(To obtain the report, please log in to Future Think Tank www.vzkoo.com) 1. Investment strategy for 2020: Buy thermal power and hold water and nuclear power 1.

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1. 2020 investment strategy: buy thermal power, hold water and nuclear

.1 Brief description of the 2020 investment strategy

The biggest variables and contradictions in the industry in 2020 That is to say, the coal and electricity benchmark, the core of the on-grid electricity price system, has been changed from the "benchmark + linkage" mechanism to the "benchmark + floating" mechanism. In addition, there are also variables in the other two key elements in the profit model - utilization hours and costs. Combining the three elements and potential market hot spots, we confirmed our investment strategy through the scoring mechanism - buy thermal power and hold water and nuclear.

.2 2019 Annual Investment Strategy Looking back

Market review: As of November 29, the Electric Power (Shenwan) Index rose 7.25%, underperforming the Shanghai and Shenzhen 300 Index by 19.92 percentage points, ranking first among the 102 Swinman Secondary Indexes 61 bits. Among the various sub-sectors, thermoelectricity performed best, rising 38.90%; photovoltaic power generation performed the worst, falling 8.05%. The top five companies in the sector that increased during the year were Minjiang Hydropower, Shennan Electric A, Xichang Electric Power, Fuchun Environmental Protection, and Lianmei Holdings; the top five companies in the sector that declined were Dongxu Blue Sky, *ST Kelin, Jiangsu Xinneng, *ST Huayuan, Huadian International. Among the key companies we recommend paying attention to, three of them have experienced gains in the upper reaches of the sector: Huaneng Hydropower (37.53%), Shenergy (25.78%), and Yangtze Electric Power (18.63%).

2. Review of 2019: The growth rate of electricity consumption slowed down as expected, and profits continued to increase

Affected by the downward socio-economic trend, the winter of 2018 was superimposed The cold wave and high temperature in summer caused a high base factor for the higher-than-expected growth of electricity consumption, and the growth rate of electricity consumption in various industries fell across the board. From January to October, the national electricity consumption was 5,923.2 billion kilowatt-hours, a year-on-year increase of 4.4%, a decrease of 4.3 percentage points from the same period last year, and was within the conservative assumption range predicted in our last annual strategy report. Viewed by industry:

 The electricity consumption of the primary industry was 64.7 billion kilowatt-hours, a year-on-year increase of 5.2%, a decrease of 4.6 percentage points from the same period last year;
 The electricity consumption of the secondary industry was 3.9867 billion kilowatt-hours, a year-on-year increase of 3.0%, a year-on-year decrease of 4.6 percentage points. A decrease of 4.2 percentage points in the same period last year;
 The electricity consumption of the tertiary industry was 994.1 billion kilowatt hours, a year-on-year increase of 9.3%, a decrease of 3.8 percentage points compared with the same period of the previous year;
 The domestic electricity consumption of urban and rural residents was 877.7 billion kilowatt hours, a year-on-year increase. 5.9%, down 5.2 percentage points from the same period last year.

……

The slowdown in demand side growth is simultaneously transmitted to the supply side. From January to October, the power generation of power plants above designated size nationwide was 5,847.2 billion kilowatt-hours, a year-on-year increase of 3.1%, and a decrease of 4.1 percentage points from the same period last year. Among them:

 The hydropower generation capacity above designated size nationwide was 1,001.3 billion kilowatt hours, a year-on-year increase of 6.5%, an increase of 1.5 percentage points over the same period of the previous year;
 The nationwide thermal power generation capacity above designated size was 4,204.1 billion kilowatt hours, a year-on-year increase of 1.1%, an increase of 1.5 percentage points over the previous year; dropped 5.5 percentage points over the same period;
 The national nuclear power generation capacity was 282.6 billion kilowatt hours, a year-on-year increase of 19.3%, an increase of 4.3 percentage points over the same period last year;
 The national large-scale wind power generation capacity was 325 billion kilowatt hours, a year-on-year increase of 9.7%, and a year-on-year increase of 4.3 percentage points. It dropped 13.4 percentage points from the same period last year.

Ø hydropower installed capacity was 309 million kilowatts, a year-on-year increase of 1.3%, a decrease of 1.9 percentage points compared with the same period last year;
Ø thermal power installed capacity was 1.174 billion kilowatts, a year-on-year increase of 4.8%, an increase of 1.9 percentage points compared with the same period last year;
Ø Nuclear power installed capacity was 48.74 million kilowatts, a year-on-year increase of 20.3%, an increase of 7.1 percentage points over the same period last year;
 Wind power installed capacity was 199 million kilowatts, a year-on-year increase of 12.2%, an increase of 0.6 percentage points over the same period last year;
 Photovoltaic power generation installed capacity 138 million kilowatts, a year-on-year increase of 12.3%.

...

