Core views

The company released its 2024 semi-annual report. The 2024H1 deduction performance increased by 22.87% year-on-year, achieving good growth. As a comprehensive leader in primary transmission and distribution equipment, the company has benefited from accelerated investment and construction of power grids, and strong demand in the downstream market. The industry is booming, and grid investment is rising steadily. From January to July 2024, the total amount of power grid investment was 294.7 billion yuan, an increase of 19.2% over the previous year. Under the demand for delivery from the Shagaohuang base and the delivery of hydropower from the southwest, UHV construction was rigid and continuous. Thanks to the boom in the industry, as a leading enterprise, the company ranks at the top of the industry for products such as integrated appliances and transformers. It is expected that orders and deliveries of high-voltage products will be more concentrated in the second half of 2024, and the company's profitability will improve.

occurrences

The company released its 2024 semi-annual report. In the first half of 2024, it achieved operating income of 10.342 billion yuan, a year-on-year increase of 7.42%, net profit to mother of 0.452 billion yuan, an increase of 5.23% over the previous year; net profit after deducting non-return to mother was 0.471 billion yuan, an increase of 22.87% year-on-year.

Brief review

Increase in profitability after deducting an increase in performance

1) Net profit attributable to mother and net profit net income not attributable to mother for the first half of 2024 were 0.452/0.471 billion yuan respectively, an increase of 5.23%/22.87% year-on-year. Due to changes in fair value profit and loss in 2024H1, the growth rate of deducted non-performance is relatively fast.

2) Revenue for the second quarter was 5.631 billion yuan, up 17.95 percent year on year; net profit to mother was 0.249 billion yuan, up 3.63 percent year on year; net profit after deducting non-return to mother was 0.281 billion yuan, up 34.34 percent year on year.

3) 2024H1 gross margin was 18.93%, up 2.42 pct year on year; 2024Q2 gross margin was 19.83%, up 2.11 pct year on year. Gross profit is expected to rise due to large-scale effects, continued promotion of cost reduction and efficiency, and an increase in the share of high-margin products.

4) Net cash flow from 2024H1 operating activities was 0.669 billion yuan, an increase of more than 3 billion yuan over the previous year. It is expected mainly due to strengthened accounts receivable management, a year-on-year increase in sales repayments; a year-on-year decrease in net increases in customer loans and advances, etc.

The industry is booming, and a comprehensive equipment leader will fully benefit 1) ① The construction of new power systems is accelerated, and grid investment is growing faster. From January to July 2024, the total amount of power grid investment was 294.7 billion yuan, an increase of 19.2% over the previous year. ② There is strong certainty about UHV development. Under the demand for transportation from the Shagaohuang base and the southwest water and power delivery needs, the construction of UHV lines is rigid and continuous.

2) The industry is booming. The tender amount for the first four batches of transmission and transformation of the State Grid headquarters in the first four batches of 2024 was about 55.5 billion yuan, an increase of about 11.8% over the previous year. Among them, the purchase amount of combined electrical appliances was about 13.9 billion yuan, an increase of about 18% over the previous year; the purchase amount of transformers was about 13.2 billion yuan, an increase of about 9.5% over the previous year. The company's core products, such as combined electrical appliances and transformers, rank among the highest in the national grid market share.

Significant increase in switches and transformers, increasing overseas business contribution

1) Looking at business segments in the first half of 2024: ① The company's transformer segment revenue was 4.468 billion yuan, up 21.64% year on year; ② The company's switch sector revenue was 4.081 billion yuan, up 25.07% year on year. ③ The revenue of the capacitor segment was 0.433 billion yuan, up 25.61% year on year; sales revenue of core products such as 2024H1 switches and transformers increased year on year, continuing to contribute to core growth.

2) Looking at the subregion, 2024H1's domestic revenue was 8.96 billion yuan, and overseas revenue was 1.32 billion yuan; international business revenue increased year-on-year, contributing to revenue growth. By market, online revenue is 4.5 billion yuan, and other off-network business is 5.78 billion yuan.

3) Rich product matrix. Leading products include high-voltage switches (GIS, GCB, isolators, grounding switches), transformers (power transformers, converter transformers), reactors (flat wave reactors, parallel reactors), power capacitors, transformers, insulators, bushings, zinc oxide lightning arresters, DC transmission converter valves, etc.

4) Stable leading position in the industry. ① The UHV market share remains leading in the industry, the off-network market is growing steadily, and new business orders continue to emerge, helping the construction of 14 UHV projects including Jinshang-Hubei and Ningxia-Hunan. ② Multiple breakthroughs in international business, winning the bid for Turkey's Akuyu nuclear power plant project to achieve new breakthroughs in the nuclear power field, expanding stand-alone products to Italy, Sweden, Ireland and other countries, and expanding engineering business to countries such as Jordan, Ghana, and Zimbabwe.

Performance forecast: The company's net profit for 2024/2025 is expected to be 1.21/1.81 billion yuan, PE 30.8/20.5x. The industry is booming, and the company will fully benefit as a comprehensive equipment leader, and will be given an increase in holdings rating for the first time.

Risk analysis

1) Demand side: Changes in national infrastructure policies have led to power investment falling short of expectations; power grid investment falls short of expectations; demand for power equipment has declined due to a decline in the growth rate of installed new energy installations; the growth rate of electricity consumption in the whole society has declined; the bidding progress of the two networks falls short of expectations; the progress of UHV construction falls short of expectations.

2) Supply side: Prices of commodities such as copper resources and steel have risen; the supply of power and electronic devices is tight, and the progress of localization falls short of expectations.

3) Policy aspects: Support related to the new electricity market falls short of expectations; the progress of the electricity price mechanism is lower than expected; the progress of the electricity spot market falls short of expectations; and the difference between peak and valley prices of electricity falls short of expectations.

4) In terms of the international situation: the energy crisis has been mitigated more quickly, energy prices have fallen faster; barriers to international trade have deepened.

5) Market side: The competitive landscape has changed drastically; increased competition has caused the profitability of all aspects of power equipment to fall short of expectations; transportation and other costs have risen.

6) Technical aspects: The progress of technical cost reduction is lower than expected; technical reliability is difficult to further improve.

Company performance sensitivity analysis: Assuming that the company's revenue in the switch sector increased by 10%, 30%, and 50% year-on-year in 2024, the corresponding company's net profit to mother in 2024 was 1.04, 1.21, and 1.37 billion yuan, respectively.