Gf Securities released a research report stating that overall, water inflows in the Yangtze River and Pearl River basins were favorable in the fourth quarter and for the full year, leading to power generation growth as expected. However, inflows in basins such as the Yalong River and the Dadu River were average. Due to insufficient water storage caused by lower-than-average inflows during the flood season, the Yalong River continued to store water in November to reach last year's levels. It is estimated that the total energy storage of the three major hydropower stations on the Yalong River reached 25.18 billion kWh, essentially flat year-on-year, with the impact of the dry season largely eliminated. Hydropower has entered a new peak period for project commissioning in recent years. Coupled with a prolonged low-interest-rate environment, the decline in long-term interest rates will dilute capital costs, making valuation uplift foreseeable. The report suggests focusing on hydropower companies experiencing high short-term power generation growth and elevated energy storage levels. The main views of Gf Securities are as follows:

Water inflows remained abundant in Q4, with power generation from the Yangtze and Pearl Rivers growing strongly as anticipated. After September 2025, water inflows into the Yangtze and Pearl Rivers continued to exceed expectations, significantly reversing the full-year power generation forecast. China Yangtze Power Co., Ltd. achieved a power generation volume of 307.194 billion kWh in 2025 (a year-on-year increase of 3.82%), with Q4 generation reaching 72.068 billion kWh (a year-on-year increase of 19.9%). In the Pearl River Basin, inflows remained abundant in the second half of the year, with Q4 inflows comparable to Q3. Guangxi Guiguan Electric Power Co., Ltd. saw its Q4 hydropower generation surge by 79.1% year-on-year (compared to +68.3% in Q3). Its full-year hydropower generation reached 41.568 billion kWh (a year-on-year increase of 35.92%), hitting a record high, and its annual performance is expected to surpass expectations. However, the Yalong River experienced lower inflows, and power generation was further reduced by end-of-flood-season water storage. Estimated growth rates for Yalong River Hydropower in October-December were -40.6%, -35.2%, and -7.2% respectively. Its full-year 2025 generation is estimated at approximately 87.144 billion kWh, down 6.2% year-on-year. Estimated full-year 2025 generation for the Dadu River is 44.881 billion kWh, down 7.5% year-on-year, with Q4 generation down 19.3% year-on-year. Overall, while water inflows were good in the Yangtze and Pearl River basins for Q4 and the full year, inflows in basins like the Yalong and Dadu Rivers were average. The report suggests focusing on companies with high power generation growth, such as China Yangtze Power and Guangxi Guiguan Electric Power.

Overall energy storage levels were relatively high at year-end, ensuring power generation during the dry season. According to provincial hydrological websites, inflows into the Hongshui River have been abundant since October. The Longtan Hydropower Station achieved full storage for the first time since 2021, with high water levels and energy storage far exceeding the past few years. The year-end water level reached 371 meters, 14.88 meters higher than the previous year, indicating assured power generation during the dry season and the potential to drive profit growth for multiple quarters. Inflows in the upper reaches of the Yangtze River were also favorable, allowing for the successful completion of end-of-flood-season storage targets. While cautiously releasing water despite good Q4 inflows, year-end energy storage remained high. It is estimated that the total energy storage of China Yangtze Power's six power stations reached 34.528 billion kWh at year-end (an increase of 3.34 billion kWh year-on-year, or +10.7%). For the Yalong River, due to initially insufficient storage from lower flood season inflows, water storage continued into November to reach last year's levels. The estimated total energy storage of its three major stations is 25.18 billion kWh, basically flat year-on-year, largely eliminating the dry season's impact.

Hydropower is entering a new peak period for project commissioning, with Guiguan Electric Power's asset acquisition unlocking growth potential. In recent years, projects such as GD Power Development Co., Ltd.'s Dadu River stations, Huaneng Lancang River Hydropower Inc.'s Tuoba and Yingliangbao stations, Huanghe Yangqu, Sichuan Chuantou Energy Co., Ltd.'s Yinjiang, and SDIC Power Holdings Co., Ltd.'s Indonesia Batang station have been successively commissioned, marking a new wave of project completions. Furthermore, various groups still hold hydropower assets that have not been securitized, and their securitization progress is also worth monitoring. Guangxi Guiguan Electric Power plans to acquire a Tibet subsidiary of China Datang Corporation, taking a leading role in constructing hydropower stations in the Yùqǔ River Basin and the Southeast Tibet Clean Energy Base, thereby opening up future growth space. The Zala Hydropower Station under construction (1,015 MW) is scheduled to commence operation in 2027.

Long-term interest rates remain low. The current dividend yield of China Yangtze Power is approximately 3.6% (calculated based on its expected 2025 net profit attributable to parent, a 70% payout ratio, and the closing price on January 9). The average interest rate spread in 2025 was 174 basis points (the annual average spread range from 2018-2024 was 60-110 bp), with the latest value at the 89th percentile since 2018. Despite the declining interest rate environment, its valuation has not shown significant improvement. As the low-interest-rate environment persists, the fall in long-term rates will dilute capital costs, making a valuation increase foreseeable.

Focus on hydropower companies with high short-term power generation and elevated energy storage. It is recommended to prioritize Guangxi Guiguan Electric Power, which shows high power generation growth and plans asset injections, and China Yangtze Power with its high energy storage levels. Also, monitor GD Power Development for its new hydropower capacity and dividend commitments, and watch for potential rebounds in oversold stocks like SDIC Power Holdings, Sichuan Chuantou Energy, and Huaneng Lancang River Hydropower.

Risk warnings include fluctuations in water inflows; reservoir regulation capacity falling short of expectations; and risks associated with adjustments to on-grid electricity tariffs.