BofA Upgrades CGN Power to Buy, Favoring Nuclear Profit Recovery

Overview

This is a BofA company research (rating adjustment) report on the China/China Hong Kong power utilities sector. The core action is upgrading CGN Power H-shares and A-shares from "Underperform" to "Buy," raising the H-share target price from HK$3.0 to HK$3.9 and the A-share target price from RMB3.7 to RMB5.0. The overall tone of the report is "structural selection": driven by recent energy price increases, El Niño heatwave expectations, and direct power connection themes, the IPP (Independent Power Producer) sector's H-shares rose an average of ~15% in the past month, led by thermal power. However, BofA believes the rally in thermal power lacks profit support and favors nuclear power's profit recovery, thus preferring nuclear power while viewing thermal power cautiously, maintaining "Underperform" ratings for Huaneng, Huadian, and Longyuan Power.

Core views

Demand and Weather: The report notes that the peak electricity consumption period for China Southern Power Grid arrived earlier this year, with load exceeding 270GW in late May (211GW in the same period last year), more than a month earlier than the typical peak in previous years, mainly driven by early high temperatures and resilient industrial activity. However, current weather forecasts do not point to a "heatwave"—according to ECMWF predictions, national temperatures in June-July 2026 will be lower than in 2025 and the 2016-25 average (June expected at 24.9°C, lower than last year's 26.05°C and the long-term average of 25.57°C; July at 26.93°C, lower than last year's 28.93°C and the historical average of 28.08°C). This implies that weather-driven summer electricity demand may be weaker than last year, and market expectations for thermal power profits are too high. However, the same agency predicts a ~25% year-on-year decline in rainfall in June, and since rainfall has a 68% historical correlation with hydropower utilization hours, output from other power sources like thermal power may be more supported even without temperature boosts. Thermal Power: The report takes a cautious stance. Its core logic is that "rising coal prices outweigh electricity price increases." Spot electricity prices in Guangdong and Yunnan once rose to ~40% above the benchmark in April, but by May (as of the 24th they had fallen back to 0-10% below the benchmark; among the 31 tracked regions, spot prices in 28 remained below the benchmark. The year-on-year increase in Guangdong's spot price fell from 48% in April to 19% in May. More importantly, spot transactions account for only 5-20% of thermal and renewable IPP volumes, with most locked into annual/quarterly/monthly contracts; 2026 annual contract prices will not change until early 2027. Coupled with the potential for "higher for longer" coal prices following the Shanxi accident and below-average coal inventories, BofA judges that the comprehensive electricity price (spot + contract) for thermal power is still declining, keeping profits under pressure. Valuation: BofA uses the historical relationship between PBV and ROE to test thermal power valuations, believing that the current 0.9-1.4x PBV implies a 2026 ROE of 8-14%, whereas BofA's own forecast is only 7-9%. To achieve such implied ROE, thermal power electricity prices would need to remain flat or even rise (e.g., Huadian +1.6%, China Power +1.0%), which is difficult to achieve in the current environment of declining electricity prices, indicating overvaluation. Green Power Direct Supply/AI Electricity Consumption: The market is optimistic about direct power connections for data centers and large users. BofA agrees that AI poses upside risk to electricity demand but believes direct connections primarily benefit "new" (rather than existing) renewable energy, and are only cost-effective when the direct supply price is lower than the grid price. In low-price regions with surplus green power, there is no significant cost saving. Renewable energy + storage account for 51% of green direct supply costs, dedicated transmission lines account for about a quarter, and adding transmission/distribution prices and system operation fees limits economic viability. In high-price regions like Jiangsu, it can be 18%/24% cheaper than grid prices (solar+storage/wind+storage), but savings are minimal in low-price regions. Current demand is highly concentrated among battery manufacturers facing EU carbon regulatory pressure, driven more by policy than market forces, remaining a niche market in the short term. Meanwhile, AI computing loads are stable and operate around the clock, increasing base load demand and peak pressure, thereby highlighting the role of thermal power in system peak shaving and reliability backup. Nuclear Power and CGN Upgrade Logic: BofA provides four supporting points. First, enhanced electricity price policy support—China piloted in Guangxi and Liaoning in March, significantly reducing the市场化 sales ratio for nuclear power from 100% to ~30% (addressing local nuclear losses), directly helping 2026 profits, and likely expanding to other provinces in 2027; second, upside potential for 2027 profits—higher 2026 coal prices plus the aforementioned policies may drive year-on-year electricity price improvement in 2027, while BofA's assumptions are conservative (2027 annual contract prices flat year-on-year, Guangdong marketization ratio maintained at ~50%); third, manageable uranium fuel costs—fuel accounts for about a quarter of total operating costs, with direct uranium costs making up about half, and management states costs will rise by ~10-15% over the next 5 years; fourth, stable nuclear capacity approvals with upside risk—new nuclear capacity is expected to be 7GW in 2026, rising to 10GW in 2027, maintaining 8-10GW/year before 2030. Nuclear power's share of total generation remains stable at 4-5% from 2021-2028, rising to 6% in 2029-2030, compared to ~10% globally, implying room for accelerated approvals. In terms of valuation, after the stock price correction, CGN's PE premium relative to other H-share IPPs has compressed from ~120% to ~41-46%, around 12x PE, returning to historical average levels.

