GF SEC: Stable electricity and coal prices are expected to rise, focusing on improving the performance of thermal power and water resources.

GF Securities released a research report stating that from the perspective of incremental electricity contribution, on the consumption side, due to base reasons, the secondary industry accounted for 79% of the electricity growth, exceeding the structural proportion for the first time this year, with a proportion of 46% from January to September; on the generation side, wind and solar contributed to a total increase of 50% in electricity generation, with a proportion of 112% from January to September, indicating a clear trend in the transformation of power generation. Since early July, hydropower stocks have experienced a significant decline due to market trends and fundamentals, but the current fundamentals have significantly improved, indicating increased value for investment. The free cash flow of the thermal power sector has turned positive, with dividend increases pushing the Hong Kong market leader's dividend yield above 7%, while several A-share companies also have dividends of over 5%. Additionally, with clear market value management and Q3 performance generally exceeding expectations, a long-term stable market trend is on the horizon. GF Securities' main points are as follows: In September, the growth rate of secondary industry electricity under the low base continued to recover, and the autumn flood drove the significant upward trend in hydropower and thermal power. According to the data from the Energy Bureau, in September, the total electricity consumption of the whole society and urban and rural residents increased by +4.5%, +7.3%, +5.7%, +6.3%, and -2.6% respectively year-on-year; the decrease in the growth rate of residential electricity consumption is mainly due to the impact of the high base caused by the 27.8% increase in the same period last year. The continued improvement in the growth rate of the secondary industry in September is in line with expectations from the previous month, and it is expected that the sequential increase will continue (due to the low base of last year). From the sub-structure of the secondary industry, the recovery of the black metal (due to the low base) and electric machinery contribute to the growth of power generation, while non-metal and non-ferrous metals continue to be under pressure. In terms of electricity generation, in September, hydropower generation increased significantly by 31.9% year-on-year, mainly due to the autumn flood and the low base effect of the same period last year. As a result, thermal power generation decreased by -5.4% year-on-year, and it is expected that this trend will remain unchanged in October and November; wind and solar power generation increased by 7.6%, +21.1%, and +1.6% respectively, with wind power under pressure. From the perspective of incremental electricity contribution, due to base reasons, the secondary industry accounted for 79% of the electricity growth, exceeding the structural proportion for the first time this year, with a proportion of 46% from January to September; on the generation side, wind and solar contributed to a total increase of 50% in electricity generation, with a proportion of 112% from January to September, indicating a clear trend in the transformation of power generation. The autumn flood exceeded expectations, and the fundamental of hydropower has undergone a major reversal, shaping investment opportunities in hydropower. Observing hydrological data, the inflow of water in the main river basins in July and August was lower, with inflow decreasing by 3-5% year-on-year. It is estimated that China Yangtze Power's electricity generation in July and August decreased by around 27% year-on-year. Of particular note is the significant effect of the autumn flood in September combined with the low base effect, with inflow in the main river basins growing by over 50% year-on-year. It is estimated that China Yangtze Power's four power plants saw a year-on-year increase of +74% in electricity generation in September, and +93% from October to date. The base for electricity generation in October and November is close to the lowest levels in the past few years, and high growth is expected to continue. Currently, the Yalong River and Dadu River basins are in a state of water storage, and it is worth noting that the inflow of water in the third and fourth quarters of the Hongshui River where Guangxi Guiguan Electric Power is located has exceeded expectations, shaping expectations of high performance. Since early July, hydropower stocks have experienced a significant decline due to market trends and fundamentals, but the current fundamentals have significantly improved, indicating increased value for investment. A consensus on stabilizing electricity prices and coal prices to prevent internal consumption is gradually forming, with coal prices steadily rising to improve expectations for electricity prices. Recently, hydropower generation has grown significantly, putting considerable pressure on thermal power generation. However, the bank has seen a rapid increase in the price of Qinhuangdao Q5500 thermal coal from August to September by 59 yuan/ton to reach 765 yuan/ton, which is expected to remain at a high level. The bank emphasizes that the expectation of stabilizing electricity prices and coal prices to prevent internal consumption is gradually forming at the industry level, with expectations for both electricity and coal prices gradually rising. If the previous pessimistic expectations can be improved, the thermal power market is about to take off. In addition, the bank is optimistic about the linkage between electricity generation, electricity prices, and coal prices. Additionally, the stability and slight increase in coal-fired power generation capacity, electricity prices, and auxiliary services strengthen the profitability of thermal power and accelerate the commercialization of utilities. The free cash flow of the thermal power sector has turned positive, with dividend increases pushing the Hong Kong market leader's dividend yield above 7%, while several A-share companies also have dividends of over 5%. Additionally, with clear market value management and Q3 performance generally exceeding expectations, a long-term stable market trend is on the horizon. Risk Warning Reforms falling short of expectations; excessive rise in coal prices; lower-than-expected progress in green energy installation.