Incident Overview

On September 14, the National Energy Administration officially issued the “Notice Announcing the Pilot List for Rooftop Distributed Photovoltaic Development in All Counties (Cities, Districts), National Energy Integrated Energy (2021) No. 84”, announcing the list of pilot counties (cities, districts) submitted by various regions. According to the notice, there are 676 nationwide, all listed as pilot projects for rooftop distributed photovoltaic development throughout the county (city, district).

Analytical judgment:

The speed of distributed photovoltaics promotion throughout the county has exceeded expectations. 676 pilot counties have been reported, and within three months, the number of pilot counties has reached 676. In late June 2021, the National Energy Administration issued the “Notice Concerning Submission of a Pilot Plan for Rooftop Distributed Photovoltaic Development in the Whole County (City, District)”. The notice proposed the principle of “build as much as possible”, making it clear that no less than 50% of the total roof area of Party and government buildings can be installed with photovoltaic power generation; public buildings such as schools, hospitals, village committees, etc. should not be less than 40%; industrial and commercial plants should not be less than 30%; and rural residents should not be less than 20%. The first pilot projects are expected to be implemented within two years.

1) Photovoltaics throughout the county have economic benefits, and construction of the whole county is promoted voluntarily. We believe that dual carbon has become the main line of energy development in China, and that the construction of distributed photovoltaics and energy storage throughout the county is a top priority in China's current clean energy development. Driven by the reform of the electricity price mechanism, through the construction of rooftop photovoltaics and energy storage throughout the county, electricity costs can be greatly reduced and economic benefits brought to the county area. This is one reason why the number of pilot counties exceeded expectations.

2) PV construction throughout the county must not conflict with power grid construction; this is an absolute increase in investment. The county-wide pilot work must strictly implement the work requirements of “no voluntary coercion, no approval of the pilot, no offside in place, no monopoly on competition, and no suspension of work”. During the pilot process, other project filing, power grid access, etc. must not be suspended or suspended on the grounds that the pilot is being carried out. Non-pilot counties (cities, districts) continue to develop and build various photovoltaic power generation projects in accordance with existing relevant regulations. The construction of the entire county is an absolute increase in terms of power grid investment, and will not reduce the planned power grid project construction work.

3) The whole county drives power planning and design to stimulate demand for distribution network transformation. The June “Notice” made it clear that local power grid enterprises should cooperate with provincial power plans and pilot county construction plans on the basis of grid carrying capacity analysis, fully consider the need for large-scale access to distributed photovoltaics, actively plan related power grids, strengthen distribution grid construction and transformation, and manage distributed photovoltaic networks on the roof.

Henghua is benefiting from distributed photovoltaic construction in the county area, and its performance is expected to enter a new boom cycle. While the county-wide project brings increased photovoltaic construction to Henghua, it will also stimulate distribution network transformation and drive Henghua's traditional business demand. Furthermore, the construction of the whole county clearly does not conflict with power grid construction, and will not squeeze investment in traditional power grid construction projects. Reiterate that Henghua's business advantages are as follows:

1) Investment in photovoltaic power projects in the county accelerated Henghua's performance growth. Based on a deep understanding of the power industry, Henghua Technology has deployed new energy BIM software+planning and design services, and provides products such as 3D photovoltaic design software, 3D wind farm design software, etc., and a full-process technical service system for photovoltaic planning and consulting throughout the county. We believe that accelerated construction throughout the county will bring rapid growth to Henghua's performance.

2) Electrical design software is leading the way, and Henghua will see its performance decline. The construction of information technology for external power grids is accelerating, and the requirements of the State Grid for 3D design are becoming stricter. Henghua Technology's 3D circuit design software products are based on pure localization platforms and are already in a significant lead. Henghua Technology will follow the trend of domestic substitution to further enhance its market position. Furthermore, in 2021, the company reformulated its development route and returned to the main software and design business, which is expected to drive the company's core indicators such as gross profit margin, net interest rate, and cash flow to bottom out.

Investment advice

Henghua Technology is benefiting from the replacement of new energy sources in the context of carbon neutrality, and industry sentiment is accelerating upward. As a leader, Henghua is expected to prioritize benefits. At the same time, under the new strategy, Henghua is actively expanding into the fields of water conservancy and transportation, which is expected to bring new growth. Maintain profit forecasts: The company's operating income for 2021-2023 is estimated to be 9.7/13.6/1.77 billion yuan, net profit of 1.4/29/41 million yuan, and earnings per share (EPS) of 0.24/0.48/0.68 yuan. Corresponding to the closing price of 12.86 yuan/share on September 15, 2021, PE is 54.2/26.9/18.8 times, respectively. It is highly recommended and maintains the “buy” rating.

Risk warning

1) The risk that revenue depends on the grid industry; 2) the implementation of new energy policy subsidies falls short of expected risks; 3) the transformation process of new energy power generation technology falls short of expected risks; 4) the informatization construction falls short of expected risks; 5) the risk of a macroeconomic downturn.