Analysis framework

BofA's analysis主线 is to "first examine the sources of sector sentiment, then verify whether these sentiments can translate into profits, and finally assess whether valuations are reasonable," thereby making choices between thermal and nuclear power. Step one deconstructs the three major themes driving recent IPP gains (energy prices, El Niño heatwaves, direct power connections), using data to "falsify" their support for thermal power profits: using temperature forecasts to show weak heatwave expectations, using spot price declines and low spot shares to show limited electricity price upside, and using coal prices and inventories to show rising cost pressures. Step two uses "volume-price decomposition" and the PBV-ROE valuation anchor to judge whether thermal power is overvalued: quantifying the sensitivity of ROE to electricity prices, fuel costs, and generation volume respectively (e.g., a 1% electricity price increase impacts Huaneng's ROE by 1.2 percentage points), then reverse-engineering whether the ROE and electricity price assumptions implied by current PB are realistic. Step three employs a top-down policy + fundamentals + valuation three-stage argument for nuclear power, using DCF as the pricing tool (forecasting 2027E-2035E cash flows, WACC 4.0%, terminal growth 1%, beta 0.51), while moving the DCF base year forward from end-2026 to mid-2027, and deriving the A-share target price based on the latest 3-month A/H premium of 45%. The value of this method lies in not denying the themes themselves, but using "whether profits can materialize" and "whether valuations incorporate overly optimistic assumptions" as uniform benchmarks, thereby concluding that "under the same themes, nuclear power's profit improvement is more verifiable and valuations more reasonable, while thermal power is overvalued."

Methodology notes

• Industry/Sector Analysis FrameworkSupply and Demand Framework

  Deconstructing the power industry from both supply (coal prices, nuclear capacity, green power capacity) and demand (weather, industry, AI computing) sides

  Power industry profits are driven by both supply and demand. In this report, the demand side looks at weather and AI electricity consumption, while the supply/cost side looks at coal prices, nuclear approvals, and green direct supply. The institution uses this to judge which power source's prosperity is more likely to materialize, helping readers understand why the same "price hike theme" affects thermal and nuclear power differently.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Breaking down power generator profits into "Electricity Price × Volume - Fuel Cost"

  Generator profits can be approximated as electricity price multiplied by volume minus fuel costs. The report uses this decomposition to point out that although thermal spot prices occasionally rise, spot transactions account for only 5-20% of volume, contract prices are still declining, and coupled with rising coal prices, overall profits remain under pressure, helping readers understand that "spot price increases" do not necessarily equal "profit improvement."

• Valuation MethodPB valuation

  Using the historical relationship between PBV and ROE to reverse-engineer market-implied profit expectations

  For thermal power with volatile profits, the institution uses Price-to-Book Value (PBV) to anchor valuation and, based on the historical relationship between PBV and ROE, reverse-engineers how high the ROE and electricity price assumptions implied by the current stock price are. The report finds that the current 0.9-1.4x PBV implies an 8-14% ROE, higher than its own forecast of 7-9%, leading to the judgment that thermal power is overvalued.

