Company fundamentals: As a subsidiary of Mingyang Group, it continues to have “active” genes, and is a key domestic power transmission, distribution and control equipment enterprise. Starting with distribution box manufacturing, the company has now developed into an intelligent power transmission and distribution equipment enterprise with three major businesses: intelligent transformers, box transformers, and intelligent complete switchgear. The products are mainly used in the fields of new energy (photovoltaics, wind energy, energy storage) and new infrastructure (data centers, smart grids).

Main business: 2023H1, the company's box-type substations/complete switchgear/transformers accounted for 69%/15%/12%, respectively, and the gross margin was 20%/19%/27%, respectively.

Financial analysis: 2022-2023Q3, the company's operating income and net profit to mother maintained a high growth rate of more than 50% compared to the same period last year. 2023Q1-Q3, the company achieved operating income of 3.303 billion yuan, +65.94% year-on-year, net profit of 319 million yuan, +88.66% year-on-year, the company's gross margin reached 23% and net margin reached 10%. u Industry highlights: New energy construction+power grid upgrading drive resonance in domestic and foreign power transmission and distribution equipment demand.

Transformer driving power: Demand for new energy support, power grid upgrades, etc. is increasing. The installed capacity of new energy sources, mainly wind power and photovoltaics, is expanding at an accelerated pace. In 2023, 217 GW of PV was added, +148% compared to the same period last year, and 76 GW of wind power was added, +102% over the same period last year. In 2024-2025, we expect the installed capacity to be:

PV: 220GW, 260GW, +1%, +18% YoY.

Land wind: 75GW, 80GW, +7% YoY.

Sea breeze: 10GW, 15GW, +67%, +50% YoY.

Under the trend of large-scale ocean breezes and high capacity, seabreeze oil has strong beta properties with increased penetration rate and a better competitive pattern.

Under the trend of high capacity and large-scale expansion of sea wind units, the penetration rate of oil change is expected to continue to increase due to the characteristics of low price, high capacity, high voltage level, and suitability for humid environments. In addition, the marine environment is poor, and the quality requirements for transformers are extremely stringent. The replacement cost for transformer faults is much higher than the procurement cost of transformers, so Haifeng customers are not very price sensitive and have strong brand loyalty.

Currently, transformers in high-end markets such as Haifeng and shipbuilding are mainly occupied by foreign brands, and the competitive pattern is excellent. The certification and supplier entry barriers faced by transformers require the manufacturer to have strong technical strength and pass the OEM's assessment over a long period of time. We believe that in the domestic replacement process for Haifeng transformers, the transformer companies that took the lead in supplying OEMs have strong competitive advantages and first-mover advantages.

The company's core focus: market+product/technology+customer high-end drives the company from cycle to growth, and marine products are expected to contribute new growth points.

High-end market: Focus on new energy+new infrastructure to benefit from the boom in the downstream industry, and the company grows from cycle to cycle.

High-end products and technology: High-tech marine products are the first to achieve import substitution, break the monopoly of foreign brands, and are expected to contribute new growth points.

Sea wind transformer (one time boost): The company's dry transformation and oil conversion technology routes are parallel, and the sea wind boost transformer and sea wind inflatable ring network cabinet have successfully achieved import substitution at the high technical threshold.

Offshore boosting station (secondary boosting): The company has developed an ocean wind 35KV and 66KV intelligent boosting system with independent intellectual property rights. The overall technology of the company's offshore boosting systems has reached the international advanced level. By the end of 2022, the company's offshore boosting systems have been used in more than 30 offshore wind farms.

Offshore PV: Successfully won the bid for the 66kV prefabricated intelligent offshore photovoltaic booster system. It will be the first GW-class 66kV booster system for offshore photovoltaic power generation projects, leading in China.

High voltage grade products: The company already has the ability to ship GIS, transformers and other products above 110KV grade.

High-end customers: Long-term cooperation has been established with large companies such as five major and six small power grids, and two major EPCs. As of 2023H1, owners of more than 10 large central and state-owned enterprise power generation groups, including Huadian Group, Datang Group, CGN, and Three Gorges Energy, have selected the company's offshore booster system products in more than 30 ocean wind projects. In the future, if the owner takes the lead in seabreeze bidding, the company's products are expected to be expanded based on project experience and customer relationships.

Investment advice: Based on the company's core points above, we expect the company's revenue for 2023-2025 to be 50.6/63.3/7.82 billion yuan, respectively, and net profit of 4.8/6.4/84 billion yuan, corresponding to the current PE of 18X/13X/10X, covered for the first time, giving Mingyang Electric a “buy” rating.

Risk warning: risk of changes in industry policies and standards; risk of deterioration of the competitive landscape; scale of power grid investment falls short of expectations; Haifeng's business expansion falls short of expectations; execution of the company's orders falls short of expectations.