Key points of investment

24H1 operation improved, and thermal management for high-power installations doubled

24H1 achieved operating income of 0.283 billion yuan, YOY +8.63%; net profit to mother of -1.7131 million yuan, a year-on-year loss reduction, mainly due to positive factors such as a doubling of revenue from high-power density thermal management products, a 12.22 million yuan reduction in income tax expenses compared to the same period last year, and a 62% year-on-year increase in government subsidies; gross profit margin of 27.81%, +0.33pct year on year; sales, management, and R&D expenses rates were 8.2%/16.7%/6.7%, respectively. 1.1 pct/+0.4 pct/+0.4 pct, mainly due to the increase in business expenses and other expenses due to the company's business expansion; credit impairment losses and asset impairment losses were 5.27 million yuan, an increase of 4.56 million yuan over the same period last year due to the combined effects of increased bad debt preparation on bills receivable, revenue growth, and reduction in repayments.

By business, the revenue of 24H1's high-power power electronic thermal management products was 0.066 billion yuan, YOY -54.81%, mainly affected by factors such as investment arrangements and project progress related to power systems. Delivery is expected to accelerate in the second half of the year, driving the company's operating performance improvement; the gross profit margin was 34.07%, +3.03pct compared to the previous year. High power density thermal management products (data center+energy storage) had revenue of 0.15 billion yuan, YOY +118.52%, and the revenue share increased sharply from 26% of 23H1 to 53%, mainly due to the rapid growth in demand for liquid cooling in data centers; the gross profit margin was 17.11%, compared to +3.26pct. Project operation and maintenance service revenue was 0.051 billion yuan, YOY +18.71%, gross profit margin 49.25%, +11.16pct year-on-year.

By the end of June '24, the company's on-hand orders were about 0.562 billion yuan. It is expected that some projects will be completed at an accelerated pace in the second half of the year and results will be released.

Data center+energy storage+UHV troika drives growth

The field of data center liquid cooling: AI is driving rapid growth. With the rapid development of domestic AI chips, it is expected that the domestic computing power boom will continue to increase in the future. Domestic computing power chips have a relatively high thermal density with the same performance, which places higher demands on heat dissipation, and the need to use liquid cooling will increase. In July '24, the “Special Action Plan for Green and Low-Carbon Development of Data Centers” aims to reduce the PUE of large and very large data centers to below 1.25 by the end of 25, promote liquid cooling and heat dissipation, and promote liquid cooling transformation of existing projects. The boom in domestic computing power and stricter policy PUE requirements are expected to jointly drive an accelerated increase in liquid cooling penetration rate.

The company's information communication liquid cooling products cover server liquid cooling plates, fluid connection components, CDU of various models and different heat transfer forms, TANK and heat exchange units of various sizes and power. It can provide cold plate and immersion liquid-cooled server heat management solutions. It has the ability to provide one-stop comprehensive solutions from heat dissipation architecture design and equipment integration to system debugging and operation and maintenance, which can reduce PUE to less than 1.1, and related products have begun to be supplied in batches. Customers related to the company's server liquid cooling products include Byte, Ali, Tencent, Wanguo Data, and Inspur.

The company continues to develop and reserve related technologies and actively expand customers. As AI high-density computing accelerates the deployment of liquid cooling demand, it is expected to fully enjoy the dividends of the industry.

The field of energy storage liquid cooling: Benefiting from the increase in the installed scale of energy storage. The installed capacity of China's energy storage market reached a record high in the first half of '24. The total installed capacity of energy storage projects was 14.40 GW/35.39 GWh, which reached 69% of the total installed capacity in '23.

According to the forecast of the Zhongguancun Energy Storage Industry Technology Alliance, in 2024, China's new energy storage capacity is expected to reach 41.2 GW/94.76 GWh, an increase of 103.3% over the previous year. The Zhongguancun Energy Storage Industry Technology Alliance predicts that 24-25 will be the last two years of the “14th Five-Year Plan”, and the scale of new energy storage installations will continue to grow rapidly.

The company continues to invest in research and development in energy storage battery thermal management technology, and has stored technical reserves and solutions for lithium battery single cabinet energy storage liquid cooling products, liquid cooling systems for large-scale energy storage power plants, prefabricated cabin energy storage liquid cooling products, etc. Currently, related products have batch supply capacity, which is expected to benefit from the rapid growth of domestic energy storage installations based on its own product and customer accumulation.

UHV sector: It is expected to enter a boom cycle. In recent years, various power generation, transmission and distribution companies have significantly increased their new investment in high voltage, UHV power grids and high power generator sets (such as large-scale wind power, photovoltaic power generation, etc.), and have increased the upgrading of low voltage and low power equipment. During the “14th Five-Year Plan” period, the State Grid plans to build a total of 38 UHV projects “24 to 14 Direct”, with a total investment of 380 billion yuan. According to CCTV reports, the State Grid Corporation will invest more than 600 billion yuan in annual power grids this year, an increase of 71.1 billion yuan over last year, mainly for UHV AC/DC engineering construction and digital intelligent upgrading of power grids. The amount of completed infrastructure investment for the Q1 power grid in 2024 was 76.6 billion yuan, up 14.7% year on year. From January to May 2024, the completed investment amount for power grid projects was 170.3 billion yuan, an increase of 21.6% year on year. It is expected that grid investment will continue to advance steadily in the second half of the year. According to the official website of the State Grid, two UHVDC projects have been approved to start in the first half of 2024, namely the “North Shanhai-Anhui ± 800 kV UHV DC” and the “Gansu-Zhejiang ± 800 kV UHV DC” lines.

The company's traditional business is highly related to power system project planning and engineering progress. Since 2020, the company's performance and revenue structure have been adversely affected by the slowdown in industry investment. The current market demand has improved markedly, and it is expected to drive the company's performance growth in the future.

Profit forecasting and valuation

The company is a leading provider of liquid cooling solutions in China. The traditional business is expected to face an inflection point, while the emerging AI data center+energy storage business contributes new flexibility. The company's net profit for 24-26 is expected to be 0.03/0.08/0.13 billion yuan, with year-on-year growth rates of 199%/159%/59%, respectively. The current market value (closing price on September 3, 2024) is 100/39/24 times PE in 24-26, respectively, maintaining the “gain” rating.

Risk warning

UHV construction fell short of expectations; bid share fell short of expectations; the company's gross margin fell short of expectations, etc.