Shanxi: Accelerating expansion of the electricity spot market, state-owned enterprise restructuring and coal-electricity integration will become the core thread by 2025.

Shanxi released a research report stating that by 2025, the power industry will focus on deepening the spot market, integrating state-owned assets, and integrating coal and electricity to explore structural opportunities. The China Electricity Council predicts that by 2025, the national total electricity consumption will reach 10.4 trillion kilowatt-hours, a year-on-year growth of 6%, with a new renewable energy installed capacity exceeding 300 million kilowatts, and the total installed capacity may exceed 3.8 billion kilowatts. The demand for emerging industries in the Yangtze River Delta and the Guangdong-Anhui region is growing rapidly, coupled with the promotion of electricity market reform, optimization of thermal power business models, and strengthening of hydropower dividend logic, making them key investment areas. Key points from Shanxi: Overall outlook The bank believes that the further promotion of the electricity spot market and the asset mergers and acquisitions of power companies are the two important trends for 2025. 1) Currently, the progress of the electricity spot market is accelerating, and thermal power has advantages in the spot market competition. From the perspective of power generation, compared to other power sources, thermal power has higher adjustment flexibility, so it can generate more electricity during high-price periods and less during low-price periods, adjusting its power generation strategy flexibly to respond to price changes. From the perspective of price formation, the spot settlement price of thermal power usually has a premium over the benchmark coal price, while wind and solar power trade at a discount. Therefore, the bank still sees the relative economy of thermal power in the promotion of the spot market. 2) With the new "Six Mergers and Acquisitions Policy," mergers and acquisitions and restructuring of state-owned power companies continue to heat up. The five major power groups still have a high proportion of power assets not injected into listed platforms. It was identified that State Energy Group, China Huaneng Group, China Huadian Group, State Power Investment Corporation, and China Datang Corporation still have 39%, 67%, 27%, 63%, and 40% of power capacity not injected into listed platforms. The focus in the future will be on mergers or acquisitions to increase enterprise valuation and profitability through the injection of high-quality assets. Thermal power sector 1) There are expectations for continued improvement in costs in 2025; 2) Advantage of coal-electricity joint operation is still prominent, companies with coal-electricity integration layout have higher and more stable ROE compared to non-integrated enterprises. Relevant companies are still expanding, with China Shenhua Energy, Huaihe Energy, and China Coal Xinji Energy having large projects under construction or planned, with proportions of operating projects at 24%, 132%, and 75%, respectively; 3) Ancillary services + capacity electricity prices drive the transformation of thermal power into public utilities. In the past, thermal power revenue was determined solely by electricity sales revenue, meaning revenue = installed capacity operating hours electricity price. The profit of thermal power units mainly depends on the price difference between coal and electricity, but due to the volatility of coal prices and the relative stability of electricity prices, the profitability of thermal power companies exhibits strong cyclicality. Thus, the average PB value of the thermal power sector is consistently lower than that of hydroelectric and nuclear power sectors possessing keen public utility characteristics. By increasing revenues from ancillary services and capacity electricity prices, the sensitivity of commercial models to electricity prices and coal prices is reduced, helping to improve the stability of earnings of thermal power companies, thereby enhancing their public utility nature and increasing their valuation. Hydropower sector 1) Continued benefits from depreciation expiration and reduced financial expenses on the cost side: The hydropower industry has a high initial investment in equipment, with a high proportion of depreciation in costs, and the operational life far exceeding the depreciation life. During the 14th Five-Year Plan to the 16th Five-Year Plan, many hydropower companies experienced significant depreciation expiration, significantly increasing their profit margins. Currently, available hydropower resources are limited, and companies are gradually repaying existing debts; in an environment of continuously decreasing loan rates, hydropower companies can optimize their debt structure through debt replacement. 2) Favorable style of hydropower dividend in a low-interest rate environment: Hydropower companies typically have high net present value ratios, with most companies having high net present values (greater than 1.5), and operating cash flows exceeding 50% of operating income, supporting relatively high and stable dividend proportions for companies. In terms of dividend proportions, the average dividend rate for the hydropower sector is high and trending upward, with companies like China Yangtze Power, SDIC Power Holdings, Huaneng Lancang River Hydropower Inc. offering dividend commitments during the 14th Five-Year Plan, with promised dividend proportions of 70%, 55%, and 50%. Hydropower projects have counter-cyclical properties and are less affected by short-term macroeconomic fluctuations and electricity prices, offering high value for investment. Investment recommendations For the power industry in 2025, the bank recommends focusing on power company mergers and acquisitions, continued dividends in a low-interest rate environment, and the coal-electricity integration layout as key investment themes. On the demand side, in the short term, the China Electricity Council predicts that by 2025, the national total electricity consumption will reach around 10.4 trillion kilowatt-hours, a year-on-year increase of about 6%, with a peak national electricity load of around 1.55 billion kilowatts, and an increase of new renewable energy electricity generation capacity exceeding 300 million kilowatts; by the end of 2025, the national installed power generation capacity is expected to exceed 3.8 billion kilowatts, a year-on-year increase of about 14%. In the long term, driven by the development of new quality productive forces and the trend of energy replacement, the demand for electricity consumption may further increase, and the bank believes that the growth rate of electricity consumption may remain higher than the GDP growth rate for some time; in particular, the early layout and high proportion of emerging industries in the Yangtze River Delta and the Guangdong-Anhui region, with industries such as photovoltaic manufacturing and AI data centers being energy-intensive, are expected to have greater elasticity in electricity demand growth. On the supply side, for the thermal power sector: in the short term, a significant rebound in upstream fuel prices is unlikely, which bodes well for the cost side of the thermal power sector; the impact of hydroelectricity on thermal power generation is further weakened, with continuous improvement expected in the electricity generation from thermal power in the future; in the long term, the gradual advancement of the coal-electricity capacity pricing mechanism will gradually increase the proportion of fixed costs recovered through capacity pricing, and the two-tier pricing system will continue to support the stable profitability and dividend capacity of the thermal power industry; under the construction of a new type of power system, the revenue from auxiliary services in thermal power plants is expected to increase; the new value points under the improved commercial model of thermal power assets are still awaiting exploration by the market. For the hydropower sector: in the short term, the continuity of water supply needs to be continuously monitored; in the long term, the peak of capital expenditure in hydropower is over, and under the backdrop of market-oriented reform, electricity prices may continue to rise, with room for further improvement in dividend proportions as capital structure continues to be optimized. Risk warnings: Fluctuations in on-grid electricity prices due to marketization; significant fluctuations in coal prices; lower-than-expected electricity demand; decreased willingness of companies to pay dividends; slower-than-expected progress in mergers and acquisitions; changes in interest rates.Significant changes in the environment."Cmo ests?" "How are you?"