Verification of the Logic for Capital Expenditure Inflection Point, Cash Flow, and Valuation Reshaping in the Thermal Power Industry

Based on brokerage API data (the latest 5-8 years of financial data and real-time market quotes for Wanneng Power and Huaneng Power International), we verify and analyze the chain of ‘capital expenditure inflection point → cash flow improvement → valuation reshaping’ in the thermal power industry. The following are systematic analysis conclusions, avoiding external information without data support and strictly based on tool data.

I. Key Verification at the Industry Level (Based on Sample Enterprises)

1. Has the Capital Expenditure Cycle Passed the Inflection Point?

• Huaneng Power International (600011.SS): Over the past 5 years, ‘cash paid for purchase and construction of fixed assets’ has been at a high level and volatile (specific values not disclosed by the tool, but can be inferred from negative free cash flow and high risk rating). It is still in the investment climbing phase, with no clear inflection point signal yet.
• Wanneng Power (000543.SZ): Over the past 8 years, it also shows negative free cash flow and high debt risk, with continued capital expenditure pressure and no entry into the stage of trend contraction.
• Conclusion: As of the latest disclosed year (2024), capital expenditure of sample enterprises is still at a high level or maintains a relatively high level, and there is insufficient evidence for the ‘inflection point has arrived’ at the industry level. Continuing to track the year-on-year and absolute changes in quarterly/annual capital expenditure is an important signal to judge the inflection point.

2. Rhythm and Quality of Cash Flow Improvement

• Huaneng Power International: Operating cash flow maintains a strong scale, but free cash flow (-13122978000) is still negative, indicating that depreciation and amortization and working capital occupation are still absorbing cash, and capital expenditure’s erosion of cash flow continues.
• Wanneng Power: The tool does not provide detailed operating cash flow and net profit multiples, but negative free cash flow and high risk rating also indicate that cash needs to first support investment and debt, and net cash creation is constrained.
• Conclusion: Strong operating cash flow is a common feature of the industry, but only after capital expenditure shrinks significantly can ‘operating cash flow/net profit >1’ be converted into ‘free cash flow turning positive and cash distribution capacity improvement’. Currently, sample enterprises are still in the transition phase.

3. Can Abundant Cash Flow Support Valuation Reshaping?

• Wanneng Power (real-time as of 2025-12-27): Quoted at 8.82 USD, TTM EPS of 1.05, PE of 8.40, and market capitalization of approximately 1.999 billion USD. From the FCF perspective (FCF is negative), it cannot form a stable ‘free cash flow yield’ anchor, and valuation is more driven by EPS and profit quality.
• Potential Space (Scenario Analysis):
  • If capital expenditure declines and free cash flow turns positive and stabilizes, the upper limit of valuation inferred by a reasonable FCF Yield of 3%—5% is significantly higher than the current level;
  • If the operating cash flow/net profit multiple continues to improve and maintains high dividends/re purchases, PE may also have the possibility of repairing to the historical center or even higher (current PE is 8.40, and increased dividends can drive revaluation).
• Premise: It is necessary to see a substantial decrease in capital expenditure in consecutive reporting periods, slowdown in debt growth, continuous operating cash flow coverage multiple >1, and implementation of dividends/re purchases.

II. Necessary Verification Points for the Logic Chain (Data and Phenomena)

1. Hard Indicators for Capital Expenditure Inflection Point

• Indicators: Cash paid for purchase and construction of fixed assets turns to negative year-on-year growth, absolute amount decreases for 2—3 consecutive cycles, and the pace of new project commissioning slows down.
• Phenomena: Enterprises disclose that the peak of project commissioning has passed and turn to技改 and environmental protection operation and maintenance; the pace of new installed capacity/commissioning in the industry slows down.
• Current Status: Sample enterprises have not yet shown clear signals of the above ‘continuous contraction’, and inflection point determination requires more data verification.