From January to October 2019, the cumulative average utilization hours of power generation equipment nationwide was 3157 hours, 55 hours less than the same period last year. Among them,

 The cumulative average utilization hours of hydropower equipment above designated size nationwide is 3244 hours, 162 hours more than the same period last year;
 The cumulative average utilization hours of thermal power equipment above designated size nationwide is 3495 hours, 100 hours less than the same period last year;
 National nuclear power The cumulative average utilization hours of equipment are 6040 hours, 44 hours less than the same period last year (the published value is 159 hours less than the same period last year. Comparative analysis with the accumulated utilization hours from January to September and the same period last year shows that the data is incorrect, so the data for the same period last year is used to calculate the year-on-year 44 hours less);
 The cumulative average utilization hours of wind power equipment above designated size nationwide is 1,688 hours, 36 hours less than the same period last year;
 The cumulative average utilization hours of photovoltaic power generation equipment above designated size nationwide is 1,117 hours, 57 hours more than the same period last year.

2019 In the first three quarters of 2019, among the 73 listed companies in the power industry, 38 companies achieved year-on-year growth in net profit attributable to parent companies, and another 4 companies turned losses into profits; 23 companies achieved net profit attributable to parent companies. There was a year-on-year decrease, with another 3 companies experiencing losses and 5 companies continuing to suffer losses. In the third quarter of 2019, 39 companies achieved a year-on-year increase in net profit attributable to their parent companies, and another 4 companies turned losses into profits; 17 companies saw a year-on-year decrease in net profit attributable to their parent companies, while another 3 companies suffered losses and 10 companies continued to suffer losses.

...

3. Looking forward to 2020: The undercurrent of the new electricity price policy is surging, and the floating mechanism opens up the imagination

.1 The benchmark + linkage ended as scheduled, and the benchmark + floating came to the stage
On September 26, 2019, Premier Li Keqiang chaired an executive meeting of the State Council. The meeting decided: Starting from January 1 next year, the coal and electricity price linkage mechanism will be cancelled, and the current benchmark on-grid electricity price mechanism will be changed to a market-oriented mechanism of "base price + floating up and down".
.1.1 After sixteen years of ups and downs, the coal power on-grid electricity price benchmark + linkage mechanism came to an end as scheduled
.1.2 The "benchmark + floating" mechanism debuted, opening a new era of electricity prices
On October 21, 2019, the National Development and Reform Commission issued the "About Deepening the Integration of Coal-fired Power Generation into the Internet" "Guiding Opinions on the Reform of the Electricity Price Formation Mechanism" (Fagai Price Regulation [2019] No. 1658), officially canceling the coal and electricity benchmark on-grid electricity price + coal and electricity linkage mechanism that has been used for 16 years. The opinions decided to implement the new "base + floating" electricity price mechanism from January 1, 2020.
.2 Market pessimism: electricity prices are under pressure again
News reports related to the adjustment of the electricity price mechanism have been flowing out since mid-to-late September. The market focus is mainly on "provinces that implement the 'base price + floating up and down' price mechanism. Temporarily in 2020 "Do not rise, and ensure that the average industrial and commercial electricity price only falls but does not rise." It is believed that this is another time the national level has put pressure on the power industry to protect downstream power users after the two consecutive reductions in general industrial and commercial electricity prices in 2018 and 2019; The revenue side of the entire power industry continues to be under pressure, with thermal power plants bearing the brunt and performance recovery being hampered.
Therefore, the thermal power and electricity indexes in the secondary market experienced a wave of decline, with declines of 6.09% and 4.55% respectively from September 16 to September 30; after the official announcement of the plan on October 21 to November 15 It fell again by 5.21% and 2.61% on the same day; the cumulative declines in the two months from September 16 to November 15 reached 9.57% and 8.00% respectively, underperforming the CSI 300 Index by 7.18pct and 5.60pct.
.3 Our optimism: The electricity price imagination space opens up, and everything is possible.
.3.1 The floating mechanism opens up the electricity price imagination space, and everything is possible.
...
By observing the top-level design of the policy and local pilot projects, we believe that: for a long time The "invisible hand"'s control over electricity prices has finally begun to weaken, and it is expected to gradually straighten out the price transmission mechanism and benefit distribution pattern in the upstream, middle and downstream sectors, and the space for imagination has been opened up. There are six main highlights of :
 Release of price increase expectations: Since the last explicit implementation of the coal-electricity linkage increase in electricity prices on December 1, 2011, and the disguised increase in electricity prices on July 1, 2017, the decision-makers have approved an increase in electricity prices for the first time. .
 Decentralization of pricing rights : Decentralize top-level decision-making, top-down, and multi-party game-making power and responsibilities for coal-fired electricity price setting. Pricing rights are left to independent decision-making and game-playing between power generators and consumers.
 Expand the scope of linkage: has been linking coal and electricity for 16 years. On-grid electricity prices can only be linked to upstream coal prices. Affected by policy controls, price elasticity is small and policy uncertainty is high; in the future, it can be linked with downstream users. , after the degree of policy control is weakened, price elasticity is enhanced and implementation certainty is improved.
 Increase the room for price increase : In the 10 linkages between 2004 and 2015 and the price adjustment in 2017, except for a few provinces where the increase exceeded 10%, the average increase in most regions and the country has never reached 10%. Calculated based on the national average on-grid electricity price of coal power in 2018 of 370.52 yuan/MWh, the maximum increase corresponding to 10% reached 3.71 cents/kWh; based on the gross profit margin of thermal power enterprises in 2018 of approximately 15% and the fuel cost of 70% of operating costs. A rough estimate is that the impact of a 10% increase in electricity prices on profits is approximately equivalent to a 17% decrease in coal prices.
 Limit price reduction: At present, some provinces in the central and western regions have a high proportion of renewable energy installed capacity and greater pressure on coal and electricity bidding. Limiting the price reduction to 15% can alleviate the operating pressure of local thermal power companies to a certain extent.
 Increase the frequency of adjustments : The pilot in Jiangxi Province carried out quarterly floating adjustments in accordance with the recommendations in the supporting document "Implementation Plan for Comprehensive Liberalization of Electricity Generation and Consumption of Electricity Users in Some Key Industries" in Document No. 1027, and Document No. 1027 even proposed to use the floating mechanism Connected with monthly bidding. The timeliness of price feedback will be improved in the future.
.3.2 Sample observation, marketization is not terrible
Price increases after 2020, that is, the "14th Five-Year Plan" are already expected, but the price reduction pressure in 2020, the final year of the "13th Five-Year Plan", still exists. So how much pressure is there to make profits from the planned coal power generation through marketization? We may be able to observe this from the existing electricity market trading situation. Taking into account the installed capacity structure of each province, Guangdong and Jiangsu, two major thermal power provinces, which are also the top two provinces in the country in terms of market-based transaction electricity, were mainly selected as samples for observation.
Ø Guangdong: Transaction spreads stabilize, profit margins narrow
Ø Jiangsu: Market-oriented power generation leads the country, annual long-term agreements stabilize prices
...
Through the observation of Guangdong and Jiangsu provinces, it can be seen that market-oriented electricity transaction margins are beneficial to power generation companies The impact is not so great that it is difficult to control. Taking into account the factors of electricity generation at the revenue end and coal price at the cost end, power companies can basically remain rational when bidding and control the profit margin within the scope allowed by their own conditions; the game between each other will not be a beggar-thy-neighbor situation, resulting in a situation that harms others but does not benefit oneself. .