• Valuation MethodDCF Discounted Cash Flow

  Pricing nuclear power using discounted future cash flows (WACC 4.0%, terminal growth 1%, beta 0.51)

  DCF involves discounting a company's future multi-year cash flows to present value using a discount rate. CGN's target price is based on DCF of 2027E-2035E cash flows, with the base year moved forward to mid-2027, so changes in profit forecasts and discount assumptions are directly reflected in the target price.

• Valuation MethodPE/PEG valuation

  Judging individual stock expensiveness using relative PE premium (CGN's PE premium relative to other H-share IPPs)

  A higher PE (Price-to-Earnings) ratio means the market is willing to pay a higher price for each unit of earnings. The report focuses on CGN's PE premium relative to peers: this premium has narrowed from >100% to ~46%, with an absolute level of ~12x PE, returning to historical averages, meaning it is "no longer significantly expensive relative to other power stocks," which is an important basis for the rating upgrade.

• Quantitative/Factor/Portfolio TheoryBeta/alpha analysis

  Using company beta 0.51 in DCF

  Beta measures a stock's volatility relative to the broader market; a beta less than 1 means lower volatility than the market. As a nuclear asset with stable cash flows, CGN has a beta of only 0.51, reflecting its defensive attributes, which also corresponds to a lower cost of capital (WACC 4.0%) in the DCF, thereby supporting a higher valuation.

• Event Arbitrage and Behavioral FinanceExpectation Gap/Expectation Management

  Finding opportunities using the difference between internal forecasts and consensus expectations (2027E net profit 8% higher than consensus)

  "Expectation gap" refers to the discrepancy between an institution's judgment and market consensus. The report emphasizes that its 2027 net profit forecast is 8% higher than market consensus, and its assumptions are conservative with upside potential, viewing this positive expectation gap as a potential catalyst for the stock price.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• CGN Power (1816.HK / 003816.CH)

  Higher certainty of nuclear profit recovery: electricity price policy support, manageable fuel costs, accelerated capacity additions, valuation回归 to mean; upgraded to Buy

  Strengths

  Guangxi/Liaoning electricity price support policies expected to expand; uranium fuel costs expected to rise only ~10-15% over next 5 years, relatively manageable; accelerated nuclear capacity additions (2026E 7GW, 2027E 10GW); PE premium narrowed to ~46%, ~12x PE, valuation returned to historical average; 2027E net profit 8% higher than consensus with conservative assumptions

  Weaknesses

  Limited disclosure on unit fuel costs, creating upside uncertainty

  Comparison

  PE premium relative to other H-share IPPs compressed from previously >100% to ~41-46%, returning to historical average; viewed as having the highest certainty of profit recovery among IPPs

  Risks

  Increase in marketized sales ratio and weakening market electricity prices dragging down comprehensive electricity prices, fuel costs higher than expected, utilization hours lower than expected, nuclear accidents, large-scale equity financing, dividend cuts

• Huaneng Power International (902.HK / 600011.CH)

  Thermal power标的, profits most sensitive to coal prices, rising coal prices outweigh electricity price increases, maintains Underperform

  Strengths

  If coal price increases are weaker than expected or electricity prices rise earlier, its elasticity may outperform peers due to highest sensitivity to coal prices; if successful in acquiring coal mine equity and achieving self-sufficiency targets, profits may exceed expectations

  Weaknesses

  Base-case profits are most sensitive to coal price volatility, bearing the most pressure when coal prices rise

  Comparison

  Highest sensitivity of ROE to electricity price/fuel among the four thermal power companies (1% electricity price increase drives ROE by ~1.2 percentage points)

  Risks

  Faster and higher coal price increases, carbon costs, accelerated retirement of coal-fired units, dividend cuts

• Huadian Power International (1071.HK / 600027.CH)

  Thermal power标的, rising coal prices suppress profits, maintains Underperform

  Strengths

  Performance may exceed expectations if upstream coal assets come online earlier or if more attractive coal-power assets are successfully acquired

  Weaknesses

  Execution capability of coal-related assets unproven, profitability is low, expansion may require equity financing

  Comparison

  Current PBV is ~0.9x, implying electricity prices need to rise by ~1.6% to support, which the institution believes is difficult to achieve

  Risks

  Coal prices rising faster due to stronger economic growth, execution falling short of expectations, potential need for equity financing

• China Longyuan Power (916.HK)

  Wind/New Energy Operator, limited economic viability of green direct supply, uncertain realization of industry themes, maintains Underperform

