Huatai Securities: Nuclear Power Expected to Restart "Performance Growth + Valuation Increase" Double Boost

Huatai Securities’ research report states that, against the backdrop of energy transition and energy security, the significance of nuclear power is increasingly highlighted. China’s globally leading nuclear power industrial chain has laid the foundation for the long-term growth space of CNNC and CGN. Starting in 2026, a potential rebound in coal prices, continued increases in carbon prices, and the introduction of supportive policies for mechanism-based electricity pricing pilots will very likely bring a phased conclusion to the nuclear power price-cut concerns that the capital market has had over the past three years. With the “15th Five-Year Plan” period seeing dense commissioning of nuclear power, we expect nuclear power leaders’ stock prices to sequentially receive three positive catalysts: earnings recovery, growth acceleration, and valuation uplift.

Full text as follows

Huatai | Utilities: a “double drive” for nuclear power—earnings growth + valuation uplift

Against the backdrop of energy transition and energy security, the significance of nuclear power is increasingly highlighted. China’s globally leading nuclear power industrial chain has laid the foundation for the long-term growth space of CNNC and CGN. Starting in 2026, a potential rebound in coal prices, continued increases in carbon prices, and the introduction of supportive policies for mechanism-based electricity pricing pilots will very likely bring a phased conclusion to the nuclear power price-cut concerns that the capital market has had over the past three years. With dense commissioning of nuclear power during the “15th Five-Year Plan” period, we expect nuclear power leaders’ stock prices to sequentially benefit from three positives: earnings recovery, faster growth, and valuation improvement.

Core viewpoint

Accelerating nuclear power development: the best solution to the energy “impossible triangle” that can be independently controlled

Under the “dual carbon” targets, nuclear power may be the most effective way to solve the energy “impossible triangle.” The domestically manufactured “Hualong One” and “Guohe One” have already formed complete industrial chains. We estimate that each third-generation nuclear power unit can reduce China’s nationwide coal and LNG import volumes by 0.4%-1.1%, and that the external dependency ratio of coastal provinces will fall by more than 10%. Nuclear power costs are stabilized at 0.2 yuan/ kWh; compared with coastal thermal power and wind/solar, its cost-effectiveness in heat supply/power generation is especially prominent. With carbon prices in the “15th Five-Year Plan” period potentially continuing to rise, nuclear power’s advantage over thermal power may further widen.

Fundamentals: the “15th Five-Year Plan” period may bring a double boost in volume and price

In 2022, approvals for China’s nuclear power entered a new normal, indicating that from 2026 onward commissioning will move into a phase of rapid growth. We estimate that CNNC and CGN’s “15th Five-Year Plan” equity installed-capacity CAGR will be 11% and 13%, respectively. Since 2023, lower coal prices have driven down electricity prices, leading to a decline in the profits of both companies. In 2026, we judge that increases in coal prices and carbon prices may catalyze a turning point for electricity prices, and that the mechanism-based electricity pricing pilot programs in Liaoning/Guangxi will be implemented one after another—showing the government’s attitude of propping up nuclear power profitability. We estimate that if the pilot is promoted nationwide in 2026, there will be 7%-43% earnings recovery room for the two companies. Assuming the coal price midpoint moves up by 150 yuan/ton, which would correspond to an increase of 5-6 fen/kWh in electricity price, it could bring an upward earnings elasticity of 30%-40%, resulting in an upside potential for company performance of 30%-40%.

Valuation: reported ROE is being suppressed; mechanism-based electricity pricing may lift valuations as commissioning accelerates

Even in 2023-25, when electricity prices continue to decline, ROE at the nuclear power plant level has almost never fallen below 15%, and it does not lag behind the three major hydropower leaders. A construction period of more than 5 years means that nuclear power listed companies have not demonstrated growth characteristics that reflect incremental profit; overall ROE has also been suppressed by the upfront costs and expenses of new projects, and has not reflected nuclear power stations’ true high profitability. We believe that the implementation of mechanism-based electricity pricing may significantly strengthen the capital market’s confidence in the stability of nuclear power earnings, and that the commissioning acceleration starting in 2026 will further alleviate the dilution pressure on projects under construction, thereby leading to a dual uplift in both earnings and valuation.

Our view differs from the market’s

In 2023-25, the decline in nuclear power electricity pricing has increased profitability risks for both existing projects and new projects, making it difficult for the market to value it in the way it values growth stocks. Compared with the capital market, we have greater confidence that nuclear power electricity prices will rise: increases in coal prices and carbon prices will directly drive a rebound in coastal electricity prices, and the policy propping-up signal has already been implemented in advance. Considering nuclear power as a long-duration asset, we estimate that at a 7% WACC, the DCF values of CNNC and CGN’s projects on hand are 218.5 and 266.1 billion yuan, respectively. Considering that each third-generation unit can also further increase value by an additional 100-120 billion yuan, China’s routine approvals of 8-10 units per year will also provide a steady stream of incremental capacity for the two companies. If the Liaoning and Guangxi pilots are promoted nationwide, market confidence in the stability of nuclear power earnings is expected to rise materially, which would mean that the WACC requirement used in DCF valuation could further decline.

Risk warning: the subsequent progress of the Liaoning and Guangxi nuclear power pilots; coal price volatility (including the duration of the Strait of Hormuz blockade, changes in Indonesia’s coal export quotas, domestic supply-side reforms, etc.); coastal power supply and demand.

（Source: Yicai Global）