The signal of deepening reform after the tide of power rationing is gradually strengthening, and the underlying investment logic of the power industry is changed

Sector Performance: Performance in the current period: Utilities sector outperforms the broader market. The CSI 300 index rose 0.35%, the ChiNext rose 1.15%, the utilities sector fell 0.24% year-on-year, the sub-sector power sector rose 1.05%, the water sector fell 4.33%, the gas sector fell 0.46%, and the environmental protection engineering and services sector fell 3.50%.

Important information review: Utility view: After the tide of power rationing, the signal of deepening reform is gradually strengthening, changing the underlying investment logic of the power industry. Recently, the state and local governments have expressed and promoted the market-oriented reform of the power industry in the form of documents, speeches, comments and other forms on many occasions.

1) In the past 20 years, coal-electricity contradictions have erupted in a concentrated manner, and the production factors have been marketized in the last deep-water area. From the experience of previous years, the air conditioning load fell sharply in September and the heating demand was not started, and the southern autumn flood thickened the hydropower output, so September is often the most relaxed month for electricity supply and demand in the whole year, and the outbreak of a national power curtailment tide at this time is inevitably worrying;

2) In recent years, China has repeatedly proposed to promote the marketization of production factors, but the coal-electricity contradiction that has lasted for nearly 20 years has always been unresolved, becoming the last deep-water area of market-oriented reform in the field of production factors;

3) The new power system needs a new electricity price mechanism, and carbon neutrality cannot only change supply without touching demand.

4) The signal of deepening reform is getting stronger, and the underlying investment logic of the power industry is expected to change completely; it still takes time to solve the problem, but the future is worth looking forward to. Taking the power ration tide as an opportunity, the state and local governments have recently expressed the real significance of market-oriented reforms in the power industry in the form of documents, speeches, comments, etc. on many occasions, and established a long-term mechanism that is in line with the carbon neutrality goal and responds to the tight supply and demand of electricity in the medium and long term;

5) Rhythmically, we expect that it will take time for non-public welfare electricity prices to be fully liberalized.

There is a strong expectation of reform of the electricity price mechanism, superimposed on the recent favorable new energy policies, and comprehensively benefiting clean energy operators and thermal power transformation leaders:

1) Thermal power transformation: The first promotion of China Resources Power, China Power, Inner Mongolia Huadian, it is recommended to pay attention to Huaneng International. As a national-type large thermal power leader, the above-mentioned companies rely on the huge stock of coal power assets to provide sufficient cash flow, new energy installed capacity and rapid profit growth, the current market value is in an absolutely undervalued state. Inner Mongolia Huadian has more than 10 million kW of coal-fired power projects in the Inner Mongolia region, of which more than half are sent to the North China Power Grid through UHV. There is a strong complementarity between the company's existing coal power assets and the development of new energy projects, the company currently has more than 1.4 million kilowatts of high-quality new energy projects, and is expected to become an important development body of the Inner Mongolia large base project in the future;

2) Pure new energy operators: Recommend CGN New Energy, Longyuan Power, and Three Gorges Energy. As the flagship new energy development platforms of China General Nuclear Power Group, National Energy Group and China Three Gorges Group, the three major shareholders continue to grow their installed new energy capacity by relying on the huge power development strength of major shareholders in the country;

3) Hydropower: Recommend Qianyuan Power, Yangtze River Power, Huaneng Hydropower, Sichuan Investment Energy. Leading hydropower companies are expected to enter the field of new energy operations through the integration of water, wind and photovoltaic projects, opening up growth space, and the value of existing hydropower assets is also expected to be revalued. Qianyuan Power, a new key recommended target, in the past two years, the company is fully promoting the expansion of photovoltaic projects, we emphasize that the company's photovoltaic transformation goals are firm, the space is broad, and cutting into the new energy track will help the company achieve good growth and have high configuration value.

Environmental protection point of view: The "Measures for the Management of Urban Water Supply Prices" began to be implemented, improving the water price linkage mechanism and benefiting the environmental protection water sector. On October 1, 2021, the Measures for the Administration of Urban Water Supply Prices were officially implemented, requiring the establishment and improvement of a linkage mechanism for water supply prices based on the principles of "permitted cost plus reasonable benefits", water conservation and fair burden. The Administrative Measures stipulate that the permitted income of the water supply business of water supply enterprises shall be composed of three parts, such as the permitted cost, the permitted income and the tax, and specify in detail the respective components of the three parts. At the same time, the management measures clearly provide and adjust water prices according to the actual local situation and social affordability as the core basis

Hong Kong stock views:

1) Midstream storage and transportation boom upwards. The essence behind the surge in LNG prices reflects strong demand. We believe that the storage and transportation of the LNG midstream is a key beneficiary;

2) Gas prices are further soared, and the pressure of residents to ensure supply in winter is highlighted. At present, the global gas price continues to rise, China's LNG spot to land price from 10 US dollars / million British heat further rushed to a new high of 26 US dollars / million British heat in the year, corresponding to the terminal retail cost of about 4.5 yuan / square, April so far the price has nearly doubled, forming a substantial price inversion. The gross pressure of the urban heating season is not optimistic, and we believe that the urban combustion gross difference will be further under pressure in the second half of the year;

3) The growth rate of sales volume remained high. According to the data disclosure of the National Development and Reform Commission, the apparent consumption of natural gas in July 2021 was 28.37 billion cubic meters, an increase of 15.2% year-on-year. From January to July 2021, the apparent consumption of natural gas was 211.2 billion cubic meters, an increase of 17.1% year-on-year. The overall natural gas industry has a high degree of prosperity, and the sales performance of Longtou City Combustion in the first half of the year is eye-catching;

4) The long-term outlook for the integrated energy business remains unchanged. Under the goal of carbon peaking in 2030, carbon reduction is largely equivalent to coal reduction, industrial coal to gas is expected to continue to accelerate, and gas companies actively layout transformation business.

Common focus

1) Thermal power: China Electric Power, China Resources Power, Huaneng International, Inner Mongolia Huadian;

2) Clean power generation: Yangtze River Power, Huaneng Hydropower, SDIC Power, Sichuan Investment Energy, Qianyuan Power, Three Gorges Energy, Longyuan Power, Funeng Shares, China General Nuclear Power, China Southern Grid Energy, Jinko Technology;

3) Gas: Shenzhen Gas, New Natural Gas, China Resources Gas, ENN Energy.

4) Power grid: State Grid Information and Communications, Fuling Electric Power.

Environmental protection focus

1) Atmosphere + monitoring: first river environmental protection;

2) Solid waste: Zhefu Holdings, High Energy Environment, CICC Environment, Jinyuan Shares, Weiming Environmental Protection, Shanghai Environment, Grand Blue Environment;

3) Water treatment: DelinHai, Bishuiyuan, Boschke, Guozhen environmental protection.

Disclaimer: Investment is risky, enter the market need to be cautious, the above content is for reference only, not as a personal investment basis!