In the current macroeconomic environment, every industrial chain that is still growing in reverse is invaluable.

Last year, domestic grid investment scale (527.5 billion yuan) and growth rate (5.4%) both hit new highs in recent years. The boom continued in January-February of this year, +2.3% year-on-year. Furthermore, power equipment going overseas last year also ushered in huge growth, bringing considerable orders and revenue to the power grid industry chain.

Up to now, 84 companies in the A-share power equipment sector have disclosed their 2023 results, and more than 70% of their net profit has increased. Furthermore, the stock prices of many individual stocks in the industrial chain hit new highs in the range last week.

Do you think this is the end?

Poor expectations for the new round of grid investment were caused by the conflict between the previous round of large-scale clean energy grids and the expansion of downstream demand for electricity, and it is only now that they have begun to be realized.

As Musk said before, the future will not be a lack of video cards, but a lack of power.

In line with the larger global context, investment opportunities are gradually shifting from the power supply side to the power grid side. There are leading companies with outstanding technical strength, and hidden champions based on market segments. Valuations are being re-evaluated with new opportunities to go overseas.

This track is gradually taking on the color of gold.

01

In the past two years, as large-scale new energy projects have been connected to the grid, domestic grid investment has formed two main lines: investment in UHV transmission grids, and investment in distribution grids that can adapt to large-scale distributed energy access and convert energy into information.

On the main grid side, the State Grid plans to build “24 to 14 direct” UHV lines during the “14th Five-Year Plan” period in order to absorb large-scale demand for new energy transmission to the outside world.

The second batch of 100GW scenic base projects will be completed during the “14th Five-Year Plan” period. In principle, they will be connected to the grid on a large scale in 2023, of which about 75% of the transmission scale will be exported for consumption.

However, due to the impact of the epidemic in the previous two years, the approval and commencement of the line fell short of expectations, and most of the work had to be delayed. It was only in the last two years that construction of UHV transmission channels began to accelerate rapidly and enter the peak period of operation.

The State Grid Corporation plans to approve “5 direct and 2 transit” last year and commence construction of “6 direct and 2 transit”. The scale of construction has exceeded its 15-year historical peak. The power grid company has conducted 6 tenders for UHV equipment, with a total bid amount of 40.33 billion yuan, an increase of nearly 11 times over 2022. Currently, the procurement of four DC UHV equipment has been completed.

Among them, transformers, converter valves, and combined electrical appliances are the core primary equipment in UHVDC projects, accounting for 70% of the value.

China Electric Equipment Group's three listed companies, China Xidian, Xuji Electric, and Pinggao Electric, are leading companies, and their performance far exceeded market expectations. In the State Grid tenders for the three types of equipment last year, these three companies were basically the main players.

China Western Power's net profit for the fourth quarter of last year increased 144% year-on-year. Pinggao Electric (+678%) was more aggressive. Due to higher technical barriers, stable patterns, and an increase in the revenue ratio of high-margin products, the company's gross margin improved in all profit indicators.

The three leading companies were prioritized for market exploration this year. Xu Ji Electric and Pinggao Electric both increased by 28% this year. The stock price continued to rise 50.18% in the 6 trading days after the release of China Xidian's earnings report.

Some agencies predict that during the “15th Five-Year Plan” period, in order to continue to solve the “big base” delivery problem, UHVDC will still be the focus of construction, and the number of lines put into operation is expected to reach 17 or more.

It is foreseeable that as the construction cycle is shortened, the time from generating an order from tendering to delivery of confirmed revenue may be greatly accelerated. The performance of major equipment companies in the next few years will be much more visible.

02

Meanwhile, on the power distribution side, as the two networks increase their investment in UHV and other backbone networks, the problem of centralized new energy consumption has been solved. In the future, investment in distribution networks will be increased, and social capital will be introduced to build distribution networks.

The power grid system consists of a transmission and transformation grid and a distribution grid system. Since it is responsible for connecting multiple types of power units, the voltage hierarchy has multiple spans (35-110KV, 6-20 kV, 220/380V). The equipment vendor market pattern is more scattered than the main grid, and the regional characteristics are more obvious.

China's electricity investment has long had a “heavy power supply, light grid, heavy transmission, and light distribution grid” situation, and distribution grid construction lags behind the main grid construction.

However, with the acceleration of the construction of distributed new energy sources such as household photovoltaics, there have been obvious changes in the characteristics of users and power sources connected to the distribution network, because the increase in installed capacity requires a corresponding increase in the carrying capacity of the distribution network. This is the most important reason why there is still a need to increase investment on the distribution side.

As a result, in March of this year, the National Energy Administration and Development and Reform Commission issued the “Guiding Opinions on the High-Quality Development of Distribution Grids under the New Situation”, which now set the maximum target.

“By 2025, the carrying capacity and flexibility of the distribution grid will be significantly improved, with a distributed new energy access capacity of around 500 million kilowatts. By 2030, the flexible, intelligent and digital transformation of distribution grids will basically be completed, which can better meet the development needs of distributed power supplies, new energy storage and various new business formats.”

During the “14th Five-Year Plan” period, the planned investment of the State Grid distribution grid exceeded 1.2 trillion yuan, accounting for more than 60% of the total investment; the planned investment of China Southern Power Grid's distribution grid reached 320 billion yuan, accounting for about 48% of the total investment.

