Sinolink: The weakening correlation between profits and coal prices and annual long-term contract electricity prices can enhance valuation central tendency through the integration of utilities and electricity trading.

Sinolink released a research report stating that the electricity reform has led to a more timely transmission of coal prices, electricity consumption prices, and capacity electricity prices, reducing the use of hours through market-based trading, and the stability of thermal power performance has been continuously improving. Both national and regional companies have seen a contraction in quarterly performance volatility for four consecutive years. With positive free cash flow in the sector and an increase in dividend payout ratio, the dividend nature of thermal power will drive an increase in valuation. The sector is already significantly underweighted, and the cost-effectiveness of dividend yield is becoming apparent, indicating that valuations are already in a window of repair. In addition, the integration of electricity and finance also has the opportunity to further open up valuation space, optimistic about the transformation of business models. In conclusion, the fundamentals of the bottom-up, underweighted and undervalued thermal power, in conjunction with the theme of public utilityization, are worth paying attention to. Sinolink's main points are as follows: Smooth price transmission of electricity consumption prices, focusing on the rise in electricity consumption prices The bank has been discussing electricity consumption prices under energy inflation since the beginning of the year. The transmission chain of rising coal prices -> spot electricity prices increase (1-2 months lagging behind coal prices) -> monthly electricity prices increase (1 month lagging behind spot electricity prices) -> annual long-term contract price increase (depending on the monthly electricity price at the end of the year) has progressed to the third section, and the market has gradually developed expectations for an increase in annual long-term contract electricity prices. Two things are particularly important in the above chain: first, the sustainability of rising coal prices. The bank believes that the central rise in coal prices this year is a high probability event. In the short term, the increase in coal prices is driven by high demand for thermal power in the first half of the year; in the long term, the bank's calculation shows that the total amount of thermal power generation in the next 5 years can maintain a level of 6.2 trillion kilowatt-hours, with geopolitical factors, global power shortages, and domestic safety oversight leading to supply-side shrinkage. The second is the tightness of the power supply and demand. At present, China's thermal power utilization hours are still in a downward cycle, but the bank's calculation shows that the marginal decline has slowed down, which is already reflected in the increase in monthly spot electricity prices. In addition, over the past few years, China's electricity consumption prices have continued to decline, which has increased the preference for spot and monthly prices in user power purchase agreements, indirectly lowering the prices of annual long-term contracts. The bank expects the demand for annual long-term contracts in 2027 to increase, driving an increase in electricity prices. Different viewpoints: Market-based trading has decoupled the utilization hours/nominal supply and demand of electricity and the profitability of thermal power generation The market had linked the utilization hours/nominal supply and demand of electricity with the electricity profit of thermal power generation (ignition price difference), believing that a decrease in utilization hours/electricity surplus would lead to a narrowing of the ignition price difference. The bank has always emphasized that thermal power now includes non-power utilization hours, meaning that through market-based trading, during periods when market-based trading electricity prices are lower, thermal power plants can purchase lower-priced electricity through channels such as spot markets to fulfill their generation contracts, generating revenue without actually generating power. This means that while nominally the utilization hours are decreasing, the actual profitability of electricity generation is not affected. At the same time, by increasing the proportion of electricity generation during high-priced periods, thermal power plants can increase their electricity profit levels. Therefore, the bank observes that while thermal power utilization hours are declining, the profitability of electricity generation is better than the levels of long-term contract electricity prices and coal price changes, with leading companies disclosing that market-based trading electricity revenue increased by 1.5% in Q1 2026, which further confirms the above view. Tighter reliable power supply, focusing on the excess increase in capacity electricity prices Discussion of capacity value is more about the level of reliable power supply. China's peak electricity demand has been at a new high, with rapid growth in new energy installations but a reduction in effective capacity during peak periods. The demand for system reliability capacity is growing faster than the growth in nominal installed capacity, highlighting the capacity value of regulating resources such as coal-fired power. The bank's calculations show that during the 13th Five-Year Plan period, there is downward pressure on capacity reliability when considering only power generation installations, and even after considering pumped storage and electrochemical energy storage, only a tight balance can be achieved. Therefore, the bank believes that the capacity electricity prices of thermal power plants have the potential to continue to increase. By 2026, the capacity electricity prices of most provinces in China will increase from 100 yuan per kilowatt-year to 165 yuan per kilowatt-year, with some provinces further raised to 231-330 yuan per kilowatt-year. By 2025, the proportion of capacity profits for leading thermal power companies will exceed 50%. The future increase in capacity electricity prices can offset the decrease in utilization hours, combined with the improvement in market-based trading capabilities, reducing the impact of declining hours on profits. Investment Recommendations From the perspective of dividend value and public utility, it is recommended to pay attention to national companies such as Huaneng Power International, Inc.H, Huadian Power International CorporationH, GD Power Development, CHINA RES POWERH, and regional companies such as An Hui Wenergy, Shenergy, Jiangsu Guoxin Corp., Ltd., Gepic Energy Development, HCIG Energy Investment, Beijing Jingneng Power, Guangzhou Development Group Incorporated. From the perspective of electricity price increases, it is recommended to pay attention to integrated coal-fired power companies such as China Coal Xinji Energy and Inner Mongolia Mengdian Huaneng Thermal Power Corporation, as well as Guangdong's Guangdong Baolihua New Energy Stock. Risk Warning: Unexpected fluctuations in coal prices; policies on electricity system reform not meeting expectations; utilization hours of various power sources falling below expectations.