GF SEC: Electricity price cycle inflection drives profit recovery; cash flow improvement solidifies dividend allocation

GF SEC released a research report stating that in 2026Q1-3, the utilities sector (GFGY) achieved net profit attributable to parent of RMB142.2 billion (YoY -25.1%) and net profit attributable to parent after non-recurring items of RMB137.6 billion (YoY -21.8%); the sector's fundamental expectations are improving, dividend value is prominent, and it has significant allocation value. Looking ahead, thermal power is expected to see a resonance of earnings and valuation, while investors are also advised to watch the earnings elasticity of hydro, thermal, and nuclear power as electricity price expectations improve. GF SEC's main views are as follows: Sector free cash flow rises sharply; upward electricity price expectations point to fundamental improvement In 2026Q1-3, the utilities sector (GFGY) achieved net profit attributable to parent of RMB142.2 billion (YoY -25.1%) and net profit attributable to parent after non-recurring items of RMB137.6 billion (YoY -21.8%), of which 26Q1 net profit attributable to parent was RMB52.7 billion (YoY -10.2%), 26Q2 net profit attributable to parent was RMB46.9 billion (YoY -23.3%), and 26Q3 net profit attributable to parent was RMB42.6 billion (YoY -39.2%). Under the adverse effects of falling electricity prices and rising coal prices, the decline in Q3 thermal power profit widened, and the green power sector's performance continued to come under pressure. The sector's cyclical bottoming signal has emerged, and cash flow improvement exceeded expectations: 1. Expectations of electricity price recovery are strengthening: with coal prices rising rapidly this year, thermal power was already on the verge of loss in Q3, giving strong impetus to raise electricity prices. Monthly electricity prices in coastal provinces such as Jiangsu and Guangdong have continued to rise, and there is a relatively high probability that next year's annual long-term contract electricity price will increase; a recovery in electricity prices will significantly restore industry profitability. 2. Free cash flow improvement: in 2026Q1-3, the sector's net operating cash flow was RMB521.3 billion (YoY -5.9%), with the decline in cash flow far smaller than the decline in profit; meanwhile, net investing cash flow fell 17.0% YoY, and free cash flow was RMB127.2 billion (YoY +60.5%), with cash flow improvement exceeding expectations; 3. Underweight dividend appeal is prominent: public fund holdings in the sector rose 0.34pct QoQ to 0.59% at the end of Q3; with the sector's fundamental expectations improving and dividend value prominent, it has significant allocation value. Thermal power earnings cycle bottoms out, profit recovery expected; cash flow improves and dividend capacity rises In the first three quarters, the thermal power sector's net profit attributable to parent was RMB42.8 billion (down 41.9% YoY), of which Q1, Q2, and Q3 net profit attributable to parent fell 1.5%, 36.5%, and 76.0% YoY, respectively. This year's annual long-term contract electricity price decline and the rise in coal prices starting in Q2 widened the decline in thermal power performance. Looking ahead, thermal power is expected to see a resonance of earnings and valuation: 1. Upward electricity price expectations to restore profitability: the Q4 annual long-term contract signing cycle is approaching, and monthly electricity prices are providing increasingly strong guidance for annual long-term contract prices. Under pressure from rising coal prices, next year's annual long-term contract electricity price is expected to stabilize and recover, and thermal power profitability is expected to recover. 2. Weakening cyclical attributes to enhance earnings stability: thermal power capacity prices bring stable revenue, and adjustable capability allows thermal power to increase per-kWh revenue through market-based trading; after the proportion of annual long-term contracts declines, thermal power can more easily obtain stable returns through monthly long-term contracts and spot transactions. 3. Investment contraction improves free cash flow: in the first three quarters, the thermal power sector's investing cash flow fell 19% YoY, and free cash flow fell 10%, far less than the decline in profit. 4. High dividend cost-effectiveness: multiple thermal power companies have issued dividend commitments, and some high-dividend companies have dividend yields exceeding 4% at mid-cycle profit levels. Hydro and gas performance steady; nuclear power enters peak commissioning; green power awaits turnaround The hydro/nuclear/green/gas sectors' 2026Q3 net profit attributable to parent changed -14.6%/+20.7%/-36.7%/+5.3% YoY, respectively. Hydro: Q3 inflow was relatively low; under El Nio, inflow is expected to recover next year, while outbound electricity prices are expected to rise, so hydro is expected to see both volume and price increases next year, and hydro's dividend value is prominent in a low-interest-rate environment. Nuclear: Q3 performance improvement is clear, the 15th Five-Year Plan period will see a peak in unit commissioning, and next year's electricity price expectations are expected to significantly enhance nuclear profit elasticity. Green power: performance pressure has deepened due to electricity prices, consumption, and other factors, but cash flow has clearly improved, and a recovery in electricity price expectations will bring marginal improvement. Gas: gas volume growth was slightly below expectations, the gross spread is still recovering, overall performance is steady, and demand recovery is awaited. Recommended to watch the earnings elasticity of hydro, thermal, and nuclear power as electricity price expectations improve: (1) Thermal power: HUANENG POWER, HUADIAN POWER, GD Power Development, Guangdong Baolihua New Energy Stock, Jiangsu Guoxin Corp.,Ltd., Shenergy, and Inner Mongolia MengDianHuaNeng Thermal Power Corporation, which have significant elasticity to electricity price recovery; (2) Hydro: Sichuan Chuantou Energy and SDIC Power Holdings, benefiting from electricity price increases and improved inflow; (3) Nuclear: China National Nuclear Power and CGN Power Co.,Ltd., with a reversal in electricity price expectations and a peak in unit commissioning; (4) Gas: Jiangxi Jovo Energy with diversified gas sources, and Sino Prima Gas Technology with high-quality gas field assets. Risk warning Risks of reform falling short of expectations, excessive coal price increases, and electricity price declines.