China's electricity consumption growth is shifting from the secondary industry to the tertiary industry and residential users, with the incremental supply primarily contributed by wind and solar power. In 2025, the stock performance of thermal power companies showed significant divergence, with northern companies generally demonstrating superior stock performance alongside high earnings growth. Thermal power's free cash flow has improved markedly, and there is substantial room for increasing dividend payout ratios, suggesting the "utilities-ization" moment for thermal power may have arrived. In the second half of 2025, abundant water flow in the Pearl River and Yangtze River basins drove hydropower generation growth, drawing attention to industry capacity additions and asset securitization. As the transformation into utilities accelerates, it is advisable to focus on the sector's dividend value.

China's power generation and consumption structure is undergoing a notable transformation, with the proportion of medium-to-long-term electricity contracts gradually declining. The incremental growth in electricity consumption is shifting from the secondary industry to the tertiary industry plus residential users: from 2023 to 2025, their contribution to the total consumption growth was 34.6%, 47.6%, and 50.2%, respectively. Incremental power generation is mainly contributed by wind and solar: from January to November 2025, they accounted for 86.2% of the total generation increase (compared to 35.8% in 2023 and 44.7% in 2024). The share of medium-to-long-term electricity volume is decreasing: two ministries have adjusted the 2026 medium-to-long-term electricity ratio to 70% (previously 80%). Regions like Shaanxi and North Hebei have already reduced their medium-to-long-term ratios to 60%-70%. As new energy fully enters the market, lowering the annual ratio provides market participants with greater flexibility for allocation.

For thermal power, the 2026 capacity tariff increase is expected to accelerate its utilities-ization. A review of 2025 shows a clear divergence in the stock performance of thermal power companies, with northern companies like Jiante neng yuan and Jingneng Power achieving stock gains of 60%-70% in the first half of the year, supported by high earnings growth. Currently, the prices for 2026 annual contract electricity in various provinces are gradually approaching the lower limit, suggesting limited room for future declines. Furthermore, the increase in coal power capacity tariffs for 2026 could add nearly 2 fen per kWh. Thermal power is also enhancing revenue per kWh through market-based trading mechanisms, making improved profit stability still achievable. In terms of corporate governance, market capitalization management is a key driver for thermal power companies. This involves balance sheet repair actions (in the first three quarters of 2025, saved financial expenses accounted for 3.2% of total profits). On the other hand, the significant improvement in free cash flow and the vast potential for higher dividend payouts indicate that the "utilities-ization" of thermal power may have arrived.

For hydropower, high reservoir levels ensure generation output, with attention on capacity additions and asset securitization. Abundant water flow in the Pearl River and Yangtze River in the second half of 2025 boosted hydropower generation. China Yangtze Power has released a preliminary earnings report, showing a net profit attributable to shareholders of 34.2 billion yuan for 2025 (up 5% year-on-year), with Q4 reaching 6 billion yuan (up 34% year-on-year). Overall hydropower performance is expected to be strong. High reservoir levels at the end of 2025 will support generation during the dry season in the first half of 2026. With a low base during the flood season, hydropower profits are expected to improve for multiple quarters. The peak period for hydropower project commissioning is approaching, with multiple stations in basins like the Dadu River set to commence operation. Additionally, various groups still have unsecuritized hydropower assets, making their securitization progress worth monitoring. Guiguan Electric Power's plan to acquire a Tibet subsidiary from China Datang Corporation opens up future growth potential. With long-term interest rates remaining low, the dividend value of hydropower continues to stand out.

For green power, policy drivers are key; for nuclear power and city gas, focus on demand improvement. The green power sector has not yet broken free from the sequential decline pattern from capacity additions to generation, to revenue, and finally profits. However, the implementation of Document No. 136 is expected to enhance the stability of Green Power's Return on Equity (ROE). Investment in green power is still recommended to focus on policy entry points like subsidies and environmental value, while placing less emphasis on short-term earnings. The approval of nuclear power units continues, with more attention on the pricing level of the market-oriented portion. For the city gas sector, against a backdrop of recovering gross margins, focus should be on the growth of gas sales volume. Both sectors exhibit stronger pro-cyclical attributes.

The acceleration of the utilities transformation warrants attention to the sector's dividend value. Recommended focuses include: (1) Thermal Power: High-performing, high-dividend companies with market cap management, such as Huaneng Power International, Huadian Power International, SDIC Power, Shenergy Company, Inner Mongolia Dianji, and Ganergy Company. (2) Hydropower: China Yangtze Power for high earnings growth and Guiguan Electric Power for potential asset injections. (3) City Gas: Jovo Energy, benefiting from the implementation of coal-to-gas projects. (4) Green Power with high ROE and low P/B: China Longyuan Power Group (H-shares) and Fujian Funeng. (5) Nuclear Power: CGN Power, benefiting from policy adjustments in Guangdong. Risks include reforms falling short of expectations, coal prices rising beyond expectations, and slower-than-expected progress in green power capacity additions.