China Galaxy Securities: Spot spread supply and demand pricing, power central SOE mergers and reorganizations expected to accelerate.

China Galaxy Securities released a research report stating that the spot market is fully open, focusing on the supply-demand pricing logic and the regulation ability of thermal power. As of October 2024, five spot markets, including Shanxi, Guangdong, Shandong, Gansu, and inter-provincial markets, have officially started operations. At the same time, four markets in Inner Mongolia, Hubei, Zhejiang, and Fujian are in the stage of continuous settlement trials and are expected to officially operate in the next two years. With the accelerated construction of spot markets, the market is concerned that bidding among different power sources on the same platform may put pressure on electricity prices. At the same time, spot electricity prices have the function of price discovery, which will transmit to medium to long-term electricity prices and have an impact on the overall electricity price level. China Galaxy Securities believes that from the underlying pricing logic, spot electricity prices are mainly affected by fuel costs and electricity supply and demand. In the backdrop of a downward shift in coal prices, it is expected that thermal power companies in provinces with high coal proportions and strong demand layout will have profit support in 2025. In addition, differentiating between different power sources, although new energy entering the spot market faces discount difficulties, considering the high proportion of medium to long-term holdings and the income recovery/compensation mechanisms in some markets, the settlement price of new energy has significantly improved stability compared to spot electricity prices; for thermal power, its strong regulation ability allows it to benefit from the widening peak-valley price difference in the spot market, enabling thermal power to earn premiums in the spot market. It is recommended to focus on gas-powered units and high-parameter coal units with stronger regulation capabilities. China Galaxy Securities' main points are as follows: Review of 2024: Hydropower, thermal power, and nuclear power perform well, while green electricity is relatively under pressure. From the beginning of the year to November 30th, the SW Public Utilities index has risen by 7.81%, while the Shanghai and Shenzhen 300 index has risen by 14.15% during the same period, with the public utilities index underperforming the Shanghai and Shenzhen 300 index by 6.33% points, mainly due to the increase in market risk appetite after the implementation of the "924" policy package. In terms of sub-sectors, from the beginning of the year to now, the changes in hydropower/thermal power/nuclear power/solar power/wind power are 15.21%, 7.90%, 25.73%, -10.43%, and -0.44% respectively. Among them, the significant increases in hydropower and nuclear power are mainly due to the market's preference for dividend assets in a declining interest rate environment. In addition, the improvement in hydropower performance driven by improved water supply within the year, and although nuclear power has experienced slight fluctuations in short-term performance, its long-term growth prospects are solid; the decline in coal prices has driven profit recovery, promoting thermal power to lead in growth; green electricity is constrained by integration and pressure on electricity prices, presenting a situation of dual pressure on performance and valuation, but structurally, wind power outperforms solar power. Opinions on 2025: The spot market is fully open, focusing on the supply-demand pricing logic and the regulation ability of thermal power. As of October 2024, five spot markets, including Shanxi, Guangdong, Shandong, Gansu, and inter-provincial markets, have officially started operations; meanwhile, four markets in Inner Mongolia, Hubei, Zhejiang, and Fujian are in the stage of continuous settlement trials and are expected to officially operate in the next two years. With the accelerated construction of spot markets, the market is concerned that bidding among different power sources on the same platform may put pressure on electricity prices. At the same time, spot electricity prices have the function of price discovery, which will transmit to medium to long-term electricity prices and have an impact on the overall electricity price level. We believe that from the underlying pricing logic, spot electricity prices are mainly affected by fuel costs and electricity supply and demand. In the backdrop of a downward shift in coal prices, it is expected that thermal power companies in provinces with high coal proportions and strong demand layout will have profit support in 2025. In addition, differentiating between different power sources, although new energy entering the spot market faces discount difficulties, considering the high proportion of medium to long-term holdings and the income recovery/compensation mechanisms in some markets, the settlement price of new energy has significantly improved stability compared to spot electricity prices; for thermal power, its strong regulation ability allows it to benefit from the