UBS: Lowering the target price of Mainland China's power sector, CGN POWER (01816), downgraded to "sell" in one fell swoop.

UBS released a research report stating that their view on mainland China's power stocks has turned neutral, as they expect the fundamentals to weaken due to factors such as this year's electricity price reduction being higher than expected, and the slowdown in the growth prospects of electricity demand. The target price for independent power plants was reduced by an average of 31%. They downgraded CGN POWER (01816) from "buy" to "sell", and downgraded CHINA RES POWER (00836) from "buy" to "neutral". At the same time, they lowered profit forecasts for 2025 to 2027 by 20% to 24%, lower than market expectations by 12% to 16%. The report mentioned that although mainland power stocks underperformed the MSCI China Index by 15% during the year, they believed that the industry's valuation was equivalent to a forecast PE ratio of 10 times in 2025, with earnings per share growth of 11% from 2025 to 2027, compared to 9% from 2020 to 2023. With an average PE ratio of 9 times in 2020, they considered the valuation fair but not attractive. UBS prefers China Longyuan Power Group Corporation more than CHINA RES POWER because of the former's lower coal exposure, potential benefits from renewable energy policy reforms, and a preference for China National Nuclear Power (601985.SH) over CGN POWER due to its zero open positions in Guangdong and Guangxi, lower risks of rising fuel costs, and potential surprises from renewable energy business. The bank believes that Longyuan will be a major beneficiary of future renewable energy policy reforms in China, and considers the valuation of the coal sector fair, reflecting slower profit growth and demand growth slowdown, but a drop in coal prices may bring upside surprises. In the nuclear power sector, they believe potential profit squeeze or valuation pressures on CGN POWER (equivalent to a forecast P/B ratio of 0.9 times, with a return on equity continuously under pressure at 8%, lower than the historical average of 11%) will bring further downward pressure. Their sector preferences are in order: renewable energy, followed by coal, and lastly nuclear power.