Extreme weather is affecting power supply. Since the beginning of summer, most areas in the south have had continuous rainfall and some areas have experienced floods. Meanwhile, the northern regions are experiencing high temperatures and some areas are suffering from severe drought. The polarization of floods in the south and droughts in the north has resulted in a rapid growth of electricity load in the north, and the rising trend of the electricity sector may continue.

In fact, the power industry is one of the most stable industries. The country's total electricity consumption has steadily increased each year, with a compound growth rate of 6.3% over the past five years. From January to May of this year, the total electricity consumption of the country reached 2.4263 trillion kilowatt hours, an increase of 6.4% year-on-year. With the driving force of the industry's fundamentals, the power sector has witnessed a trend of rising prices for eight consecutive months. Long Yangtze Power represents the A shares, while CLP Holdings represents the Hong Kong shares, both of which have entered a bullish trend.

Event-driven industry chain trading has rotated, such as the recent sustained and significant rise of the power grid industry chain. The extreme weather has exacerbated the tension between demand and supply in electricity, and data from the National Energy Administration has shown that the highest expected electricity load growth this summer is over 100 million kilowatts year-on-year, putting pressure on electricity supply. With the rotation of the sector, the power sector is likely to experience a wave of accelerating bull market.

However, the basic situation of the targets is different, and there are also differences in valuation. So, which target in the power sector is worth paying attention to?

Acceleration of energy transformation

In fact, the power industry is one of the most stable industries. The country's total electricity consumption has steadily increased each year, with a compound growth rate of 6.3% over the past five years. From January to May of this year, the total electricity consumption of the country reached 2.4263 trillion kilowatt hours, an increase of 6.4% year-on-year. With the driving force of the industry's fundamentals, the power sector has witnessed a trend of rising prices for eight consecutive months. Long Yangtze Power represents the A shares, while CLP Holdings represents the Hong Kong shares, both of which have entered a bullish trend. Electricity can be sourced from fossil fuel resources (coal and natural gas) and non-fossil fuel resources (such as photovoltaic and wind power). Under the guidance of the "dual-carbon" policy, thermal power companies are actively transforming and non-fossil fuel sources will become the mainstay of development in the coming decades. China is rich in coal resources, with thermal power accounting for over 60%. However, in recent years, the development of clean energy sources such as wind and photovoltaics has been rapid, and the energy transformation strategy has already shown results.

In May 2024, the State Council published the "2024-2025 Energy-saving and Carbon-reduction Action Plan" (referred to as the "Plan" below), which proposes to increase the efforts to promote energy conservation and carbon reduction, enhance the consumption capacity of renewable energy, and make it clear that by the end of 2025, the proportion of non-fossil energy in national power generation will reach about 39%. In the first four months of this year, China's non-fossil energy accounted for 29.7% of power generation, still far from the policy target. In June, the National Energy Administration issued a notice on improving the consumption of new energy and ensuring the high-quality development of new energy, strengthening the emergency response system and emergency response force of the power industry, and further promoting the participation of new energy in the electricity market. Restrictions on cross-provincial new energy trading have been lifted. At the same time, the Comprehensive Department of the National Energy Administration released the "Basic Rules for Power Market Registration" to solicit public opinions, deepen the reform of the power system, strengthen and regulate the registration of power market, and safeguard the order of the power market and the legitimate rights and interests of various types of operating entities.

China's electricity demand is stable, and its energy structure is accelerating its transformation. Policies are developing along the direction of the "dual-carbon" target. In addition to China, overseas countries are also actively carrying out energy transformation. Taking the United States as an example, natural gas is its resource endowment, and natural gas power generation accounts for over 40%, followed by nuclear power, which accounts for nearly 20%. In recent years, great efforts have been made to develop solar and wind energy, and wind power has accounted for 48% of renewable energy generation in 2023, up from 41% in 2019. In 2023, photovoltaics accounted for 53% of the newly added grid capacity, exceeding half of the new installed capacity for the first time.

It is worth mentioning that the rapid development of AI has turned it into the main force behind electricity demand. The United States may experience power shortages as a result, and companies such as Exelon and Duke Energy have expressed concerns about the regional high growth of AI-powered electricity consumption and load. In addition, extreme weather has occurred frequently in the United States this year, and abnormal weather around the world has increased demand for electricity. Therefore, the power sector has become a global investment focus in terms of both demand and energy transformation.

Good quarterly earnings

In fact, the power industry is one of the most stable industries. The country's total electricity consumption has steadily increased each year, with a compound growth rate of 6.3% over the past five years. From January to May of this year, the total electricity consumption of the country reached 2.4263 trillion kilowatt hours, an increase of 6.4% year-on-year. With the driving force of the industry's fundamentals, the power sector has witnessed a trend of rising prices for eight consecutive months. Long Yangtze Power represents the A shares, while CLP Holdings represents the Hong Kong shares, both of which have entered a bullish trend.

