Investment highlights

For the first time, it covered Aero Energy (688717) to outperform the industry. The target price was 65.00 yuan. Based on the price-earnings ratio valuation method, it corresponds to 20.7, 15.0 times 2024/2025 P/E. The company focuses on the household optical storage industry, mainly selling energy storage inverters, energy storage batteries, and grid-connected inverters. The reasons are as follows:

Demand for household storage terminals is still strong, and the medium- to long-term development trend is quite certain. Currently, gas prices and residential electricity prices in Europe have declined, but compared to 2021, they are still historically high. We estimate that the current storage cycle for German households is about 6 years, and it is still somewhat economical. In addition, optical storage systems have been upgraded in regions such as Asia, Africa, and Latin America. Demand for household optical storage systems has also continued to increase dramatically in order to ensure the stability of household electricity supply and save electricity costs. We expect global household storage capacity to remain flat year over year in 2024. In the medium to long term, the European market is expected to experience steady growth under carbon-neutral energy self-sufficiency, low penetration in Asia, Africa and Latin America, and driven by economy. We expect the global household optical storage industry to maintain 20% + growth in 2025-2028, and the medium- to long-term development trend is quite certain.

The industry's inventory removal is coming to an end, and enterprise-side shipments are expected to pick up quarter-on-quarter. Demand was strong in Europe in 2022, and channel providers accumulated a lot of inventory. In 2023, raw material prices declined, demand growth slowed, and channel providers began to remove inventory. The number of inverters exported from China to Europe has continued to decline since the beginning of 2023, and has stabilized in 1Q24. Looking at corporate shipments, 1Q24 shipping revenue from Airo, Paineng, etc. all rebounded month-on-month. We expect the industry to go out of storage or close to completion, and shipments from household storage companies are expected to increase sequentially in 2024.

Strong channel and brand advantages, improve product matrices, and open up new markets. Currently, the company focuses on household photovoltaic inverters, PCS and energy storage battery packs in Europe. We estimate that the company's share of the industry will be about 4%-5% in '22. At present, the company has launched industrial and commercial energy storage PCS and systems and achieved delivery, and plans to launch large storage and micro inverse products in 2024. The product matrix is continuously improved. On the market side, the company is developing efforts in Asia, Africa, and Latin America such as India and Pakistan, while reaching a product sales cooperation agreement with Japan's Sharp Energy, and the sales area is expected to gradually diversify.

What is our biggest difference from the market? The market is worried that European electricity prices will drop and household storage demand will continue to fall. We believe that short-term storage removal is coming to an end. In the medium to long term, demand for household storage in Europe is growing steadily under energy transformation and self-sufficiency demand, demand is growing rapidly in Asia, Africa, and Latin America, and the increase in demand for household storage is quite certain.

Potential catalysts: Inverter exports and corporate shipments rebounded quarter-on-quarter.

Profit forecasting and valuation

We expect the company's 23-25 EPS to be 6.7, 3.1, 4.4 yuan, and CAGR, respectively. For the first time, coverage gave a rating of outperforming the industry. The price-earnings ratio valuation method was used to give a target price of 65 yuan, corresponding to 20.7/15.0x P/E in 2024/2025, and the closing price corresponds to 18.1/13.1x P/E in 24/25, with room for 14% upward.

risks

Demand for household storage falls short of expectations, industry competition intensifies, new market development falls short of expectations, and exchange rate risks.