conflict. The bank expects China's electricity prices and natural gas prices to gradually enter a new round of upward trend.
Orient Securities's main views are as follows:
Profits in the 2Q26 thermal power sector accelerated, and the fastest decline in performance expectations may have passed
The total operating income of the 2Q26 thermal power sample company was -3.6% YoY, the total net profit to mother was -37.4% YoY, -32.2% YoY, and total operating cash flow -11.4% YoY; gross margin -3.9 pct to 13.8% yoy, and net interest rate -3.8 pct to 6.9% yoy. Of the 24 sample companies, net profit returned to their mother improved year-on-year, while 17 declined. The decline in profit in the second quarter was mainly due to the year-on-year rise in coal prices driving up fuel costs, while electricity prices in most regions are still in a downward cycle, and both sides of the price and cost are squeezing profit space; performance differentiation is related to differences in the regional decline in electricity prices and differences in electricity volume structure. Looking ahead, considering that coal prices in the market have remained strong since 3Q26, the bank expects that the 3Q26 thermal power sector's year-on-year growth rate may still be difficult to improve significantly compared to the second quarter (but the point where the fastest decline in performance expectations may have passed), and the 2027 sector is expected to usher in a performance recovery period as electricity prices rise. Furthermore, the bank believes that the core driver of coal-fired power sector stock prices in the second half of the year will gradually shift to 2027 electricity price expectations, and subsequent increases in coal prices in the market are expected to have an indirect positive impact on coal-fired power sector stock prices by boosting Changxie electricity price expectations in 2027.
2Q26 hydropower and nuclear power performance is under pressure, and profits from new energy sources continue to decline sharply
The 2Q26 hydropower sample company's revenue was -0.6% YoY, net profit to mother -1.6% YoY, and operating cash flow -7.7% YoY. Considering that the low base effect of water depletion from 3Q25 is quite significant, and the combined financial cost savings of hydropower are still continuing (the total financial expenses of the 2026H1 hydropower sample company were 3.59 billion yuan, -11.6% year over year), the bank expects the 3Q26 hydropower sector's year-on-year growth rate to pick up compared to 2Q26. The 2Q26 nuclear power sample company's revenue was -13.1% YoY, net profit to mother 9.4% YoY, and operating cash flow -6.4% YoY. The revenue and profit growth rates of different companies are affected by factors such as nuclear power maintenance and cost rate fluctuations, and there are differences in revenue and profit growth rates. The bank expects the profit growth rate of the industry to gradually bottom up as the installed capacity of nuclear power continues to grow and the institutional electricity price policies in various provinces are improved one after another. The new energy sample company's 2Q26 revenue was 2.8% YoY, net profit to mother was -41.9% YoY, -26.8% YoY, and operating cash flow +37.9% YoY. The main reason is that electricity prices are under pressure after new energy sources are fully entering the market due to the increase in the abandonment rate of wind and light, suppressing power generation. The bank expects that the 3Q26 energy utilization rate and market-based electricity price issues will hardly improve, and that the performance of new energy operators may continue to be under pressure.
Investment advice
In the context of the geographical conflict, the natural gas price center may exceed market expectations, and domestic upstream gas resources are expected to benefit. The hydropower business model is simple and excellent, and the cost of electricity is at the lowest level among all power sources. It is recommended to lay out large hydropower in high-quality watersheds at low prices. In 2026, the electricity price compensation ratio for coal power capacity in various provinces in China will continue to increase, and the superposition spot market will be fully rolled out nationwide. Thermal power will gradually shift from base-charged power sources to adjustable power sources. Improvements in its business model are already beginning to appear. The thermal power industry's dividend capacity and willingness to pay dividends are expected to continue to increase in the future. There is strong certainty about the long-term installed growth of nuclear power, and the time point where the greatest downward pressure on market-based electricity prices has passed. Under the expectation of carbon neutrality, there is still room for high growth in electricity production. Waiting for the bottom inflection point of the industry's profits, leading companies in the industry with a relatively high share of wind power are preferred.
Risk warning: The abandonment rate of wind and light has increased dramatically, coal prices have risen sharply, market electricity prices are lower than expected, etc.