According to the WiseNews app, domestic thermal power companies are vigorously transitioning to clean energy, and some targets have achieved completion rates of over 70%. However, the rapid expansion of the industry chain in recent years has resulted in serious overdrafts in the upstream, such as silicon wafer for photovoltaic, whose price has fallen more than 80% and has dropped below the cost line. Wind turbines have also fallen sharply. In the field of energy storage, chemical energy storage, mainly lithium batteries, continues to increase its proportion, but lithium mines are overdeveloped and the capacity is seriously oversupplied. New energy batteries and other energy storage cannot be effectively consumed and the price of lithium carbonate has fallen more than 80%.

Due to the surplus upstream capacity and the downstream power generation companies' control of pricing, the cost has been further reduced. This actually benefits power generation companies. Therefore, in the capital markets, upstream materials suppliers such as silicon wafer and wind turbines have almost been wiped out, such as JA Solar Technology and Goldwind Science & Technology (02208), which are leaders in their respective fields and have had their market cap significantly reduced. In contrast, the downstream power industry has its own independent market. Among them, China Yangtze Power has been bullish for 11 years, with its market cap increasing more than three times.

In Q1 2024, major power generation companies had steady operations and achieved growth. Their profitability has significantly improved. For example, China Huaneng International Power achieved a net income of 4.596 billion yuan, a year-on-year increase of 104.25%. Due to the transformation period, some power generation enterprises, with thermal power as their core, experienced declining performance due to a decrease in thermal power income, such as Jilin Electric Power. However, the company's Q1 net profit was 619 million yuan, a year-on-year increase of 22.94%, and the net margin was 16.23%, which was significantly ahead of its counterparts.

China Longyuan Power Group (00916) is one of the more aggressive targets in the Hong Kong energy transformation. In 2023, its wind and photovoltaic business revenue accounted for nearly 80%. However, since 2022, its performance has fluctuated, and its performance in the capital market has not been good. Recently, the company has undergone personnel changes. At the end of May, it announced that Mr. Gong Yufei resigned as general manager, and Mr. Wang Liqiang took over. Mr. Gong, the former general manager, was nominated as chairman of the board of directors. Some investment banks (HSBC) have indicated that the two individuals have previously held different positions in major shareholders of China Energy Group and Shenhua Group, respectively. The market seems to believe that this change in management can promote the plan to inject renewable energy assets into the parent company.

In addition, Hong Kong does not require quarterly report disclosures, and some targets (mostly non-AH shares) have not released their Q1 2024 financial reports, such as China Power. However, its performance in previous years has maintained growth, and its non-thermal power business revenue proportion is close to 50%. Judging from the sales volume, it is expected to continue the trend of growth. China Resources Power (00836) is a thermal power leader, with nearly 80% of its revenue coming from thermal power. Judging from China Huaneng and other thermal power companies, it is expected to achieve significant optimization of profits this year affected by coal fundamentals.

Bullish trend this year.

Overall, the power generation sector has a steady performance, and dividends are relatively generous. According to Dongfang Choice data, looking at Hong Kong targets' cumulative dividend ratio, China Longyuan Power is 20.32%, China Resources Power is 25.06%, China Power is 53.25%, and Huaneng International Power is 81.48%. Major brokerages are also relatively optimistic about the power industry, especially the profit recovery of thermal power companies. They unanimously believe that the decline in coal prices will boost the profitability of targets, while also being bullish on high-profit new energy businesses.

From a valuation perspective, the PB and PE (TTM) values of Hong Kong's power industry are 1.07 times and 12.08 times, respectively, both of which are lower than the industry average. China Longyuan Power's two indicators are both lower than the industry average, at 0.8 times and 8.9 times, respectively, although its expectations for asset injection by its controlling shareholder have been halted. Another example is China Power, with a PB of 1 and a PE close to the industry average. Its energy transformation is excellent, and the proportion of high-profit clean energy businesses continues to increase, and its dividend payout ratio is higher than the industry average. It is expected to be favored by investors. The company's market cap has risen more than 30% this year.

Extreme weather will not have an immediate impact on performance, but it will stimulate investors to make choices. The north is the main venue for thermal power, and sustained high temperatures provide a demand environment for thermal power. Taking Beijing as an example, according to media reports, State Grid Beijing Electric Power has deployed 70 emergency rescue stations and 22 electric power emergency rescue teams are on standby to meet residents' electricity needs. The penetration rate of clean energy in the south is relatively high, and there is demand for power transmission and distribution from the south to the north, which allows cross-province consumption and shows that clean energy electricity is breaking through regional restrictions and gradually occupying the dominant position in energy.

In the long run, on one hand, dual-carbon is still the main energy guideline, and clean energy maintains growth. On the other hand, the rapid development of new energy vehicles also brings huge demand for electricity. Especially with the continuous advancement of energy storage technology, super-long cruising distances exceeding 1000 kilometers and 4C super fast charging are popularized, the national electricity demand will continue to innovate and drive the overall social electricity consumption to maintain a high growth level.

Overall, the power generation sector will maintain an upward trend this year, and events will accelerate the market trend. In conjunction with individual stocks, China Power has steady performance, leading energy transformation, high dividend payout, and expected performance, with a high value-for-money ratio.