The digital asset restructuring under the State Grid focuses on the cloud network integration business. The predecessor of State Grid ICT was Minjiang Hydropower. Minjiang Hydropower and State Grid ICT Industry Group carried out major asset heavy assets in 2019. After completion, the controlling shareholder of China Grid ICT changed to China Grid ICT Group, and the overall business changed from mainly hydropower generation to grid cloud grid integration. Currently, as a listed platform under the ICT Group, the overall positioning focuses on informatization and digitalization; on the one hand, the company's main business includes digital power services, enterprise digital services, and cloud network infrastructure, covering digital-related hardware and software products; on the other hand, State Grid ICT currently has four core subsidiaries CLP Pu Hua, CLP Feihua, Jiyuan Software, and CLP Star, which are the main carriers of the company's business. At the same time, judging from the business situation in recent years, the State Grid ICT has maintained an overall growth trend. The company's net profit belonging to the parent company's shareholders averaged an annualized compound growth rate of about 14% in 2019-2023; among the three major business segments, the electricity digitization business revenue growth rate was the highest, and cloud network infrastructure and enterprise digitalization showed a steady growth trend.
The trend of digitalization of power grids is being strengthened, and advantages are highlighted to lock in industry dividends
At the industry level, considering that new energy sources require high sensing and regulation capabilities for power grids, the construction of digital power grids is necessary in new power systems. State Grid and South Grid have all been able to confirm in recent years: on the one hand, China Southern Power Grid proposed in the “White Paper on Digital Grids Promoting the Construction of New Power Systems with New Energy Sources”; on the other hand, the digital tender amount of the State Grid headquarters increased from 4.5 billion yuan in 2020 to 8.5 billion yuan in 2023, corresponding to an annualized compound growth rate of about 24%. At the same time, the State Grid proposed “digitally intelligent strong power grids” at the 2024 working conference. Compared with “strong smart grids,” it further emphasizes the importance and necessity of digitalization, and also validates the future prosperity of power grids digitalization.
At the company level, China Grid ICT believes that it is expected to fully benefit from industry dividends, mainly because: on the one hand, State Grid ICT positions itself as one of the core platforms for State Grid's digital construction. Its controlling shareholder, Xinshan Group, is a wholly-owned subsidiary established with high-quality information and communication resources within the State Grid integrated system and is positioned as the main information and communication technology, product and service provider in the Chinese energy industry; on the other hand, the company and the controlling shareholder, Xinshan Group, have been deeply involved in digital informatization for many years. It already has multiple laboratories and research centers, and China Grid ICT's R&D investment ratio in 2022 It increased to 7.9%, and the number of employees with a master's degree or above accounts for more than 40%. Therefore, supported by multiple advantages, the State Grid ICT has had a stable and leading share in the State Grid digital tenders in recent years.
Furthermore, as a listing platform under the ICT Group, China Grid ICT currently accounts for a relatively small asset volume in the ICT Group, and the assets of the China Grid Group other than China Grid were also ahead in the State Grid digitalization. Previously, during major asset replacements, the controlling shareholder, Xinshan Group, made promises to compete in the same industry. It is expected that in the future, if interindustry competition promises to be resolved, China Grid ICT is expected to benefit to a certain extent.
Focus on the load-side market outside the network, and equity incentives stimulate enthusiasm
In addition to the business within the power grid, State Grid ICT has also been actively expanding the off-grid market in recent years, mainly targeting load-side related tracks, including virtual power plants. We believe that with the continuous advancement of electricity marketization, the profit level of various business models on the load side is expected to increase, thereby opening up a broad market space for corresponding models. With its accumulated advantages in the communications field and its top-down layout advantages, State Grid ICT has now participated in the construction of demonstration projects related to virtual power plants, and is expected to become a new growth engine for the company's performance in the future.
Investment advice
We believe that State Grid ICT is expected to continue to benefit from the digital construction of power grids. The company's net profit attributable to shareholders of the parent company in 2023 and 2024 is estimated to be 8.4 billion yuan and 1.04 billion yuan, respectively, corresponding valuations of about 25.5 and 20.6 times. First coverage, giving a “buy” rating.
Risk warning
1. The speed of digital investment and development of power grids falls short of expectations; 2. Off-grid business is progressing faster than expected; 3. Risk that profit forecasting assumptions are not true or fall short of expectations.