4. Thermal Power: Industry recovery is hard to change after a bad spring

.1.1 Electricity price: The profit margin is controllable, and the capacity mechanism protects the loss-making units

In addition to the "price limit" similar to the previous analysis In addition to the limits on the range of upward and downward fluctuations, there are three other points in Document No. 1658 that are conducive to the reasonable control of coal and electricity price concessions, and will have long-term benefits for electricity prices:

The new mechanism is applicable to limited electricity: policy clarifies that the electricity that has been marketized will still use the original According to the electricity price formation method, the "base + floating" mechanism is only applicable to the part of the original planned electricity that meets the trading conditions and trading users. According to statistics from the China Electricity Council, in 2018, among the various types of power supplies that large-scale power generation groups across the country participated in market-based transactions, the marketization rate of coal power grid-connected power has reached 42.8%, and the planned power accounted for approximately 57.2%; in primary industry and urban and rural areas It is estimated that residential electricity consumption accounts for 15.2% of the total electricity consumption in the whole society, and the proportion of planned electricity that can adopt the "base + floating" mechanism accounts for about 42.0%. According to what we learned from our research, except for special units such as heating, basically all coal power units in some areas have entered the electricity market, and the new electricity price mechanism has little impact on them.

Environmental protection electricity price subsidy continues : The policy clarifies that in addition to the desulfurization, denitrification and dust removal electricity price, the on-grid electricity price for market-based electricity also includes ultra-low emission electricity price. This clarifies the electricity price structure of the previously market-based electricity. On November 15, the Anhui Provincial Electric Power Trading Center issued a notice allowing both power generators and consumers who have signed a 2020 trading contract and the contract price does not include ultra-low emission electricity prices to renegotiate. Since then, many power companies have requested that the direct transaction electricity price be increased by 1 cent/kWh.

Capacity electricity price mechanism is on the agenda : In some provinces in the central and western regions, due to the large proportion of installed capacity of renewable energy sources such as hydropower, wind power, and photovoltaics, the output of local thermal power units has been seriously suppressed, and the utilization hours are significantly lower than the designed break-even point. This has caused power companies to suffer losses all year round; in some provinces in the central and eastern parts of the country, although thermal power utilization hours are relatively high, some old units are not competitive in market-based electricity transactions due to backward technical parameters and high coal consumption, which imposes huge pressure on environmental protection emissions. They have been gradually marginalized, shut down year-round, and even gone bankrupt early, which has had a negative impact on the power grid's ability to regulate peak load and ensure supply. For this type of coal power generation unit, converting to a peaking unit similar to gas power in the future is a feasible way to balance the demands of multiple parties; and the gas power generation units in Jiangsu, Zhejiang and Shanghai implement a "two-part system" of capacity price + electricity price Electricity price policy can ensure the profitability of peaking units and achieve sustainable development.