Primary equipment for distribution networks includes distribution transformers, switch cabinets, column switches, smart meters, reactive power compensation devices, etc. Secondary equipment includes distribution automation systems, monitoring systems, etc. Judging from the winning bid results, a smart meter with a larger volume expected came out.

From mechanical, ordinary electronic, to smart electronic, the promotion of electric meters has gone through several stages. During this period, the value of a single unit increased from 250 yuan/unit to 370 yuan/unit in 2020-2022.

However, after reaching the peak bidding period in 14-15, due to the disruption of the epidemic, the scale did not expand. According to the 8-10 year replacement cycle, changes that should have been completed in the previous two years may actually be scaled up again in these two years.

In the second half of last year, the State Grid's single-batch bidding scale reached a high point in recent years. In the 2024 batch of purchases announced by the State Grid on April 7 this year, the winning bid amount for metering equipment (electric energy meters) increased by nearly 40% year on year. Among them, 44.14 million electric meter units were +84.1% over the same period last year, exceeding market expectations.

The peak of two consecutive batches of tenders, plus an average delivery cycle of half a year, also means that meter companies will have good performance support for the next two or three quarters.

In addition to this, export demand for smart meters is also growing rapidly. Emerging countries and regions in Asia, Africa, and Latin America have poor grid facilities, and the costs of manual meter reading and electricity theft are high. There is an urgent need to improve the level of grid intelligence.

In 23, along with the rapid increase in the global smart meter penetration rate, meter exports increased 23% year on year, exceeding 10 billion yuan for the first time. Asia, Africa and Europe together accounted for 90% of total exports. Smart meter companies such as Haixing Electric Power, Samsung Healthcare, and Weili Group have laid out production capacity and formed stable supply relationships.

In terms of performance, the market pattern for suppliers participating in domestic tenders is relatively loose. Samsung Healthcare, Weisheng Information, Juhua Technology, and Xu JiElectric won the highest bid shares, but their total market share was less than 25%.

Last year, Haixing Electric Power's overseas revenue increased 51.29% year on year. Among them, the overseas smart electricity business achieved revenue of 2,561 billion yuan, an increase of 41.72% year on year, once again verifying the export boom. Meanwhile, another leading company, Samsung Healthcare, as of the end of the third quarter of 2023, overseas orders also surged 46% year over year to 4.5 billion yuan.

Both companies have risen 72% since the beginning of the year, under the double favorable catalyst of domestic tenders and the boom in overseas demand. It is very similar to the inverter explosion two years ago, and the boom at home and abroad is very high.

03

In the past, the overall grid investment progress of the world's major overseas economies fell short of expectations; in other words, compared with the investment in clean energy on the power side, it is really difficult to cope with future grid-connected power supply.

According to the IEA, the scale of global grid investment will reach the next level by 2030. From now until 2023, the average annual investment amount will reach 500 billion US dollars, rising to 775 billion US dollars in 2031-2040, and 870 billion US dollars from 2041 to 2050.

In addition to emerging economies, many developed countries are also facing the problems of old routes and aging equipment. It should be said that the level of anxiety about upgrading is no less than at home, and it will accelerate rapidly in the future.

Just as people are focusing on AI technology stocks, overseas, from power grid equipment companies to power generation operators, are enjoying the dividends brought about by the imbalance between electricity supply and demand.

For example, as one of the largest electricity producers and retail energy providers in the US, Vistra Energy's (VST) electricity sales business serves 4 million customers in 20 states, including Texas, which is responsible for 1/3 of the population and is very power-tight in summer.

Not only did the company turn a loss into a profit last year, but its stock price continued to hit new highs. Notably, Vistra's increase reached 193% in the past two years, and the stock price performance is not inferior to these tech stocks.

Another medium- and low-voltage power distribution leader, Eaton, had many transformer orders. Last year's backlog of orders was almost 3 times the historical average, which is expected to be sufficient to support the company's business growth until 2025. Overseas electrical equipment giants have begun to expand production one after another, but the average expansion cycle for transformers is close to two years, and the period of short supply will continue.

There used to be a trend that was very popular, saying AI and new energy vehicles. At the end of these downstream applications, electricity was lost.

In the future, downstream electricity demand will change dramatically. Electric monsters will not only come from charging piles that charge electric vehicles, but also data centers, continuing the lifeline of the artificial intelligence revolution.

According to Bank of America forecasts, global data center electricity demand could reach 126-152 GW by 2030, adding about 250 terawatt-hours (TWh) of electricity demand during this period, which is equivalent to 8% of the total electricity demand in the US in 2030. The electricity demand of the data center under construction will exceed 50% of the electricity consumption of the existing data center, and the electricity consumption of the data center will double within a few years of construction.

Data centers have higher requirements for the reliability and continuity of electric energy. Although the power supply and distribution system can calm certain fluctuations, the stability of the power source itself is also important, and nuclear energy may be more suitable than clean energy to supply power to data centers. This also explains that power operators such as Vistra Energy are also benefiting from the advance of AI.

The power industry's boom cycle has begun to shift to the middle and downstream. The upper limit of AI and computing power cannot be estimated. The only certainty right now is the arrival of a new construction cycle. With confirmation from order to delivery, the big alpha is still on the way. (End of full text)