Orient Securities has released a report expressing optimism toward the public utilities sector. The firm believes that: 1) Against the backdrop of restructuring in the international order, public utilities, as significant tangible assets, are likely to undergo a revaluation; 2) To accommodate the integration of high proportions of new energy generation, China must further advance market-oriented electricity pricing reforms. In the future, the electricity market will gradually assign appropriate pricing to various attributes of electricity as a commodity, including energy value, regulation value, capacity value, and environmental value. Key viewpoints from Orient Securities are as follows:

In the first quarter of 2026, thermal power sector profitability remained high, but internal divergence intensified. The gross margin for the thermal power and transition sector stood at 16.0%, up 0.3 percentage points year-on-year and 2.2 percentage points quarter-on-quarter. The net margin was 9.4%, increasing by 0.1 percentage points year-on-year and 7.4 percentage points quarter-on-quarter. Total operating revenue for the first quarter of 2026 reached 276.5 billion yuan, down 0.6% year-on-year and 5.2% quarter-on-quarter. Combined net profit attributable to shareholders was 19.3 billion yuan, rising 0.8% year-on-year and surging 523% quarter-on-quarter. Operating cash flow amounted to 62.1 billion yuan, declining 20.0% year-on-year but increasing 9.2% quarter-on-quarter. Among 24 sample companies, 14 showed year-on-year improvement in performance, while 10 experienced a deterioration. The bank attributes this internal performance divergence to regional differences in electricity price declines, the impact of fuel price changes on costs, and variations in power generation mix. Orient Securities expects profitability among different thermal power companies to continue diverging in 2026, with companies possessing superior asset quality likely to outperform.

Hydropower demonstrated steady growth, while new energy and nuclear power faced performance pressures. In 2025, combined operating revenue for sample new energy companies totaled 151.1 billion yuan, a decrease of 4.5% year-on-year. Combined net profit attributable to shareholders was 21.6 billion yuan, down 25.2% year-on-year. For the first quarter of 2026, combined operating revenue was 39.3 billion yuan, falling 5.4% year-on-year, and combined net profit was 6.57 billion yuan, dropping 36.0% year-on-year. National newly installed capacity for wind and photovoltaic power from January to March was 15.8 GW and 41.2 GW respectively, representing a year-on-year increase of 0.8 GW for wind and a decrease of 18.5 GW for photovoltaic, suggesting that photovoltaic installations may have entered a deceleration phase. The firm anticipates that challenges related to utilization rates and market-based electricity prices for new energy are unlikely to improve significantly in 2026, potentially keeping performance pressure on sample companies. For hydropower sample companies, the combined net profit attributable to shareholders in 2025 was 59.0 billion yuan, an increase of 8.4% year-on-year, primarily benefiting from cost savings and improved water inflows. Nuclear power sample companies faced performance pressure, mainly due to declining comprehensive electricity prices year-on-year resulting from the deepening of power market reforms. Orient Securities expects that with continued growth in nuclear power capacity and the gradual refinement of provincial nuclear power pricing mechanisms, the industry's profit growth rate may bottom out and recover.

Fund holdings in the public utilities sector increased quarter-on-quarter by the end of the first quarter of 2026. The proportion of public utilities (covering electricity, heat, gas, and water production and supply) in the total stock investment market value of all funds rose to 1.31%, up 0.06 percentage points from the previous quarter. By fund category, the top ten fund products holding the sector by the end of the first quarter of 2026 were predominantly passive index funds. The firm estimates that passive funds (including passive index and enhanced index funds) and active funds (remaining funds excluding passive types) accounted for 0.96% and 0.35% of the total fund stock investment market value, respectively. The public utilities sector was underweighted by 2.32 percentage points in fund holdings by the end of the first quarter of 2026, with the underweight margin expanding by 0.29 percentage points quarter-on-quarter, remaining above the historical average (the average underweight since 2016 has been 2.02 percentage points).

Investment recommendations and targets: - Gas: Against the backdrop of global order restructuring and geopolitical conflicts, the central price level for natural gas may exceed market expectations. Domestic upstream gas source assets are expected to benefit. Related targets include: Shouhua Gas and Xinjiang Natural Gas. - Thermal Power: In 2026, the compensation ratio for coal-fired power capacity prices is set to increase across Chinese provinces, coupled with the nationwide full rollout of the spot market. Thermal power is gradually shifting from a baseload power source to a regulatory source, with initial signs of business model improvement emerging. The firm anticipates that both the ability and willingness to pay dividends in the thermal power industry will continue to improve in 2026. Recommended targets are: Jianneng Energy, Huadian Power International, China Power Investment Corporation, Huaneng Power International, and WanNeng Power; related targets include: YUNENG Control. - Hydropower: The business model is straightforward and robust, with per-unit electricity costs among the lowest across all power sources. It is advisable to accumulate positions in large hydropower plants within high-quality river basins during market dips. Related targets include: China Yangtze Power, SDIC Power Holdings, and Guiguan Electric Power. - Nuclear Power: Long-term capacity growth is highly certain, and the period of greatest pressure from declining market-based electricity prices has likely passed. Related targets include: China General Nuclear Power Corporation. - Wind and Solar: Under carbon neutrality expectations, electricity generation volume still has significant growth potential. Investors should await the inflection point at the bottom of the industry's profit cycle, preferring leading companies with a higher proportion of wind power. Related targets include: China Longyuan Power Group.

Risk warnings include a significant increase in wind and solar curtailment rates, a substantial rise in coal prices, and market electricity prices falling below expectations.