.1.2 Coal price: Returning to the green range, the floating mechanism conducts pressure

Although coal prices rebounded in early 2019 due to successive production accidents at the production site, under the influence of the following four factors, the price of thermal coal throughout the year showed highs and then lows. The trend:

 Coal supply-side reform is coming to an end, and production capacity continues to be released;
 There has been no extreme weather throughout the year, and electricity demand is weak;
 Hydropower output has reached its peak in the past decade, while thermal power output is sluggish;
 Power plants maintain high inventories Strategy, purchase large quantities of long-term coal and imported coal.

The average value of the China Thermal Coal Price Index (CTCI) from January to October fell to 496.59 yuan/ton, down 6.8% from the same period last year; while the comprehensive average price index of Bohai Rim Thermal Coal (Q5500K), which has a basically stable trend, rapidly entered November. It has plunged to 560 yuan/ton, which has entered the green price range stipulated in the "Memorandum on Suppressing Abnormal Fluctuations in Coal Market Prices" (Fagaiyun [2016] No. 2808).

On November 25, 11 coal companies including China National Energy Investment (Shenhua), China Coal, Tongmei, Yancoal, and Yitai jointly submitted a letter demanding guaranteed supply, stable prices, and compliance with contracts. Thirty years in Hedong and thirty years in Hexi. The seesaw relationship between coal and electricity has caused a change in the position of host and guest in less than three years. Under the trend of slowing economic growth, coal on the supply side faces the risk of simultaneous decline in demand and prices, and thermal power on the demand side is also expected to gradually increase its voice.

also roughly estimates based on the gross profit margin of thermal power companies in 2018 of about 15% and the fuel cost of 70% of operating costs. Assuming that the gross profit of power companies remains unchanged, a 10% increase in electricity prices will have an impact on profits of approximately 17%. coal price increase; a 15% electricity price drop corresponds to a coal price drop of approximately 25%. Document No. 1027 and Document No. 1658 have straightened out the transmission mechanism of thermal coal prices in coal power on-grid electricity prices. Under the policy guidance of converting planned electricity to market-based pricing and not allowing increases in 2020, thermal coal prices will still further increase. room for downside. We predict that the price center for the whole year of 2020 will be in the green range and may run below the benchmark price of 535 yuan/ton.

.1.3 Utilization hours: The suppression of hydropower and nuclear power output gradually faded, and profitability continued to recover

In the first half of the year, electricity demand in most areas was weak, coupled with the strong performance brought about by the high output of hydropower and the substantial growth of nuclear power installed capacity, suppressing the output of thermal power . However, the sharp decline in hydropower growth in August and September marked the temporary end of the period of high hydropower output since the summer of 2018. The decline in hydropower output has led to an increase in thermal power output. The growth rate of thermal power generation in a single quarter has increased from 0.8% in Q2 to 3.8% in Q3, pushing the revenue growth rate of the thermal power sector from 5.8% in Q2 to 12.6% in Q3; In addition, the price of thermal coal continued to decline. The growth rate of operating costs in Q3 was 9.0% lower than the revenue growth rate. Net profit attributable to the parent company increased by 68.2% year-on-year. In the summer of 2019, the water supply and storage conditions in major river basins across the country were not good. If the demand for electricity picks up, thermal power output is expected to grow further.

Among the 39 companies in the thermal power (including thermal power) sector, 24 achieved a year-on-year increase in net profit attributable to parent companies in the first three quarters, and another 2 companies turned losses into profits; 7 companies declined year-on-year, another 1 company suffered a loss, and 5 companies experienced a loss. Continued losses. Among them, 22 companies achieved a year-on-year increase in net profit in 3Q19, and 4 companies turned a profit; 5 companies experienced a year-on-year decline, 1 company suffered a loss, and 7 companies continued to suffer losses.

.2 Recommended targets: Huaneng International, Shenergy Group, Zheneng Electric Power

.2.1 Huaneng International: The country's thermal power leader

The company was affected by factors such as the suppression of the output of other power sources and weak electricity demand in the area where the units are located, and the progress of profit recovery Slightly lower than expected; and the new electricity price policy has made the market doubt the prospects of the entire thermal power industry. However, through the analysis of the three factors of thermal power profitability, it can be seen that the electricity price risk in 2020 is generally controllable, the downward trend of coal prices is expected to continue, and utilization hours are likely to improve. As the leader of thermal power, the company will benefit from the overall recovery of the thermal power industry.

.2.2 Shenergy Co., Ltd.: a comprehensive energy operator

The company’s power business is diversified. It controls and participates in a variety of power sources including coal power, gas power, nuclear power, hydropower, wind power, and photovoltaics. The controlling units are mainly coal power, gas power, etc. Mainly electricity. Although the company's unit output in Shanghai declined in the first half of the year, it was still better than the regional average. Factors such as value-added tax adjustments and falling electricity and coal prices have combined to improve the profitability of the company's two main businesses of electricity and oil and gas. Fengxian Thermal Power and Pingshan Phase II will be put into operation one after another. Combined with the acquisition of wind power and photovoltaic projects, the company will continue to grow its installed capacity and optimize its installed structure.

