According to the Zhitong Finance APP, Huatai Securities released a research report stating that the focus of the public environmental protection sector in recent years has been on dividend potential and stable growth. Assets such as electrical power, gas, water affairs, and waste incineration in the industry have strong cycle-transcending capabilities, stable operating models, and strong profit-making abilities. Looking ahead, repairing the profitability of thermal power + changing the profit model is still the direction that benefits the most from power system reform. The short-term performance elasticity of hydropower seems to be recovering, and the superposition of gas prices and cost decline will drive the continuous improvement of gross margins. With fewer new projects, more attention will be paid to the improvement of cash flow recovery ability and the streamlining of potential user payment mechanisms for water affairs and waste incineration.

Recommended symbols: Huaihe Energy (600575.SH), Shaanxi Energy (001286.SZ), Zhejiang Zheneng Electric Power (600023.SH), Huadian Power International Corporation (600027.SH), China Res Gas (01193), Hubei Energy Group (000883.SZ), China Yangtze Power (600900.SH), Guangxi Guiguan Electric Power (600236.SH), Sichuan Chuantou Energy (600674.SH), EB Environment (00257), Chongqing Sanfeng Environment Group Corp (601827.SH), Chengdu Xingrong Environment (000598.SZ), and other symbols.

Here are the main points of HuaTai Securities:

For thermal power and hydropower, we are focusing on the improvement of profitability and water recovery, while nuclear power will benefit from normalized approvals.

Huatai Securities pointed out that since 2023, the thermal power profit has gradually recovered quarter by quarter, and under the background of loose coal supply and demand, the central coal price is expected to move downward compared with the same period in 2024, and the thermal power profit is expected to continue to increase year on year. As for hydropower, the improvement of profitability of the stock hydropower mainly depends on the promotion of depreciation expiration and financial cost reduction during the water recovery in 2024. Regarding nuclear power, I am bullish on the inherent value increase brought by future unit commissioning under normalized approvals. Recommending power targets from two perspectives: 1) High dividend levels from 2024 to 2026, recommending focusing on Huaneng Power International, Huadian Power International Corporation, Zhejiang Zheneng Electric Power, Shaanxi Energy, China Yangtze Power, Guangxi Guiguan Electric Power, etc.; 2) Mid-dividend levels from 2024 to 2026 (dividend yield 2~5%) and 2024-26CAGR of net profit attributable to the parent company is not less than 8%, recommending focusing on Huaihe Energy, GD Power Development, SDIC Power Holdings, and China National Nuclear Power.

Gas: The marginal improvement in natural gas supply and the domestic long-term LNG contracts may have shown a turning point downward in price.

Domestic apparent consumption of natural gas has returned to a growth trajectory, with a YoY growth rate of +11.9% from January to March 2024. Gas and electricity have become the main driving force for domestic natural gas demand growth. Since October 2022, international spot prices of LNG have fallen from their highs, and some domestic long-term LNG contracts may have shown a turning point downward in price. Recommending gas targets from two perspectives: 1) Mid-dividend levels from 2024 to 2026 (dividend yield 3~5%) and the YoY growth rate of net profit attributable to the parent company or CAGR from 2024 is no less than 10%, recommending China Res Gas and Jiufeng Energy; 2) High dividend levels from 2024 to 2026 (dividend yield higher than 5%) and maintaining positive growth in net profit attributable to the parent company from 2024 to 2026, recommending Bluesky Power and ENN Natural Gas and Foran Energy Group.

Environmental protection: The trend of positive free cash flow is obvious. Pay attention to high dividend and stable growth opportunities.

Water affairs and solid waste industry are becoming mature and gradually entering a stable operating period. Operating companies are deeply cultivating the stock market, and capital expenditures are decreasing year by year. Free cash flow is expected to improve, with significant high-dividend features. At the same time, some companies are expected to benefit from the raise of water fees and expansion of the industry chain, and their performance is expected to continue to grow. Based on two perspectives, we recommend the following eco-friendly symbols: 1) 2024-2026 high-dividend level (dividend yield not less than 6%), we suggest focusing on EB Environment / Beijing Enterprises Water Group / Dynagreen Environmental Protection Group; 2) In 2024-2026, the mid-dividend level (dividend yield 2-5%) and CAGR of net profit attributable to mother not less than 6%, we recommend focusing on Chongqing Sanfeng Environment Group Corp., Ltd. / Chengdu Xingrong Environment.

Risk Warning: risk of rebound in coal prices, fluctuations in electricity prices, fluctuations in gas prices, and difficulty in implementing water price increases.