GF Securities has released a research report stating that in the first three quarters of 2026, the utilities sector (GFGY) achieved a net profit attributable to parent companies of 142.2 billion yuan (down 25.1% year-on-year), with non-recurring net profit attributable to parent companies of 137.6 billion yuan (down 21.8% year-on-year). The sector's fundamental expectations are improving, and its dividend value is prominent, offering significant allocation value. Looking ahead, thermal power is expected to see a resonance of earnings and valuation, while the earnings elasticity of hydro, thermal, and nuclear power is recommended for attention amid improving power price expectations. The main views of GF Securities are as follows:
Sector Free Cash Flow Surges, Power Price Uptrend Expected as Fundamentals Improve
In the first three quarters of 2026, the utilities sector (GFGY) achieved a net profit attributable to parent companies of 142.2 billion yuan (down 25.1% year-on-year), with non-recurring net profit attributable to parent companies of 137.6 billion yuan (down 21.8% year-on-year). Of this, Q1 2026 net profit attributable to parent companies was 52.7 billion yuan (down 10.2% year-on-year), Q2 2026 was 46.9 billion yuan (down 23.3% year-on-year), and Q3 2026 was 42.6 billion yuan (down 39.2% year-on-year). Under the adverse effects of declining power prices and rising coal prices, the decline in Q3 thermal power profits widened, and the performance of the green power sector continued to face pressure.
Signals of a cyclical bottom for the sector have emerged, with cash flow improvements exceeding expectations: 1. Power price rebound expectations are strengthening: rapid coal price increases this year have pushed Q3 thermal power to the edge of losses, providing ample incentive to raise power prices. Monthly power prices in coastal provinces such as Jiangsu and Guangdong continue to rise, and there is a high probability that annual long-term contract power prices will increase next year. A power price rebound will significantly restore industry profitability. 2. Free cash flow improvement: In the first three quarters of 2026, the sector's net operating cash flow was 521.3 billion yuan (down 5.9% year-on-year), a decline far smaller than the profit decline. Meanwhile, net investment cash flow fell 17.0% year-on-year, and free cash flow reached 127.2 billion yuan (up 60.5% year-on-year), with cash flow improvement exceeding expectations. 3. Outstanding cost-effectiveness of underweight dividend allocation: At the end of Q3, public fund holdings in the sector rose 0.34 percentage points quarter-on-quarter to 0.59%. With improving fundamental expectations and prominent dividend value, the sector offers significant allocation value.
Thermal Power Earnings Cycle Bottoming Out with Profit Recovery Expected, Cash Flow Improvement and Enhanced Dividend Capacity
In the first three quarters, the thermal power sector's net profit attributable to parent companies was 42.8 billion yuan (down 41.9% year-on-year), with Q1, Q2, and Q3 net profits attributable to parent companies declining 1.5%, 36.5%, and 76.0% year-on-year respectively. This year's annual long-term contract power price decline and the coal price increase starting in Q2 have widened the decline in thermal power performance. Looking ahead, thermal power is expected to see a resonance of earnings and valuation: 1. Power price uptrend to restore profitability: The Q4 annual long-term contract signing period is approaching, and monthly power prices are providing increasingly strong guidance for annual long-term contract prices. Under coal price upward pressure, annual long-term contract power prices are expected to stabilize and rebound next year, restoring thermal power profitability. 2. Weakening cyclical attributes to enhance earnings stability: Thermal power capacity prices bring stable revenue, and adjustment capabilities allow thermal power to increase per-kilowatt-hour 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 markets. 3. Investment contraction improves free cash flow: In the first three quarters, thermal power sector investment cash flow declined 19% year-on-year, while free cash flow fell 10%, far less than the profit decline. 4. High dividend cost-effectiveness: Multiple thermal power companies have issued dividend commitments, and some high-dividend companies have dividend yields exceeding 4% at central profit levels.
Hydro and Gas Performance Stable, Nuclear Power at Investment Peak, Green Power Awaits Turnaround
The hydro/nuclear/green/gas sectors' Q3 2026 net profits attributable to parent companies declined 14.6%, increased 20.7%, declined 36.7%, and increased 5.3% year-on-year respectively. Hydro: Q3 incoming water was below normal, but under El Niño conditions, water inflow is expected to recover next year, and outbound power prices are expected to rise. Next year, hydro is expected to see both volume and price increases, 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 installed capacity commissioning, and next year's power price expectations will enhance nuclear power's profit elasticity significantly. Green power: Performance pressure has deepened due to power prices and consumption issues, but cash flow has clearly improved, and a power price rebound will bring marginal improvement. Gas: Gas volume growth was slightly below expectations, the price gap is still recovering, overall performance is stable, and demand recovery is awaited.
It is recommended to focus on the earnings elasticity of hydro, thermal, and nuclear power amid improving power price expectations: (1) Thermal power: Huaneng Power International, Inc., Huadian Power International Corporation Limited, GD Power Development Co., Ltd., Baoxinengyuan, Jiangsu Guoxin Corp., Ltd., Shenergy Co., Ltd., and Huaneng Mengdian, which have significant power price rebound elasticity; (2) Hydro: Chuantou Energy Co., Ltd. and SDIC Power Holdings Co., Ltd., benefiting from power price increases and improved water inflow; (3) Nuclear: China National Nuclear Power Co., Ltd. and China General Nuclear Power Corporation, with reversed power price expectations and a peak in installed capacity commissioning; (4) Gas: JOVO Energy with diversified gas sources and Shouhua Gas with high-quality gas field assets.
Risk Warnings: Risks of reform falling short of expectations, excessive coal price increases, and power price declines.