.2.3 Zheneng Electric Power : Provincial power company leader and nuclear power heavyweight player

The company is the largest thermal power generation company in Zhejiang Province. Its managed and controlled installed capacity accounts for about half of the provincial regulated installed capacity. Comparing the installed capacity and power generation of 16 provincial-level power companies in the A-share power sector, the company ranked first in all, making it the largest local power generation company in the country. The company is deeply involved in the field of nuclear power. Although it does not directly control and operate nuclear power plants, it has participated in its nuclear power projects in Zhejiang Province from the early stage through close cooperation with CNNC. The company changed its equity investment in CNNC from fair value measurement to equity method accounting, eliminating the impact of fluctuations in CNNC's stock price on the company's profits. The recovery of electricity demand in Zhejiang is expected to drive further growth in the company's revenue and profits.

5. Nuclear power: What to watch is the increase

The criteria for formulating the nuclear power benchmark electricity price mainly refer to the coal power benchmark electricity price in the region. Under normal circumstances, the on-grid electricity price of newly put into operation units is not higher than the local coal power benchmark, which reflects the ability of nuclear power to replace coal power. Currently, among the 47 nuclear power units in operation across the country, 26 units have an on-grid electricity price lower than the local coal power benchmark price (including desulfurization, denitrification, dust removal, and ultra-low emission electricity prices), 19 units have a price higher than the coal power benchmark, and another 2 units remained unchanged. Document No.

1658 clearly stipulates that the nuclear power price formation mechanism refers to the benchmark on-grid power price of coal-fired power generation, and instead refers to the benchmark price. This achieved a smooth transition to the nuclear power benchmark electricity price system and dispelled the market’s early uncertainty expectations regarding the adjustment of nuclear power on-grid electricity prices. However, there is the possibility of further expansion of the market-oriented power of nuclear power, and the average electricity price level may be lowered.

2018 is a big year for nuclear power production. A total of 7 units were put into operation throughout the year, 6 of which were put into commercial operation in the second half of the year; in 2019, Haiyang 2, Yangjiang 6, and Taishan 2 were put into operation successively. Consumption problems caused by the substantial increase in newly installed capacity are unavoidable; and the four major nuclear power provinces of Guangdong, Zhejiang, Fujian, and Jiangsu, as well as Shandong Province, which has newly put into operation two AP1000 units, and Shanghai, which consumes part of the power of Qinshan Nuclear Power, have The growth rate of electricity consumption in the first half of the year was lower than the national average. Affected by this, the average utilization hours of nuclear power nationwide in the first seven months decreased by 129 hours compared with the same period last year, a year-on-year decrease of 3.1%. Since the third quarter, Guangdong Province's demand for power generation and electricity has taken the lead in recovering and continues to increase. In the fourth quarter, Jiangsu, Zhejiang, Shanghai, and Fujian also began to show signs of recovery. We expect that as the Sino-US trade dispute eases, the demand for production electricity in the southeastern coastal provinces will gradually return to normal levels, and nuclear power utilization hours are expected to rebound further in 2020.

.2.1 The first reactor will be put into operation in 2020, and "Hualong One" will speed up again

The biggest attraction in the nuclear power industry in 2020 is the "Hualong One" using domestic third-generation nuclear power technology "The first reactor demonstration project - Fuqing Unit 5 was put into commercial operation. On October 11, 2018, the U.S. Department of Energy (DOE) issued "Measures to Prevent China from Illegal Transfer of U.S. Civilian Nuclear Technology for Military or Other Unauthorized Purposes." In terms of technology transfer, it mainly includes the ban on light water small reactors, non-light water advanced reactors (such as fourth-generation nuclear reactors, etc.), the transfer of new technologies after January 1, 2018, and the source code of related software systems, engineering design technology, etc. Transfer; in terms of equipment and components, export applications that are in direct economic competition with the United States are prohibited, such as "Hualong One" and U.S. proprietary equipment of CAP1400. The consideration of independent intellectual property rights by decision-makers is a key factor in the future development planning of nuclear power, a representative of "Made in China 2025"; and whether it has independent intellectual property rights determines whether it has independent export rights, that is, whether it can become a "walk-in" enterprise. In the "Going Out" strategy, it is like a "national business card" like high-speed rail. Therefore, "Hualong One" has also replaced the AP1000, which had attracted global attention, and become the main reactor type of domestic third-generation nuclear power technology.

On January 30, 2019, a total of 4 units of CNNC Zhangzhou Nuclear Power Phase I and CGN Huizhou Taipingling Nuclear Power Phase I were approved. On March 18, the Ministry of Ecology and Environment officially accepted the environmental impact report (construction phase) of Units 1 and 2 of the Fujian Zhangzhou Nuclear Power Plant and the first phase of the CGN Guangdong Taipingling Nuclear Power Plant; on October 9, the Ministry of Ecology and Environment issued the "About Approval of the Environmental Impact Report (Construction Phase) of Units 1 and 2 of Fujian Zhangzhou Nuclear Power Plant”; October 16, FCD of Unit 1 of Zhangzhou Nuclear Power Plant. The approval of the new unit before the first reactor was put into operation shows the decision-makers' support and expectations for the development of "Hualong One" and even China Nuclear Power Company. In addition, the second phase of Hainan Changjiang Nuclear Power Plant, which also uses Hualong One technology, has begun preliminary construction and is expected to be approved to start construction in 2020.

