Zhito Finance APP learned that China Galaxy Securities released a Research Report stating that the spot market is fully opened, emphasizing the supply-demand pricing logic and thermal power adjustment capabilities. As of October 2024, five regional spot markets in Shanxi, Guangdong, Shandong, and Gansu have officially started operating; meanwhile, four markets in Inner Mongolia, Hubei, Zhejiang, and Fujian are in a continuous settlement trial operation stage, expected to formalize over the next one to two years. With the accelerated construction of the spot market, there are concerns that competitive bidding among different energy sources could pressure electricity prices, while the spot electricity price has a price discovery function that will transmit to mid- to long-term electricity prices, thereby affecting the overall electricity price level.

China Galaxy Securities believes that from the underlying pricing logic, spot electricity prices are primarily influenced by fuel costs and power supply-demand. Against the backdrop of declining coal price centroids, thermal power companies in regions with high market coal proportions and strong demand are expected to have supported profits by 2025. Furthermore, distinguishing different energy sources, although new energy faces discount issues entering the spot market, considering the high proportion of mid- to long-term Hold Positions and some markets' revenue recovery/compensation mechanisms, new energy settlement prices show significantly improved stability compared to spot electricity prices; for thermal power, strong adjustment capabilities allow it to benefit from increasingly widening peak-valley price differences in the spot market, enabling thermal power to earn premiums in the spot market. It is recommended to focus on gas units and high-parameter coal units with stronger adjustment capabilities.

The main viewpoints of China Galaxy Securities are as follows:

2024 Review: Hydro, thermal, and nuclear power show bright performance, while green electricity is under pressure. From the beginning of the year to November 30, the SW Public Utilities has increased by 7.81%, while the CSI 300 Index has risen by 14.15%, with the utility index lagging behind the CSI 300 Index by 6.33 percentage points, primarily due to increased market risk appetite following the introduction of the "924" policy package. In terms of sub-sectors, the increases and decreases in hydropower/thermal power/nuclear power/photovoltaics/wind power from the beginning of the year to now are 15.21%/7.90%/25.73%/-10.43%/-0.44%. Among them, the notable increases in hydropower and nuclear power are mainly due to market preference for red assets in a declining interest rate environment. Additionally, this year, improved water inflow has driven the growth of hydropower performance, while nuclear power, despite slight short-term performance fluctuations, still has confirmed long-term growth potential; the decline in coal prices has driven profitability recovery, positioning thermal power gains at the forefront; green electricity is constrained by consumption and price pressure, showing a dual blow to performance and valuation, but structurally, wind power outperformed photovoltaics.

2025 Outlook: The spot market is fully opened, focusing on supply-demand pricing logic and thermal power adjustment capabilities. As of October 2024, five regional spot markets in Shanxi, Guangdong, Shandong, and Gansu have officially started operating; meanwhile, four markets in Inner Mongolia, Hubei, Zhejiang, and Fujian are in a continuous settlement trial operation stage, expected to formalize over the next one to two years. With the accelerated construction of the spot market, there are concerns that competitive bidding among different energy sources could pressure electricity prices, while the spot electricity price has a price discovery function that will transmit to mid- to long-term electricity prices, thereby affecting the overall electricity price level. It is believed that from the underlying pricing logic, spot electricity prices are primarily influenced by fuel costs and power supply-demand. Against the backdrop of declining coal price centroids, thermal power companies in regions with high market coal proportions and strong demand are expected to have supported profits by 2025. Furthermore, distinguishing different energy sources, although new energy faces discount issues entering the spot market, considering the high proportion of mid- to long-term Hold Positions and some markets' revenue recovery/compensation mechanisms, new energy settlement prices show significantly improved stability compared to spot electricity prices; for thermal power, strong adjustment capabilities allow it to benefit from increasingly widening peak-valley price differences in the spot market, enabling thermal power to earn premiums in the spot market. It is recommended to focus on gas units and high-parameter coal units with stronger adjustment capabilities.

Central State-owned Enterprises in Electrical Utilitiesmergers and acquisitions.The restructuring is expected to accelerate, with a focus on Electrical Utilities integration platforms that have greater installation capacity flexibility. In September 2024, the China Securities Regulatory Commission released the "Opinions on Deepening the Reform of the Mergers and Acquisitions Market for Listed Companies" (Six Merger Guidelines), which mentioned increased support for resource integration for listed companies in traditional industries to reasonably enhance industry concentration. Considering that the proportion of unlisted installed capacity of the five major power generation groups remains relatively large, we anticipate that mergers and acquisitions among listed companies in the utilities sector are likely to accelerate. Specifically, as of the end of 2023, among the five major power generation groups, the unlisted installed capacities of Huaneng Group, Huadian Group, State Energy Group, GD Power Development, and Datang Group are approximately 67 million kilowatts, 0.143 billion kilowatts, 0.128 billion kilowatts, 0.149 billion kilowatts, and 73 million kilowatts, accounting for 27.5%, 66.6%, 39.4%, 62.6%, and 40.1% of the total installed capacity of the groups respectively. Based on the positioning of various electrical business platforms of the five major power generation groups, SPIC Industry-Finance Holdings, Huadian Power International Corporation, GD Power Development, Datang International Power Generation, CHINA LONGYUAN, and Spic Yuanda Environmental-Protection have significant flexibility in installed capacity growth, with injected capacity accounting for current installed capacity proportions of 404%, 150%, 80%, 77%, and 66% respectively (Spic Yuanda Environmental-Protection currently has no running installed capacity).

Investment Strategy: 1) Interpretation of supply-demand pricing logic: On one hand, the comprehensive opening of the spot market has strengthened the impact of supply and demand on electricity prices. Here, supply and demand refer to both electricity supply and demand, as well as coal prices derived from coal supply and demand. Looking ahead to 2025, under the backdrop of declining coal price levels, we expect that thermal power enterprises in provinces with a high proportion of market coal and strong demand will have supported profits. It is suggested to pay attention to Shenergy, Zhejiang Zheneng Electric Power, Huaneng Power International, Inc., among others. On the other hand, unlike the price discounting difficulties faced by new energy participating in the spot market, the adjusting capability of thermal power allows it to benefit from the widening peak-valley price difference in the spot market. It is recommended to focus on gas units and high-parameter coal units with stronger adjustment capabilities. 2) Mergers and acquisitions along with enhancement of listed companies' quality: Currently, the unlisted proportion of the five major power generation groups is still close to 50%. Under the backdrop of central state-owned enterprise reform, mergers and acquisitions are expected to accelerate. Among them, the major electrical business integration platforms of the five major power generation groups are likely to see quality asset injections. It is advised to pay attention to Electric Utilities platforms with significant installed capacity growth flexibility, such as SPIC Industry-Finance Holdings, Spic Yuanda Environmental-Protection, Huadian Power International Corporation, GD Power Development, Datang International Power Generation, CHINA LONGYUAN, etc. The actions to improve the efficiency and quality of listed companies are continuously being promoted, with a favorable outlook for the hydropower and Nuclear Power sectors with strong dividend attributes, as well as some thermal power enterprises with higher dividend yields. It is suggested to focus on China Yangtze Power, China National Nuclear Power, Zhejiang Zheneng Electric Power, and Shenergy, etc.; at the same time, it is recommended to seize potential profit and valuation repair opportunities in some enterprises, such as Three Gorges Energy and China Green Electricity Investment Of Tianjin.

Risk Warning: Risks of policy implementation falling short of expectations; risks of electricity demand falling short of expectations; risks of significant fluctuations in coal prices; risks of natural resource conditions such as water flow, wind, and sunlight falling short of expectations, etc.