A leader in the vacuum arc extinguishing chamber industry, diversified its transformation into hydrogen energy storage. The company is the leading domestic vacuum arc extinguisher, with a market share of over 30%. In 2021, the company embarked on a transformation path, entering energy storage and hydrogen energy. The company's business development is steady. In 2021-2023, the company achieved revenue of 1.01/1.229/1.349 billion yuan, +11.96%/+21.65%/+9.84% year-on-year, and achieved net profit of 0.051/0.058/0.071 billion yuan, +5.17%/+4.86%/+5.37% year-on-year.

Distribution network investment has accelerated, environmental requirements have increased, and demand for vacuum arc extinguishers has been released. Benefiting from accelerated investment in distribution networks (new energy development increases requirements for distribution networks) + increased environmental requirements (EU fluorinated gas regulations prohibit the use of sulfur hexafluoride), demand for vacuum arc extinguishers has been released. According to the High Voltage Appliance Network, the global market size will grow from $2.67 billion in 2023 to $2.85 billion in 2024, yoy +6.5%, and will grow to $3.64 billion by 2028, with a CAGR of 6.3%. The company's market share in the vacuum arc extinguisher product industry has remained above 30% for many years. It is in a leading position in the domestic industry and ranks among the highest in the world. The company has technical and brand advantages: the company has been deeply involved in vacuum arc extinguishing chambers for more than 50 years, and has mastered the full range of vacuum arc extinguishing chamber technology from raw material production to complete tube sealing. It is one of the few enterprises that independently process all core components in domestic arc extinguishing chamber companies. For the third time in 2024, it was awarded the title of “Manufacturing Individual Champion Demonstration Enterprise” by the Ministry of Industry and Information Technology. The gross margin is ahead of peers. In 2022 to 2023, Xuguang electronic switch tube gross margin was 11.70%/10.10%, and the gross margin of the company's vacuum arc extinguisher products was 18.58%/20.30%, higher than +6.88pct/+10.20pct, respectively.

The rapid development of new energy sources is driving demand for energy storage, and the company is entering energy storage FM+EPC. In 2023, the domestic PV installed capacity was 217 GW, +148% compared to the same period, and 76 GW of wind power connected to the grid was added, which led to an increase in corresponding distribution and storage demand, and the growth rate of energy storage connected to the grid was fast. In total, 46 GWh was connected to the grid, and +182% compared to the same period last year. We expect 87 GWH of energy storage installed in 2024, yoy +82.6%, and will continue to grow at a high rate. In March 2021, Baoguang Zhizhong was established (holding 45% shares) and officially entered the energy storage industry with the energy storage and frequency modulation business as an entry point. In 2022/2023, Baoguang Zhizhong's revenue increased to 0.171/0.284 billion yuan, respectively, and YOY +686.46%/+65.85% respectively.

The energy transition accelerates the growth of hydrogen energy, and the company actively lays out hydrogen energy. The hydrogen energy industry has become one of the fastest growing industries in the world for investment in the energy sector. According to our estimates, hydrogen demand may be 50.99 million tons by 2030, and the 2023-2030 CAGR is 4.9%. Among them, the demand for hydrogen production from electrolyzed water may increase. We expect the demand for hydrogen production from electrolyzed water to reach 9.18 million tons/year by 2030, and the CAGR will be 90.7% from 2023 to 2030. The company actively lays out the hydrogen energy industry, and Baoguang Lianyue was formally established in 2021 (holding 40% shares).

Profit forecasting and valuation. We estimate that the company's net profit for 24-26 will be 0.098/0.114/0.13 billion yuan, respectively, and the corresponding EPS will be 0.30/0.34/0.39 yuan, respectively. Comparable to the company's 2024 PE was 31 times. We gave 2024 a 36-40 times PE valuation range, corresponding to a reasonable value range of 10.70-11.89 yuan. First coverage, giving an investment rating of “superior to the market”.

Risk warning: The expansion of the hydrogen energy and energy storage market falls short of expectations; demand for vacuum arc extinguishers falls short of expectations; raw material market prices fluctuate; distribution network investment growth falls short of expectations.