According to the research report released by Guolian, with the acceleration of the electricity reform, three major directions should be focused on, namely: (1) In the current stage of high increase of electricity consumption, it is necessary to construct the basic load power sources such as thermal and nuclear power, the large-scale grid connection of new energy and the consumption issue of new energy need to be solved as well. (2) Accelerate the implementation of the electricity reform policy. It is expected that the single electricity price in the past can obtain the comprehensive value such as capacity, ancillary service, environmental premium, etc. according to the different roles of power supply. (3) The electricity reform policy has promoted the transmission of coal electricity capacity electricity fees to downstream users. As of May 2024, the power purchasing cost of industrial and commercial users is about 4.7% on average. In the future, the cost of ancillary services is also expected to be transmitted downstream to divert costs.

Guolian Securities' main points are as follows:

Equipment providers: Energy security is guaranteed by electricity reform and the construction of basic load power sources is progressing steadily.

Guolian believes that both thermal and nuclear power equipment providers will fully benefit from the accelerated construction of basic load power sources in the background of electricity reform and achieve rapid performance growth. Thermal power: A new round of thermal power investment is accelerating, with a YoY growth rate of 35% in Q1-Q4 2024, the amount of new construction of thermal power in 2023 is 122 GW, with a YoY growth of 68.8%. In Q1-Q5 of 2024, the amount of new construction of thermal power is 34.5 GW, with a YoY growth of 10.6%. Benefiting from the new construction and flexibility transformation of thermal power, thermal power equipment providers are expected to usher in a period of performance realization. Nuclear power: It is estimated that 10-12 sets of units will be approved in 2024, and the nuclear power industry has high growth potential. In Q1-Q4 of 2024, the cumulative investment amount of nuclear power is CNY 26.5 billion, with a YoY growth rate of 25.0%. It is predicted that the amount of units under construction in 2024 will be close to 12.02 GW, which will drive the profit growth of equipment providers.

Thermal power operators: Three parts of revenue models are gradually realized.

Guolian believes that the three revenue models of thermal power operators have been fully improved. With the continuous promotion of electricity reform policies, the price of electric energy tends to stabilize, the recovery ratio of capacity electricity price increases, the capacity of ancillary service market expands, the revenue model of thermal power is more stable, ROE of thermal power continues to increase, and the typical thermal power company's ROE increases by 1.12%. In terms of coal prices, Q2 coal prices decreased YoY, and the inventory of key power plants is relatively high compared with history. The fuel cost of thermal power is expected to decrease YoY throughout the year, which will increase the profit of thermal power operators.

Green power operators: The issue of consumption and absorption is expected to improve, and marginal improvement may occur.

The issue of consumption and absorption has resulted in pressure on the utilization hours. In Q1-Q4 of 2024, the cumulative utilization hours of wind power decreased by 77 hours YoY, reaching 789 hours. The cumulative utilization hours of photovoltaic power decreased by 42 hours, reaching 373 hours. The utilization rate target of new energy is theoretically relaxed to 90%. The utilization hours of new energy projects may be under pressure. The construction of ultra-high-pressure transmission lines for green power exports accelerates the improvement of physical absorption conditions. The requirements for the assessment of renewable energy are improved, and the scale of green power trading expands to reflect the environmental value, which is expected to bring about marginal improvement for green power operators.

Hydropower and nuclear power operators: Scarce basic load power sources, stable assets to improve valuation.

Hydropower: The water diversion and transformation is good, and the water level and storage volume in Q1 are high in YoY. In terms of utilization hours, benefited from the abundant precipitation in Q1 2024 and the improvement of water diversion, hydropower output increased, with a cumulative utilization hours of 785 hours, up by 48 hours YoY. The depreciation of hydropower units is gradually due, and its profitability is gradually improving. Nuclear power: The utilization hours of basic load power sources are stable. With the deepening of electricity reform, the proportion of market-oriented trading volume increases, which is conducive to driving up the on-grid price of nuclear power. As basic load power sources, hydropower and nuclear power have stable profitability and improved dividend capability, and their valuation levels are expected to continue to increase.

Investment advice: The electricity reform has entered the deep-water area, and operators and equipment providers are the first to benefit.

In terms of electricity operation, it is recommended to focus on Huaneng Power International, Inc. (600011.SH), Anhui Wenergy Co., Ltd. (000543.SZ), Zhejiang Zheneng Electric Power Co., Ltd. (600023.SH), China Three Gorges Energy Co., Ltd. (600905.SH), and China National Nuclear Power Co., Ltd. (601985.SH), etc. In terms of thermal and nuclear power equipment, it is recommended to focus on Dongfang Electric Corporation (600875.SH), Jiangsu Shentong Valve Co., Ltd. (002438.SZ), etc.

Risk warning: The pace of policy promotion is slower than expected; the progress of power source approval and construction is slower than expected; changes in raw material costs.