.2.2 The demand for steady growth in infrastructure investment drives the increase in nuclear power

Nuclear power has the characteristics of long construction period and large investment scale; nuclear power construction can play a role in stabilizing investment without increasing supply capacity in the past five years, but it is important for promoting future energy Structural optimization plays an important role. Since 2018, due to the slowdown in domestic investment growth, in order to maintain effective investment, promote the expansion of domestic demand and structural adjustment, and ensure that the economy operates within a reasonable range, on October 31, the General Office of the State Council issued the "About Maintaining the Strengthening of Weaknesses in the Infrastructure Sector" Guiding Opinions on the Intensity” (Guobanfa [2018] No. 101). The opinions require efforts to make up for shortcomings in railways, highways, water transportation, airports, water conservancy, energy, agriculture and rural areas, ecological environmental protection, public services, urban and rural infrastructure, shantytown renovation and other fields, and accelerate the advancement of major projects that have been included in the plan. On the one hand, with the policy guidance of coal power overcapacity reduction unchanged, hydropower development stagnant, and wind power and photovoltaic power generation subject to subsidy restrictions, investment in power projects has slowed down significantly; on the other hand, with the trend of decelerating UHV construction, the power grid has Engineering investment is also facing sluggish growth. In the first half of 2019, the completed investment in power grid projects decreased by 19.3% year-on-year; driven by increased investment in hydropower, the completed investment in power supply projects increased by 3.3% year-on-year.

Based on the estimated unit cost of a single nuclear power plant with two units of approximately 2.5 million kilowatts per phase and a third-generation unit of 18,000 yuan/kilowatt, each phase of the project will drive approximately 45 billion yuan in project investment. Nuclear power has become one of the best thrusts for large-scale infrastructure policies in the entire power industry under the current political and economic situation. According to statistics, there are currently 29 units that have started preliminary work (including Tianwan Units 7 and 8 and Xudabao Units 3 and 4 that have signed a contract with Russia), with a total installed capacity of 34.84 million kilowatts. In the medium term, assuming that all 29 units are under construction and put into commercial operation, the number of nuclear power units in operation in China will reach 93, and the total installed capacity will exceed 100 million kilowatts.

According to the carrying capacity of 4-6 units per nuclear power plant site and the expansion margin of 2 units, domestic nuclear power development has huge potential. WNA statistics show that mainland China plans to have 170 nuclear power project units with a total installed capacity of nearly 200 million kilowatts. According to our statistics, in addition to the aforementioned 64 units, the existing nuclear power plant site reserves still have 116 units that can be built, with a total installed capacity of 143 million kilowatts. Even if the inland nuclear power plant sites are not taken into account, there are still 48 units that can be built at the coastal sites, with an installed capacity of 60.84 million kilowatts. According to our calculations, the total investment budget for 34 units that have been approved, pending approval, and preliminary work has been carried out in 2019 is approximately 720 billion yuan; the total investment budget for the other 48 units that can be built at coastal sites is approximately 1.12 trillion yuan.

.2.3 New players are ready to move, and the sword accuses equity

On September 19, 2016, the Legislative Affairs Office of the State Council publicly solicited opinions on the "Nuclear Power Management Regulations (Draft for Review)". Since the National Energy Administration organized legislative research and drafting of regulations in October 2008, the regulations have been brewing for eight years, with repeated discussions, discussions and revisions. One of the biggest controversies is the setting of the threshold for nuclear power licenses. The draft regulations for review clearly put forward the principle of encouraging the diversification of investors in nuclear power projects, and for the first time clarified the access conditions for investors in nuclear power projects in Chapter 4. On February 1, 2019, the National Energy Administration issued the "Implementation Opinions on Deeply Promoting Legal Governance in the Energy Industry", requiring vigorous promotion of the legislative review of the "Nuclear Power Management Regulations".

Except for China National Nuclear Corporation, China General Nuclear Power Corporation, and State Power Investment Corporation, which have nuclear power operation licenses, the remaining four of the five major power generation groups and local energy groups can only participate in the development and construction of nuclear power plants through equity participation and cannot occupy a dominant position. However, with the development of traditional coal power basically stagnating and the scale of new energy being scaled up at a slow pace, various power generation companies are still diligently pursuing nuclear power licenses.

Ø Huaneng: On April 17, 2019, China Huaneng Group Co., Ltd. and China General Nuclear Power Group Co., Ltd. signed a strategic cooperation agreement at the headquarters of the group company.According to the agreement, the two parties will focus on carrying out all-round strategic cooperation in the fields of nuclear power, information construction, new energy, nuclear fuel, finance, overseas power projects and other fields. On June 11, Huaneng Nuclear Power Development Co., Ltd. and China Nuclear Power Co., Ltd. signed an investment agreement at the Huaneng headquarters in Beijing. According to the agreement, the two parties will jointly invest in the development, construction, operation and management of Huaneng Hainan Changjiang Nuclear Power Phase II Project #3 and #4 For the two "Hualong One" units, Huaneng Hainan Changjiang Nuclear Power Co., Ltd. is the investment, construction and operation management entity of this project.