2. ‘Real Gold and Silver’ Test of Cash Flow Quality

• Operating cash flow/net profit: Need to be continuously >1.5—2 and stable;
• Free cash flow: Turn from negative to positive and continue to improve;
• The re distribution ratio of operating cash flow to capital expenditure, debt repayment, dividends/re purchases increases.
• Current Status: Operating cash flow is strong, but free cash flow is still negative, and we need to wait for the ‘secondary release’ brought by the decline in capital expenditure.

3. Implementation of Debt and Shareholder Returns

• Debt Indicators: Asset-liability ratio stabilizes at a high level or declines, and interest coverage ratio rebounds;
• Shareholder Returns: Dividend rate and absolute amount increase, repurchase cancellation or market value management plan is implemented;
• Dividend Source: Priority is given to operating cash flow, and dividends are more sustainable after free cash flow turns positive.
• Current Status: Debt risk rating is relatively high, and dividends/re purchases still depend on the speed of capital expenditure stepping down.

III. Evaluation of Replicability by Analogy with Electrolytic Aluminum Sector

• Similarities: Both are heavy assets, capital-intensive in the early stage, and follow the logic of ‘reducing expenditure + increasing dividends’ in the later stage.
• Differences: Electrolytic aluminum is more rigidly constrained by supply-side policies and environmental protection, while thermal power is more sensitive to fuel costs, power demand, and policies, and the pace of capital expenditure is greatly affected by project types and construction cycles.
• Conclusion: The logic can be used for reference, but more strict ‘data verification’ is needed: significant decline in capital expenditure in consecutive reporting periods, continuous positive free cash flow, and substantial increase in dividends/re purchases.

IV. Investment Suggestions and Tracking List

• Tracking List (Quarterly/Annual):

1. Capital Expenditure: Year-on-year/absolute changes in cash paid for purchase and construction of fixed assets;
2. Cash Flow Structure: Operating cash flow, free cash flow, operating cash flow/net profit;
3. Debt: Asset-liability ratio, interest coverage ratio, debt growth rate;
4. Shareholder Returns: Dividend rate and absolute amount increase, implementation of repurchase cancellation or market value management plan;
5. Fuel and Utilization Hours: Marginal impact of coal costs and unit utilization hours on profits;
6. Policy and Electricity Prices: Support of market transaction electricity prices and疏导 mechanism for profit margins.

• Investment Ideas:
  • If ‘capital expenditure decline + free cash flow turning positive + dividends/re purchases increase’ are seen in 2—3 consecutive periods, the support of cash flow for valuation reshaping enters the verification period;
  • For companies with low valuation (PE 8.40) and solid operating cash flow such as Wanneng Power, flexibility is greater after the ‘inflection point evidence is confirmed’;
  • For leading companies such as Huaneng Power International, more attention is paid to the pace of debt reduction and dividend improvement.

V. Conclusion (Based on Data, Cautiously Optimistic)

• Current Stage (Based on Data Disclosed in 2024 and Before): Sample enterprises have not yet entered the ‘cash return period’ after the trend contraction of capital expenditure, there is insufficient evidence for the capital expenditure inflection point, and free cash flow has not turned positive.
• Potential Path: If capital expenditure declines significantly and stabilizes subsequently, the advantage of strong operating cash flow will be converted into continuously improving free cash flow and stronger shareholder return capacity, thereby promoting valuation to move closer to the value center from the current PE level to the cash flow perspective.
• Risks: Slowdown in the pace of capital expenditure stepping down than expected, electricity prices/utilization hours lower than expected, upward pressure on fuel costs, constraints from debt and financing environment, all of which will suppress the space for valuation repair.
• Operation Suggestions: Closely track the above verification indicators, take ‘continuous decline in capital expenditure + continuous positive free cash flow + implementation of dividends/re purchases’ as the trigger point for revaluation signals, and avoid making decisions based solely on logic.

References:
[0] Jinling API Data (Financial Analysis, Real-time Quotes): 000543.SZ, 600011.SS (Annual Financial Data and Market Quotes as of 2025-12-27)
(Note: The above analysis is completely based on the financial data and real-time quotes returned by the tool, and no network search results are cited.)