widening peak-valley price difference in the spot market, enabling thermal power to earn premiums in the spot market. It is recommended to focus on gas-powered units and high-parameter coal units with stronger regulation capabilities. The merger and reorganization of central enterprises in the power sector is expected to accelerate, focusing on electricity integration platforms with greater installed capacity flexibility. In September 2024, the China Securities Regulatory Commission issued the "Opinions on Deepening Market Reform for Mergers and Acquisitions of Listed Companies" (six opinions on mergers and acquisitions), which mentioned supporting resource integration and reasonably increasing industrial concentration for listed companies in traditional industries. Combined with the fact that the five major power generation groups still have a large proportion of unlisted installed capacity, we believe that the merger and reorganization of listed companies in the public utilities industry are expected to accelerate. Specifically, as of the end of 2023, within the five major power generation groups, unlisted installed capacity of Huaneng Group, Huadian Group, State Energy Group, State Power Investment Corporation, and Datang Group are approximately 67 million kilowatts, 143 million kilowatts, 128 million kilowatts, 149 million kilowatts, and 73 million kilowatts respectively, accounting for 27.5%, 66.6%, 39.4%, 62.6%, and 40.1% of the total installed capacity of the group, respectively. According to the positioning of each electricity business platform of the five major power generation groups, SPIC Industry-Finance Holdings, Huadian Power International Corporation, GD Power Development, DATANG POWER, China Longyuan Power Group Corporation, Spic Yuanda Environmental-Protection have high growth potential in installed capacity, with the ratio of waiting-injected installed capacity to existing installed capacity being 404%, 150%, 80%, 77%, 66% (Spic Yuanda Environmental-Protection currently has no operating installed capacity). Investment strategy: 1) Deriving the supply-demand pricing logic: On the one hand, the full opening of the spot market strengthens the impact of supply and demand on electricity prices, including both electricity supply and demand, as well as coal prices derived from coal supply and demand. Looking ahead to 2025, in the context of a downward shift in coal prices, we expect that thermal power companies in provinces with high coal proportions and strong demand layout will have profit support, and we recommend focusing on Shenergy, Zhejiang Zheneng Electric Power, Huaneng Power International, Inc., etc. On the other hand, unlike the discount difficulties faced by new energy participating in the spot market, considering the high proportion of medium to long-term holdings and the income recovery/compensation mechanisms in some markets, the settlement price of new energy has significantly improved stability compared to spot electricity prices. For thermal power, its strong regulation ability allows it to benefit from the widening peak-valley price difference in the spot market, enabling thermal power to earn premiums in the spot market. It is recommended to focus on gas-powered units and high-parameter coal units with stronger regulation capabilities.Discount dilemma, the regulating ability of thermal power benefits from the increasing peak-valley price difference in the spot market. It is suggested to pay attention to gas turbines and high-parameter coal-fired power plants with stronger regulating abilities. Mergers and acquisitions and the improvement of the quality of listed companies: Currently, the proportion of the top five power generation groups that are not listed is still close to 50%. With the background of central SOE reform, mergers and acquisitions are expected to accelerate. The integration platforms of the major power businesses under the top five power generation groups are expected to receive high-quality asset injections. It is recommended to pay attention to power platforms with large installed capacity growth elasticity, such as SPIC Industry-Finance Holdings, Spic Yuanda Environmental-Protection, Huadian Power International Corporation, GD Power Development, DATANG POWER, China Longyuan Power Group Corporation, etc. The action of listed companies improving quality and efficiency and increasing returns continues to advance. It is optimistic about the hydropower and nuclear power sectors with strong dividend attributes, as well as some high dividend yield thermal power companies. It is suggested to pay attention to China Yangtze Power, China National Nuclear Power, Zhejiang Zheneng Electric Power, Shenergy, etc.; at the same time, it is recommended to seize potential profit and valuation recovery opportunities of some companies, and pay attention to China Three Gorges Renewables, CHINA GREEN, etc.Risk warning: Risks of policy implementation falling short of expectations; risks of electricity demand falling short of expectations; risks of significant fluctuations in coal prices; risks of natural resource conditions such as water supply, wind, and sunlight falling short of expectations, etc.