A leading primary transmission and distribution equipment company provides a complete set of key electrical equipment for AC/DC UHV transmission and transformation line projects in China and the world. The company mainly focuses on R&D and manufacturing of transmission and distribution equipment. It mainly provides power automation integration and complete power equipment such as transformers, reactors, high and low voltage switches, converter valves, etc., to provide key equipment such as transformers and combination appliances for the world's first 1000kV UHV AC transmission project (southeast Jinjin-Nanyang-Jingmen), and to provide converter transformers, converter valves and other equipment for the world's first ±800kV UHV multi-terminal flexible DC transmission project (Wudongde Transmission Guangdong). Among converter transformers, the company's product market share was 40.16%, accounting for first place in the industry; among AC transformers, the company's product market share reached 38.46%, making it a leading primary transmission and distribution equipment enterprise in China.

Take advantage of the power grid investment to speed up the East Wind and set sail. According to data disclosed by the State Grid and Southern Grid, the total investment of the State Grid South Grid during the “14th Five-Year Plan” period exceeded 3 trillion yuan, an increase of 10.5% over the 13th Five-Year Plan period. China Grid plans to invest 350 billion US dollars, mainly in the construction of UHV transmission lines to promote the consumption of new energy in the Sanbei region. It is expected to start construction of a total of 7 “5 straight 2” UHV lines in 23, with an investment scale of over 130 billion yuan and core equipment exceeding 30 billion yuan. China Southern Power Grid plans to invest mainly in digitization and modern power grid construction, such as increasing the level of intelligent transmission. The company will fully benefit from the acceleration of power grid investment, such as intelligent inspection of transmission lines and the construction of intelligent substations.

Promote product diversification, environmental protection and intelligence, and enhance the added value and market share of products.

In 2018, the company established a “outstanding main business, diverse related” transformation and development strategy, which extended to power generation and consumption in the transmission and distribution industry chain. On the basis of expanding and strengthening primary equipment, the company continues to increase investment and technology investment in secondary equipment, new energy fields, and smart grid sectors. In the field of new energy, the company has completed the development of offshore wind power equipment such as the 550kV DC GID for offshore wind power; in the field of energy storage, the company has completed research and development of distribution grid power electronic transformers and high voltage cascade energy storage devices.

Accelerate overseas travel and improve overall gross margin level and profitability. The company has rich experience in overseas new energy projects, and has won bids for wind power and hydropower projects such as the Vietnam Xianqiang 2 (20MW phase I) wind power project EPC project and the Dutch IJmuiden Ver ±525kV project. Benefiting from the country's energy transformation opportunities and rising domestic and foreign market demand, overseas revenue accounted for 14.14% in 2022. Due to the pandemic, the gross margin was as high as 26.36%, exceeding the gross margin of domestic business by 12pct. Going overseas will significantly increase the company's profitability.

Profit forecast and investment advice: We expect the company's revenue in 2023-2025 to be 235.7/317.9/41.47 billion yuan respectively, and the corresponding net profit attributable to the mother is 881/13.86/1,953 million yuan respectively. According to the DCF model, we gave the company a target price of RMB6.79/share, covering the “superior to market” rating for the first time.

Risk warning:

1. Power grid investment and construction fell short of expectations;

2. Fierce competition in the industry has led to a sharp drop in product prices;

3. The prices of upstream raw materials have risen sharply.