GF Securities: Defensive nature of the utility sector continues to stand out, focus on Free Cash Flow Funds.

GF SEC released a research report stating that the public utility index has achieved a counter-trend increase since mid-March (exceeding the Shanghai and Shenzhen 300 index by about 5.75%). The bank reiterated: (1) Expectations of fundamental reversal: driven by coal prices continuously lower than expected and the release of stored energy during the hydroelectric dry period, thermal and hydroelectric power reversed performance downgrades expectations at the end of last year when electricity prices were signed; (2) Frequent performance releases and market value management: In the background of improved profitability for most companies throughout the year, dividend proportions/amounts have increased, and there has been a recent increase in holdings, dividends, and market value management plans, significantly enhancing market sustainability; (3) Market style shift: key companies have generally experienced a 20%-30% pullback from last year's highs, and most Hong Kong stocks have dividend yields of 5% or even over 6%. Currently, the market's demand for defensive stocks is evident, and public utilities, previously overlooked, stand out in terms of both relative and absolute returns. GF SEC's main points are as follows: The issuance of two documents to improve the pricing governance mechanism and elevate the level of public utility in the sector The Central Committee and the State Council issued opinions on improving the pricing governance mechanism, emphasizing that everything that can be priced by the market should be left to the market. (1) Thermal power: under a market-based mechanism, the value of capacity + ancillary services is strengthened, electricity quantity and prices reflect variable costs, and stability of thermal power profitability and dividends increases; (2) Green power: Document 136 emphasizes stable green power contract electricity prices and expected green power income, combined with improved environmental value from green certificate trading, expecting policy advancement and capital operations; (3) City gas: Promoting price linkage between upstream and downstream natural gas, accelerating gas flow with price, repairing gross margin differentials, positive outlook for city gas profit recovery, a beneficial cycle in the dividend; (4) Cross-provincial hydro and wind power bases demonstrate cleaner, low-cost values under market-based conditions; (5) Heating: Current heating prices are mainly determined by the government and rarely change, under market reform, they are expected to receive reasonable returns. In short, straightening out the pricing mechanism helps increase stability and promote the public utility sector. Free cash flow ETFs/actively managed equity funds are gathering momentum, focusing on the sector's cash flow value Recently, the bank has observed a surge in the issuance of free cash flow funds, such as the Huaxia Guocert Free Cash Flow ETF, which, based on its associated Guocert Free Cash Flow Index, has yielded up to 13.8% from 2013 to this year, higher than the China Dividend Index and the CSI All A Shares Index. The index focuses on free cash flow yield (free cash flow/enterprise value) as a core metric, without requirements for growth or dividends, public utility assets have strong cash flow generation capabilities, warranting attention. Some companies in the water, electricity, heating, and thermal power industries in the sector have already achieved high levels of free cash flow and dividends, while new energy and nuclear power are still in the peak of capital expenditure. The future potential for free cash flow growth is even greater. As a heavy asset, long-term business model, public utilities are likely to receive higher attention for their cash flow value. The sector's market has been continuously catalyzed, moving from a gathering trend to a trend-following one Focus on: (1) Hydroelectric power: China Yangtze Power, Sichuan Chuantou Energy, SDIC Power Holdings; (2) Thermal power: Huadian Power International Corporation A+H, Jointo Energy Investment, Huaneng Power International, Inc. A+H, Shenergy, Zhejiang Zheneng Electric Power; (3) City gas: KUNLUN ENERGY, CHINA RES GAS; (4) Green power: Hai Feng Fujian Funeng, undervalued Hong Kong stocks China Longyuan Power Group Corporation H, CHINA SUNTIEN, etc.; (5) Nuclear power: CGN POWER, China National Nuclear Power; (6) Heating: Luenmei Quantum. Risk warning: Reforms fall short of expectations; coal prices rise excessively; green power installation progress lower than expected.