Huachuang Securities: Optimistic about the reconstruction of the valuation order of green electricity, first choice is high certainty of offshore wind.

Huachuang Securities released a research report stating that 2024 is a year of great turbulence in the power industry, with thermal, hydropower, and nuclear power being successively reassessed by the market. Looking ahead to 2025, the core viewpoint of Huachuang Securities is to focus on the rebuilding of a new order, essentially optimistic about the restoration of the valuation system in undervalued sectors. In terms of investment order by sector: first, prioritize offshore wind with higher certainty, while also paying attention to the marginal improvement of traditional green electricity; secondly, suggest that thermal power can go with the flow; and finally, dividends and changes in style complement each other, emphasizing the narrative of stable asset denominators. In terms of individual stocks, Huachuang Securities is optimistic about the rebuilding of the valuation order for green electricity. They strongly recommend Zhongmin Energy (600163.SH) and Fujian Funeng (600483.SH), operators of offshore wind power in Fujian; three strategies for dealing with thermal power. In the short to medium term of one year, the performance expectations of thermal power are still the main pricing logic of the market. It is recommended to focus on central SOEs such as Huadian Power International Corporation (600027.SH) and Huaneng Power International, Inc. (600011.SH); hydropower and nuclear power focus on the top-down narrative. Hydropower recommends focusing on China Yangtze Power (600900.SH); nuclear power recommends focusing on China National Nuclear Power (601985.SH) and CGN Power Co., Ltd. (003816.SZ). Huachuang Securities' main points are as follows: 2024 is a year of great turbulence in the power industry, with thermal, hydropower, and nuclear power being successively reassessed by the market. Looking ahead to 2025, our core viewpoint is to focus on the rebuilding of a new order, essentially optimistic about the restoration of the valuation system in undervalued sectors. In terms of investment order by sector: first, prioritize offshore wind with higher certainty, while also paying attention to the marginal improvement of traditional green electricity; secondly, we suggest that thermal power can go with the flow; and finally, dividends and changes in style complement each other, emphasizing the narrative of stable asset denominators. Offshore wind is the first choice, with three key logics. Firstly, there is a long-awaited policy response, as the market for green electricity has been dormant for more than two years after reaching a peak in 2021, during which time there has been little response from the policy side towards green electricity. Recently, there has been a slight warming of policies, and offshore wind policies are expected to reverse. Secondly, its more solid fundamentals, including excellent absorption capacity and profitability protection brought by high electricity prices. Thirdly, there is greater room for development, combining potential growth in installed capacity in coastal provinces in the long term, offshore wind and nuclear power are expected to be the better choices in the future for coastal provinces, and the potential of offshore wind may be greater. In 2023, the total installed capacity of offshore wind power in China was only 37GW, accounting for less than 3% of the total installed capacity, and the potential development scale in the future is considerable. Secondly, the marginal changes in green electricity are also worth paying attention to, as the valuation system urgently needs to be clarified and reconstructed. Like offshore wind, traditional green electricity has seen clearer expectations of policy benefits recently. Due to the pressure on the fundamentals of traditional green electricity, we are more optimistic about pricing towards the improvement of green electricity margins. In addition, the valuation system for green electricity is chaotic, with the slope of the PB-ROE curve in 2023 almost approaching zero, meaning that regardless of ROE levels, similar PB ratios are given, behind the anchor drift is a strong expectation of valuation system reconstruction. The three-year cycle of thermal power is fluctuating, and three strategies are proposed. Looking back at the three-year cycle of thermal power, the start of each stage of the thermal power market cycle has been driven by expectations of profit games. Retrospectively, the source of excess returns has mainly been short-term performance improvement driven by rising electricity prices and declining coal prices, while the retreat has mainly been due to profit contraction caused by coal price declines that were less than expected or electricity volumes that were less than expected. At present, it is difficult to define the long-term logic of pricing for thermal power in the market, especially evident in November 2023 when thermal power capacity pricing was introduced but the market did not react in the short term. Based on this finding, we attempt to provide three strategies for seizing the thermal power market. 1. In the short to medium term, the performance expectation of thermal power over one year is still the main pricing logic of the market: looking ahead to the fourth quarter of this year, if the electricity prices signed in 2025 meet market expectations, it may lead to a new round of thermal power market. 2. Long-termism requires selecting the right framework: for example, the tighter power supply and demand in the Yangtze River Delta region, and the higher electricity prices leading to stronger profitability. 3. Pre-positioning of electricity prices, subsequent changes in coal prices may bring a certain profit elasticity, and the catalytic point may be in Q2 2025: when electricity prices are relatively determined and market coal prices are declining, companies with low long-term coal contract ratios and high market coal ratios may release greater performance elasticity. Hydropower and nuclear power focus more on top-down narratives. As stable assets, the future performance outlook is expected to remain stable, and hydropower and nuclear power may involve more top-down logic. The recent record highs of hydropower stocks are due to the continuous fermentation of denominator logic, with dividends being the main catalyst for hydropower this year. The logic of hydropower may still need to be judged based on whether the subsequent economy will reverse and whether long-term bond rates will continue to decline. Similarly, as a defensive asset, the clear growth prospects of nuclear power are one of the important bases for valuation opening. Whether the subsequent market of hydropower and nuclear power can continue may be more related to style. Investment recommendations. 1. Optimistic about the rebuilding of the valuation order for green electricity. Strongly recommend Zhongmin Energy and Fujian Funeng, operators of offshore wind power in Fujian; suggest focusing on offshore wind platforms in other provinces such as Shenergy, Jiangsu New Energy Development, Zhejiang Provincial New Energy Investment Group, China Suntien Green Energy Corporation, etc. For traditional green electricity operators, combined with profitability and valuation, it is recommended to pay attention to NYOCOR, China Three Gorges Renewables, Ningxia Jiaze Renewables Corporation, CECEP Wind-Power Corporation, etc. 2. Three strategies for dealing with thermal power.In the medium to short term, the performance expectations of the thermal power industry within a one-year timeframe remain the main pricing logic in the market. It is recommended to pay attention to state-owned enterprises such as Huadian Power International Corporation and Huaneng Power International, Inc. Preferred trends may lean towards a long-term perspective, so it is advised to focus on companies such as Anhui Wenergy, Zhejiang Zheneng Electric Power, and Shenergy. With electricity prices leading the way, unexpected profits may be generated through changes in coal prices, with a potential catalyst point in the 2nd quarter of 2025. It is suggested to keep an eye on companies with a high market share in coal, such as Zhejiang Zheneng Electric Power. In terms of hydropower and nuclear power, attention should be paid to top-down narratives. For hydropower, it is recommended to focus on companies like China Yangtze Power, Huaneng Lancang River Hydropower Inc., and Sichuan Chuantou Energy. As for nuclear power, it is advised to pay attention to companies like China National Nuclear Power and CGN Power Co., Ltd.Risk warning: 1. Slow progress in policy advancement in the green energy industry, risks related to grid connection and electricity prices, etc.; 2. Upward trend in coal prices for thermal power plants and downward trend in electricity prices, lower-than-expected electricity consumption, etc.; 3. Disruption in hydroelectric power generation due to water supply, nuclear power safety accidents, upward trend in interest rates, etc.