Why did profit fall more sharply than revenue in the third quarter?

  • In the third quarter of 2026, the company’s net profit attributable to shareholders was 11.588 billion yuan, down 23% year on year and below HSBC and market consensus estimates; revenue fell 13% year on year to 25.127 billion yuan. HSBC attributed the earnings miss mainly to lower hydropower generation.
  • As revenue fell, operating costs declined just 1% year on year to 8.46 billion yuan, and the gross margin fell from approximately 67% to 62%. HSBC estimates that hydropower tariffs rose only 1%–2%, providing a limited offset to weaker generation.
  • Investment income fell 10% year on year to 1.491 billion yuan, a steeper decline than the 1% drop in the second quarter; operating cash flow fell 14% year on year to 16.215 billion yuan, a smaller decline than that in net profit attributable to shareholders.

What do fourth-quarter inflows mean?

  • As of 2 November 2026, average inflows into the Three Gorges Reservoir since the start of the fourth quarter had fallen 39% year on year, while inflows at Xiangjiaba had fallen 5%. HSBC believes the weak inflow data point to a marked decline in generation and that fourth-quarter earnings could continue to contract year on year.
  • Based on lower generation assumptions, HSBC cut its net profit forecasts for 2026, 2027 and 2028 by 11%, 9% and 6%, respectively, to 32.284 billion yuan, 33.543 billion yuan and 34.568 billion yuan.

Why does HSBC maintain its Buy rating?

  • Based on historical weather patterns, HSBC believes a strong El Niño in 2026 could support a recovery in water resources in the Yangtze River basin in 2027. It also expects increased rainfall in the company’s operating areas during the second- and third-quarter flood season of 2027, resulting in a better outlook for generation and earnings.
  • Despite cutting its earnings forecasts, HSBC maintains its target price of 32 yuan and Buy rating. Compared with the closing price of 29.74 yuan on 30 October 2026, the target price implies upside of approximately 7.6%; the bank believes a dividend yield of around 3% and relatively stable operating cash flow provide defensiveness.
  • This assessment remains subject to inflows and electricity tariffs: downside risks identified by HSBC include inflows below expectations, lower-than-expected electricity prices under medium- and long-term hydropower contracts, and extreme weather and natural disasters.