Ø Datang: The first phase of the Ningde Nuclear Power Project, a cooperation between Datang and CGN, has been completed and put into operation. After the shareholding ratio is penetrated, it can be seen that Datang has the highest equity share. However, due to lack of qualifications, it can only become a concerted actor with CGN, which is controlled by CGN. , consolidated; and Ningde No. 2 Nuclear Power, established at the end of 2016, is controlled by Datang Group Nuclear Power Company and plans to build two "Hualong One" units #5 and #6. On November 23, 2019, Datang Power Generation, the core listing platform of Datang Group, announced that the board of directors has reviewed and approved the "Proposal on the Establishment of Liaoning Zhuanghe Nuclear Power Co., Ltd." and the "Proposal on the Absorption and Merger of Datang International Nuclear Power Co., Ltd." Proposal", Liaoning Zhuanghe Nuclear Power Co., Ltd. is controlled by the company, with a shareholding ratio of 46%.

According to the relevant detailed requirements of the "Nuclear Power Management Regulations (Draft for Review)", Datang, Huadian and Huaneng, the three major power generation giants, have basically met the requirements for controlling nuclear power plants. Combined with the expectation of the resumption of approval of third-generation nuclear power, it will gradually change the competitive landscape of existing nuclear power operators, bringing new variables and new momentum.

.3 Recommended target: China Nuclear Power

China Nuclear Power : The pearl of nuclear power, uniquely endowed by nature

The company’s controlling shareholder, China National Nuclear Corporation, is in a leading position in the country in the development of nuclear power technology. It is the only company with a complete nuclear fuel cycle industry that can realize a closed cycle. A large central enterprise, CNNC is authorized by the state to operate exclusively in the production, operation, import and export of nuclear fuel and uranium products. The shutdown and maintenance of Sanmen Unit 2 had a greater drag on the performance in 2019 than expected, but the company adjusted the depreciation policy to release profits for hedging; the new electricity price policy clarified the smooth transition of the nuclear power on-grid price system and stabilized market expectations; the use of electricity in the areas where the company's units are located Electricity demand is beginning to pick up, and utilization hours are expected to gradually increase.

6. Hydropower: Dormant

.1 Core factors: Electricity price risks are temporarily eliminated, and power consumption is likely to slow down

.1.1 Large hydropower electricity price risks are temporarily eliminated

Hydropower on-grid electricity prices are presented in three models: according to "principal and interest payment electricity price" or The independent electricity price set by the "operating period electricity price", the benchmark electricity price implemented within the province, and the negotiated electricity price for inter-provincial and inter-regional power transmission. On May 5, 2015, the National Development and Reform Commission issued the "Notice on Improving the Price Formation Mechanism for Inter-provincial and Inter-regional Electric Energy Transactions (Fagai Price [2015] No. 962)", taking Xiangjiaba, Xiluodu and Yalong River Cascade Hydropower Stations as examples. For example, the inter-provincial and cross-regional power transmission price formation mechanism is determined based on the benchmark on-grid power price and transmission price of coal-fired power generation in the province, and the backward calculation of line losses to determine the on-grid power price.

In the early stage, the market was worried that the on-grid electricity price of large hydropower stations might be suppressed due to high profit margins. However, similar to the situation with nuclear power, Document No. 1658 clearly stipulated that the inter-provincial and inter-regional power transmission price formation mechanism should refer to the benchmark on-grid electricity price of coal-fired power generation. The benchmark price dispelled some of the market's doubts. We believe that as the final year of the "13th Five-Year Plan", the price of hydropower transmitted across provinces and regions in 2020 should be able to maintain the current level; however, during the negotiation process of the new agreement for the "14th Five-Year Plan", a gaming situation may arise .

.1.2 The ebb and flow of power is likely to slow down

Although 2019 is a big year for hydropower, the national precipitation in May and June is close to the normal annual level, while the precipitation in Yunnan, Sichuan, Tibet and other major hydropower provinces is relatively high. It is less than usual all year round; in August, there is generally moderate to severe meteorological drought in most Hubei, northern Hunan, northern Jiangxi, southern Anhui and other places, and there is extreme drought in some parts of eastern Hubei, and the precipitation in the middle and lower reaches of the Yangtze River is generally less than 100 mm; the national average in September The precipitation was 62.4 mm, 4.4% less than the same period last year, and 12.8% lower than the same period last year (71.6 mm). The precipitation was in the western part of Northeast China, the southeastern part of North China, most of Huanghuai, Jianghuai, most of Jiangnan, most of South China, eastern Inner Mongolia, and Xinjiang. Precipitation in eastern and other places was 20% to 80% less than the same period in normal years; the national average precipitation in October was close to the same period in normal years, but Sichuan Province had only a slight increase in hydropower output despite the highest rainfall in the same period in history, while Yunnan and Hubei provinces hydropower output continues to decline. Affected by this, Q3 hydropower output continued to be under pressure, and the high base effect in the same period last year led to a sharp decline in growth. Power generation in a single quarter increased by 2.5% year-on-year, which was significantly lower than the growth rate of about 12% in the previous two quarters. Affected by the poor water supply situation, Q3 hydropower segment's net profit attributable to the parent company increased by 3.8% year-on-year, which was significantly lower than the year-on-year growth rate of about 20% in the previous two quarters. We predict that hydropower output is likely to slow down in 2020.

