Shen Wan Hongyuan: Urban fuel companies will fully benefit from the three major favorable factors of volume increase, price reform, and old reform

Zhitong Finance ·  Apr 14 22:02

Against the backdrop of falling global gas prices and recovering consumer demand, CICC will fully benefit from the three major favorable factors of volume increase, price reform, and old reform. CICC is optimistic about the increase in both the profitability and valuation of CICC.

The Zhitong Finance App learned that Shen Wan Hongyuan released the public utility industry's performance forecast for the first quarter of '24, indicating that in the context of falling global gas prices and recovering consumer demand, urban combustion companies will fully benefit from the three favorable factors of volume increase, price change, and old reform. They are optimistic about the increase in profitability and valuation of urban fuel companies, and recommend high-quality Hong Kong stock urban combustion companies China Resources Gas (01193), Kunlun Energy (00135), Xinao Energy (02688), China Gas (00384), and Ganghua Smart Energy (01083). The price of imported spot LNG has declined, and it has a price advantage over domestic gas. We continue to recommend natural gas trading stocks Xinao Co., Ltd. (600803.SH), Xintian Green Energy (600956.SH), and Jiufeng Energy (605090.SH).

In terms of electricity, policies such as capacity electricity prices and market-based pricing of ancillary services have been introduced continuously, and there is still room for reduction in fuel costs and financial expenses. The comprehensive profitability of thermal power has been rising steadily over a long period of time, and they are optimistic about Shenneng shares (600642.SH) and Inner Mongolia Huadian (600863.SH), which have high dividends. Optimistic about the increased generation efficiency of the large water elevator cascade in 2024 and the rise in electricity prices in the context of tight electricity supply and demand in the two provinces of Chuanyun, we recommend Changjiang Electric Power (600900.SH), SDIC Power (600886.SH), Sichuan Investment Energy (600674.SH), and Huaneng Hydropower (). 600025.SH Nuclear power has approved 10 new units for two consecutive years. We are optimistic about the growth of nuclear power companies in the long term. It is recommended to focus on China Nuclear Power (601985.SH) and China General Nuclear Power (003816.SZ,01816).

Shen Wan Hongyuan's main views are as follows:

Thermal power: Coal fell in Q1, and the reduction in interest expenses is expected to help speed up the recovery of thermal power's profitability

On the cost side, the average spot price of 5,500 kcal thermal coal in Qinhuangdao in 1Q24 was 902 yuan/ton, down 227 yuan/ton from 1Q23. Against the backdrop of significant improvements on the cost side, the annual electricity sales price of Changxie dropped slightly year-on-year. From January to February 2024, the average number of hours used by thermal power equipment nationwide was 763 hours, respectively, up 44 hours from the same period last year. LPR continues to be lowered, and interest expenses for thermal power are expected to continue to decline as a high-advance and highly leveraged business model. Considering the low performance base of the 1Q23 thermal power companies, I am optimistic that the profitability of thermal power will rebound sharply.

Hydropower: Sufficient water storage is superimposed on incoming water restoration, and hydropower utilization is improved over time

From 2021 to mid-2023, incoming water in all watersheds generally dried up, and the number of hours used for hydropower declined for three consecutive years. Since the first half of 2023, water has dried up, resulting in a year-on-year decrease of 285 hours in the country's average hydropower usage hours. Beginning in August 2023, the number of hours of hydropower utilization per month began to pick up, and annual water storage tasks in various watersheds were successfully completed.

Take the Yalong River as an example. At the end of 2023, the upstream Lianghekou Power Station completed the third phase of water storage. Since December 2023, the amount of incoming water in the Yalong River basin has increased by more than 30% year on year, overcoming the dry water dilemma. From January to February 2024, the number of hours used for hydropower in the country increased by 5 hours year-on-year.

Considering the low base of 1Q23 and the high year-on-year increase in water storage in large reservoirs, as well as the impact of interest rate cuts, I am optimistic that the performance of 1Q24 hydropower companies will improve year over year.

Nuclear power: Increased replacement and overhauls limited the growth rate of power generation in the first quarter. The decline in LPR helped reduce financial pressure during periods of high capital expenditure

China's nuclear power plants are generally located in the eastern coastal region, and consumption is generally stable. According to China Nuclear Power and China General Nuclear Power's first quarter power generation announcement, 1Q24 was affected by a year-on-year increase in material replacement overhauls. The power generation capacity of China's nuclear power sector declined slightly, and China's general nuclear power generation increased slightly year-on-year. Due to factors such as revenue recovery mechanisms, the price of nuclear power has a certain degree of rigidity. Considering the high increase in China's nuclear power and new energy generation, China's General Nuclear Power feed-in capacity increased slightly year-on-year, and we are still optimistic about the steady growth of the two-core performance in the first quarter.

Shen Wan Hongyuan pointed out that since 2019, nuclear power approval was normalized and accelerated in 2022 to 2023, and there is strong certainty about medium- to long-term installed capacity growth. China's LPR quotes for a period of 5 years or more were lowered by 10 and 25 basis points respectively in June 2023 and February 2024. With the two cores entering an intensive capital expenditure period, the pressure on the company's financial expenses was reduced during the interest rate cut cycle, and the company can also further reduce period expenses and enhance profitability through measures such as debt replacement.

Gas: High increase+cost reduction+price change are catalyzed by multiple benefits, and a sharp rise in quantitative profit helps improve urban combustion performance.

1) Volume increase: From January to February 2023, the country's apparent natural gas consumption was 72.51 billion cubic meters, up 14.8% year on year. The macroeconomic recovery continued to be compounded by the low base for the same period. The single-phase growth rate hit a new high since September 2021. Macroeconomic recovery helped downstream demand continue to recover.

2) Cost reduction: International gas prices continue to operate at a low level (US gas prices continue to operate below $2/mmBTU), and the economy of marine gas imports continues to stand out. In April, the latest imported spot LNG CIF price operated at a low level of around $9/mmBTU, and the cost advantage was even more remarkable. The pressure on procurement costs for urban fuel with multiple gas sources has been reduced. We are optimistic that the “industrial coal to gas conversion”, which was previously limited by high prices and difficult to promote, will achieve a breakthrough, and that the recovery in industrial and commercial gas consumption with high gross margins will improve the urban gas sales structure.

3) Price reform: Starting in 2H23, residential gas prices have been launched nationwide, and provinces such as Hebei and Jiangsu have basically implemented provincial price adjustments for residential gas. Cities such as 1Q24 Shenzhen have also started smooth prices. Considering that 1H23 is still an empty policy window period, there is a strong certainty that 1H24's popularity performance will increase year over year. I am optimistic that the favorable price mechanism for residents will continue to advance throughout the country to ensure the stability of the operation of urban combustion enterprises.

In summary, Shen Wan Hongyuan predicts that the performance of key companies in the utility industry for the first quarter of 2024 is as follows: 1) In the power sector, companies whose performance increased by more than 100% year on year include Guodian Electric Power and Huaneng International. Companies with 50-100% performance growth rates include Huadian International; companies with 10-20% performance growth rates include SDIC Electric Power and Sichuan Investment Energy; performance growth rates are 0-10% China Nuclear Power, China General Nuclear Power, Huaneng Hydropower, and Changjiang Electric Power. 2) In the gas sector, companies with declining performance include Xinao Co., Ltd.; companies with a performance growth rate of 0-10% include Jiufeng Energy.

Risk warning: Prices of coal and natural gas fluctuate highly, incoming water falls short of expectations, and the implementation of natural gas prices falls short of expectations.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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