Cinda: Market-oriented reform of heating prices is key to improving profitability; price adjustments are expected to spread nationwide.

Cinda's research report stated that the heating industry is greatly affected by policies, and the market-oriented reform of heating prices is expected to become the key to industry profitability improvement. The company believes that heating price adjustments are expected to spread from local regions to the whole country, and the trend of heating price adjustments is expected to continue. In the short term, with heating prices remaining unchanged, it is recommended to focus on heating companies with strong cost control capabilities and efficient operational management, which are expected to highlight their advantages in the background of heating price reform. Cinda's main points are as follows: The heating industry, as a typical public utility industry, continues to advance its reform process. From 2010 to 2023, China's centralized heating area has steadily increased, with a compound annual growth rate of 7.8%, with residential area accounting for 76%. In terms of heating methods, the proportion of coal-fired heating in China exceeds 70%, with coal-fired combined heat and power generation as the main heating method. In terms of heating medium, hot water supply is mainly used, which has the characteristics of long transmission distance and small heat loss, suitable for heating urban residents and public buildings, accounting for close to 85%. China's heating price reform has a history of more than twenty years. In April 2025, the Central Committee and the State Council issued the "Opinions on Improving the Price Governance Mechanism," proposing to deepen urban heating price reform and accelerate the transformation of heating measurement. The marketization of heating prices and the reform of the two-tier heating price system are still ongoing. There is a large difference in the profitability levels of residential heating companies, and profits and losses are affected by both heating pricing and cost control factors. In terms of pricing, nationwide, Beijing has the highest unit heating price, which also makes the profitability level of heating companies in Beijing such as Kingfore Energy Group and Beijing Jingneng Thermal better. The heating prices are determined by government-regulated pricing, based on "permitted cost + reasonable return" method, and price adjustment is generally conducted every three years. In practice, some cities have not adjusted heating prices for over ten years, and rising fuel prices are putting pressure on company profits. Since 2025, several districts and counties nationwide (such as Jiamusi City and Lintong District in Xi'an) have implemented heating price adjustments. The company predicts that future heating price increases are expected to become a trend, and heating companies are expected to see profit recovery. In terms of costs, fuel costs account for about 60% of total heating costs, so controlling fuel costs becomes crucial for profitability when prices remain stable. Comparing Luenmei Quantum and Shenyang Huitian Thermal Power, both in the Shenyang area, achieved gross profit margins of 24% and -13.8% respectively in 2024. This is mainly because Luenmei Quantum uses cost-effective brown coal with low calorific value, strengthens control over coal transportation and storage, and has strong cost control capabilities on the fuel side; while also implementing fine management of heat transmission in the pipeline network to minimize heat losses; combined with the fact that most customers in the heating area are in newly constructed buildings, with good insulation effect and low heat consumption. This helps in increasing profits by improving operational management efficiency. Due to their business models, residential heating companies have ample cash flow. Heating fees are generally collected in advance and settled based on the number of heating days in the heating period, so the cash flow situation of companies is generally good. Among the 5 heating companies selected by the company, 4 have a contract liability ratio of around 40% of total revenue, with positive free cash flow and net profit cash content exceeding 100%, indicating excellent cash flow performance of the sector companies. Risk warning: Residential heating price adjustments fall short of expectations; fuel price increases exceed expectations; safety production risks.