  Strengths

  Profits and investment returns may improve if wind power subsidies are unexpectedly increased, grid connection bottlenecks are alleviated, or turbine prices fall more than expected

  Risks

  Turbine prices rising due to concentrated capacity expansion, continued delays in renewable energy subsidy payments, rush-to-install price wars causing losses in offshore wind projects, rising interest rates increasing financing costs

Key data

• CGN Power Rating and Target PriceUpgraded from Underperform to Buy; H-share target price HK$3.9 (from HK$3.0), A-share RMB5.0 (from RMB3.7)Upgrade in rating and target price
• CGN Valuation Level~12x 2027 mid-year expected PEPE premium relative to other H-share IPPs is ~46%, narrowed from previously >100%
• CGN Profit Forecast Adjustment2026E net profit下调 by 3.7%, 2027/28E上调 by 2.5%/3.6%Reflects low 2026 electricity price base and better prospects thereafter; 2027E net profit is 8% higher than consensus
• Key DCF AssumptionsWACC 4.0%, terminal growth 1%, beta 0.51Cash flow forecast period 2027E-2035E, base year moved from end-2026 to mid-2027
• Uranium Fuel CostExpected to rise by ~10-15% over the next 5 yearsManagement guidance; fuel accounts for ~1/4 of total operating costs, with direct uranium costs making up ~half
• Nuclear Electricity Price Policy PilotMarketized sales ratio in Guangxi and Liaoning reduced from 100% to ~30%Launched in March 2026, directly helps 2026 profits, expected to expand to more provinces in 2027
• New Nuclear Capacity Additions2026E 7GW, 2027E 10GW, maintaining 8-10GW/year before 2030ENuclear share of total generation ~4-5% in 2021-2028, rising to 6% in 2029-2030E, vs. ~10% globally
• IPP Sector H-Share PerformanceAverage increase of ~15% in the past monthLed by thermal power
• Thermal Power Valuation Implied ROECurrent 0.9-1.4x PBV implies 2026 ROE of 8-14%Higher than BofA's forecast of 7-9%; institution considers thermal power valuation overly optimistic
• Thermal Coal Price (QHD5500, 1-month lag)Year-to-date increase of ~18% year-on-yearRising coal prices constitute the main pressure on thermal power profits
• Spot Electricity PriceIn May, 28 of 31 tracked regions remained below benchmark; Guangdong May YoY +19% (April was +48%)Spot transactions account for only 5-20% of thermal and renewable IPP volumes

Impact & implications

For Nuclear Power: BofA believes that policy support for electricity prices, manageable fuel costs, accelerated capacity additions, and valuation回归 to mean make CGN the IPP with higher certainty of profit recovery, hence the Buy rating and raised target price; its A-share target price is derived based on an ~45% A/H premium. For Thermal Power: The report believes that rising coal prices will outweigh potential electricity price increases, coupled with low spot shares and declining contract prices, keeping thermal power profits under pressure. Current valuations already incorporate overly optimistic ROE and electricity price assumptions, hence maintaining Underperform ratings for Huaneng, Huadian, and Longyuan Power. For Green Direct Supply/AI Theme: The institution believes green direct supply remains a policy-driven niche market with limited economic viability in the short term, offering little boost to generation profits. While AI computing growth raises electricity demand, it mostly reinforces the role of thermal power as base load and peak-shaving backup, rather than directly benefiting its profit elasticity. The above are restatements of the report's views.

Risks

• CGN: Increase in marketized sales ratio and weakening market electricity prices dragging down comprehensive electricity prices
• CGN: Nuclear fuel costs higher than expected
• CGN: Utilization hours lower than expected
• CGN: Nuclear power plant accidents
• CGN: Large-scale equity financing or dividend cuts
• Thermal Power (Huaneng/Huadian): Chinese coal prices rising faster due to stronger economic growth, rising carbon costs, accelerated retirement of coal-fired units, dividend cuts
• Weather forecasts may change, creating uncertainty regarding the impact on summer electricity consumption and prices

What to watch

• Whether nuclear electricity price support policies expand to more provinces in 2027
• Changes in 2027 annual contract electricity prices
• Pace of nuclear project approvals (upside potential exists)
• Coal price trends and coal inventory levels
• Revisions to weather forecasts for June-July temperatures and rainfall