According to the Intelligent Finance APP, Sinolink Securities released a research report stating that combining the quarterly profit trend changes in upstream raw materials and components last year, the gross margin repair of the wind power industry in the first half of the year was mainly contributed by the upward transmission of price pressure to the upstream. However, there were also factors such as the large-scaleization of wind turbines and the increase in overseas market share. Considering that the bid price of wind turbines in the first half of the year was basically stable and the purchase price of components was relatively low, it is expected that the profit repair of the whole machine in the second half of the year will be sustainable. In the later stage of the "14th Five-Year Plan", it is expected that various coastal provinces in China will enter the stage of accelerating construction, grid connection, and it is expected that the demand for offshore wind power will increase significantly in the second half of this year and next year.

Sinolink Securities' main points are as follows:

In the first half of the year, the domestic wind power installed capacity grew steadily, while the offshore wind power installed capacity was slightly lower than expected. In the first half of 2024, the domestic wind power newly installed capacity was 25.8GW, a year-on-year increase of 12.4%; among which the newly installed capacity of offshore wind power and onshore wind power were 0.83GW and 25.0GW respectively, with year-on-year changes of -24.5% and +14.3%, and the installed capacity of offshore wind power was slightly lower than expected due to the impact of construction. From January to July, the domestic wind power newly installed capacity was 29.9GW, a year-on-year increase of 13.7%; the newly installed capacity in July was 4.1GW, a year-on-year increase of 22.6%. Entering the second half of the year, it is the peak season for the installation of traditional wind power. In addition to the lower-than-expected construction of offshore wind power in the first half of the year and the delay of some projects, it is expected that there will be a dense grid connection period in China in the second half of the year.

The significant increase in bidding scale lays the foundation for demand release in the second half of the year. In the first half of 2024, the wind power bidding in China reached 66.1GW, an increase of 48% compared to the previous year; among which the newly bid onshore wind power reached 60.7GW, a year-on-year increase of 57.0%, and the newly bid offshore wind power reached 5.4GW, a year-on-year increase of 22.0%. In the second quarter of 2024, the wind power bidding in China reached 42.8GW, a year-on-year increase of 162.4%; among which the newly bid onshore wind power reached 39.4GW, a year-on-year increase of 180%, and the newly bid offshore wind power reached 3.4GW, a year-on-year increase of 52.0%.

The price of onshore wind turbines remained stable, while the price of offshore wind turbines continued to decline. From January to June 2024, the weighted average winning price of onshore wind turbine units excluding tower shafts was 1453 yuan/KW, a year-on-year decrease of 11.2%. The winning price in the first half of the year remained stable at 1400-1600 yuan/KW. From January to June 2024, the weighted average winning price of offshore wind turbine units was 3342 yuan/KW, a year-on-year decrease of 11.6% and a 6.8% decrease compared to the average price from August to December 2023.

Continued price competition has led to a decrease in industry revenue and profitability. In the first half of 2024, the wind power sector achieved revenue of 78.5 billion yuan, a year-on-year decrease of 3.3%; due to the continuous intensification of industry competition and the continuous decline in downstream bidding prices, the sector achieved a net income attributable to the parent of 4.1 billion yuan, a year-on-year decrease of 25.4%. The gross margin and net profit margin were 17.9% and 5.3% respectively, a year-on-year decrease of 1.0% and 1.5%; the ROE was 2.2%, a year-on-year decrease of 0.8%.

The profitability margin of the sector improved in the second quarter. In 2Q24, the company achieved operating revenue of 46.2 billion yuan, a year-on-year decrease of 7.8%; achieved a net profit attributable to the parent company of 2.6 billion yuan, a year-on-year decrease of 6.6%, with a significant narrowing of the decrease compared to 1Q24; realized sales gross margin and sales net margin of 16.1%/5.6%, a year-on-year decrease of 2.05/-0.05pct. The decrease in gross margin is not only due to the deterioration of the company's own profit ability, but also partly related to the adjustment of some companies' interim accounting standards, which has changed the warranty fund from sales expenses to cost of goods sold, and the net margin is almost unchanged compared to the previous year. The ROE of 2Q24 was 1.4%, a year-on-year decrease of 0.12pct, an increase of 0.6pct compared to the previous quarter.

The transmission effect of the whole machine cost is gradually emerging, and the profitability has rebounded to some extent. From the performance disclosed by Sany Heavy Energy, Goldwind Science & Technology, Ming Yang Smart Energy, and Windey Energy Technology Group in the first half of the year, the comprehensive gross margin of the four whole machine companies has rebounded to varying degrees compared to 2H23. Sinolink Securities stated that considering the quarterly trend changes in the upstream raw material and parts and components links, it is determined that the repair of the gross margin in the first half of the year is mainly due to the upward transmission of price pressure to the upstream, but there are also factors such as the large-scaleization of wind turbines and the increase in overseas proportion. Considering that the bidding price of wind turbines has basically stabilized in the first half of the year, and the purchase price of parts and components is relatively low, it is expected that the profitability repair of the whole machine sector will be sustainable in the second half of the year. The investment income/non-recurring net profit attributable to the parent company of the whole machine sector in 1H24 reached 86.7%, a significant slowdown compared to the previous year, but it is still an important source of profit for whole machine companies.

The profitability of the component sector is under pressure, and going overseas is still the main profit line. Due to the continued impact of downstream price competition, the prices of upstream parts and components have been under pressure, with the main shaft and castings seeing a year-on-year decrease in gross margin of 9.20pct and 4.99pct respectively in 2Q24. Companies with export capabilities have shown more obvious profit advantages. Large gold heavy industry in the tower segment has benefited from the increase in overseas revenue, and the gross margin in 1H24 increased by 4.6pct compared to the previous year.

With the recovery of offshore wind power and the sustained release of overseas demand, the industry's demand structure is expected to gradually optimize. In the later stage of the "14th Five-Year Plan", it is expected that various coastal provinces in China will accelerate construction and enter the stage of rushing to install and connect to the grid. It is expected that the demand for offshore wind power will increase significantly in the second half of this year and next year. From the financial statements of some companies, the scale of inventory and contract liabilities in the semi-annual report has initially verified this trend; overseas, with the accelerated development of offshore wind power in Europe, the supply gap in the tower and submarine cable segments is expected to bring considerable overflow demand, and at the same time, emerging markets such as Central Asia, Southeast Asia, and India are also expected to gradually release demand.

Investment recommendations and valuations: tower segments and submarine cable segments that benefit from offshore wind power and going overseas: Ningbo Orient Wires & Cables (603606.SH), Shanghai Taisheng Wind Power Equipment (300129.SZ), Shanghai Electric Wind Power (301155.SZ); wind turbine segments with the prospect of profitability improvement: Goldwind Science & Technology (002202.SZ), Sany Heavy Energy (688349.SH), Ming Yang Smart Energy (601615.SH), etc.

Risk warning: fluctuation risk of commodity prices; lower-than-expected downstream installation; policy risk.