.2 Hot topics: The peak of a new round of hydropower production is coming

Although the period of rapid development of hydropower has passed, some large-scale hydropower projects under construction in Sichuan, Yunnan and other provinces will be put into operation one after another from 2020. In the early stage of the "14th Five-Year Plan" The industry will usher in a new round of growth. Currently, among the four major power stations in the lower reaches of the Jinsha River, Wudongde with an installed capacity of 10.2 million kilowatts and Baihetan with an installed capacity of 16.0 million kilowatts are expected to start operation around 2020; the planned power station in the middle reaches of the Yalong River has an installed capacity of 3 million kilowatts. The Lianghekou Power Station and the 1.5-GW Yangfanggou Power Station are expected to start production around 2021. Relevant UHV lines have been successively approved for construction, preparing consumption and delivery channels for the upcoming peak production of Sichuan-Yun Hydropower.

.3 Recommended targets: SDIC Power, Huaneng Hydropower

.3.1 SDIC Power: Water and fire come together, and the middle reaches of the Yalong River are advancing in an orderly manner

The company holds the golden water section of the Yalong River and is a hydropower-based company. , a comprehensive power listed company that combines water and fire, and complements wind and solar power. The Yalong River Basin has abundant water, concentrated gaps, small hydropower flooding losses, outstanding scale advantages, significant cascade compensation benefits, both accommodation and immigration advantages, and superior economic and technical indicators. A 22-level power station is planned to be developed on the main stream of the Yalong River, with a planned developable installed capacity of 30 million kilowatts. Among the 13 major hydropower bases planned in the country, the installed capacity ranks third. In 2019, the company benefited from the relatively abundant water supply, with stable and increasing power generation; strong demand for electricity in areas where some thermal power units are located has driven revenue growth; falling coal prices have alleviated cost pressures, resulting in a significant increase in profits.

.3.2 Huaneng Hydropower : A strip of water connects Yunnan and Guangdong, sending electricity from west to east to the Greater Bay Area

Among domestic hydropower companies, the company's hydropower installed capacity is second only to Yangtze River Electric Power, and its power generation is slightly lower than SDIC Power, ranking third in the industry. The company sits on the leading reservoirs of Xiaowan and Nuozhadu power stations with multi-year adjustment capabilities, which can smooth output during peak and dry seasons, increase power generation, and increase on-grid electricity prices, which is one of the company's core competitiveness. Based on the market layout of Yunnan's west-to-east electricity transmission to Guangdong, the company's electricity and electricity prices will benefit from the improvement of the supply and demand pattern of the two provinces and the deepening of the electricity market reform.

7. Investment suggestions

.1 Industry rating

In 2019, hydropower output increased, thermal power profits recovered, and the prosperity of the power industry continued to improve.Although the reduction of user-side electricity prices for two consecutive years has continued to put pressure on the power generation side, the new coal power on-grid electricity price policy using a market-based floating mechanism is quite promising in terms of price increase expectations, pricing rights, linkage scope, price increase space, price reduction restrictions, and adjustment frequency. What to watch: Even if electricity prices cannot rise for the time being in 2020, it is expected that the price transmission mechanism and profit distribution pattern of the upper, middle and lower reaches will be gradually straightened out in the future, opening up the imagination space for electricity prices. Therefore, we raised the industry rating to "Stronger than the Market" .

.2 Profit forecast

In 2020, among the three factors of thermal power profitability, the electricity price risk is controllable, the utilization hours and the improvement trend of coal prices remain unchanged. We recommend the national leader Huaneng International, as well as the Yangtze River Delta regional leaders Zhejiang Electric Power and Shenergy Co., Ltd.; The utilization hours of nuclear power are expected to rebound. The acceleration of Hualong's new units and changes in the competitive landscape are worthy of attention. We recommend China Nuclear Power, which enjoys the advantages of the controlling shareholder's entire industry chain. We recommend paying attention to China General Nuclear Power (H)/China General Nuclear Power, which has the largest installed capacity in the country. (A); The utilization hours of hydropower are likely to fall. The successive commissioning of new power stations in the Sichuan and Yunnan areas will bring about a new round of growth. It is recommended that SDIC Power, which combines water and fire, has both offense and defense, and has two leading reservoirs, west power and east power. For Huaneng Hydropower in the Greater Bay Area, it is recommended to pay attention to Yangtze Power, the global leader in hydropower. It is recommended/suggested to pay attention to the profit forecast of the target as follows:

(Report source: Ping An Securities)

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