Key points of investment

Shenma Electric Power is a leading global company in composite external insulation products for power systems and a leading domestic rubber seal company for power equipment. Starting with rubber seals for power equipment in 1996, it entered the field of insulators in 1999. Chairman Ma Bin won the Grand Prize of the National Science and Technology Progress Award in 2012 and 2017, respectively. In 2021, the composite cross load passed the first (set) major technical equipment certification in the energy sector in 2021, and bid for the UK's booster capacity development project in 2022, which is expected to become the second growth curve.

The global grid is expected to invest $400 billion in 2024, but it is far from achieving COP28's target of 3x renewable energy installed capacity in 2030. Under the COP28 conference's goal of 3 times the installed capacity of renewable energy, investment in renewable energy and power grids is growing at an annual rate of 12% and 11%, respectively. In 2023, global grid investment was 375 billion US dollars, an increase of 9%, compared to +3 pcts. Among them, the US, the European Union, China, and EMDE (excluding China) grid investment was 1000, 60, 80, and 80 billion US dollars respectively. EMDE (excluding China) grid investment grew 15%, mainly in Latin America (Colombia, Chile, Brazil, Panama, etc.), where grid investment doubled.

The market for grid equipment will be further fragmented. The main reasons are (1) regions rich in scenery and water resources, which are generally unlivable, and the harsh environment puts forward new requirements for equipment (2) inconsistent certification standards in various countries (3) new requirements for the safety of power grid operation due to continuous wind penetration, and (4) increased scarcity of factors such as land and community support in developed economic regions.

Pilot technologies with good economic benefits throughout the life cycle will be effectively expanded. (1) The company's composite insulator materials have been tested in major projects, and the composite transmission was applied in overseas projects in 2019, with a 30-year warranty. Due to maintenance-free, etc., the full life cycle economic benefits are superior to traditional solutions (2) 90% of composite insulators for European and American substations are supplied by the company, and “export discipline” helps improve product competitiveness (3) The “refurbished insulator” incident was revealed at the 2023 315 gala. (3) The “refurbished insulator” incident was revealed at the 2023 315 gala.

Profit Forecasts and Ratings

We forecast the company's revenue for 2024-2026 to be 1.31/1.8/2.53 billion yuan, respectively, net profit to mother of 0.3/0.41/0.56 billion yuan, three-year net profit CAGR of 37.1%, and diluted EPS of 0.69/0.94/1.30 based on current total share capital of 0.432 billion shares. The company's stock price on September 26, 2024 was 32/24/17 times the PE multiples of the predicted EPS for 2024-2026, respectively. Referring to comparable company valuations, it was covered for the first time and gave it an “increase in weight” rating, taking into account the expected volume of composite crossburdens, etc.

Risk warning:

Risk of global grid investment falling short of expectations; corporate governance risk; risk of fluctuations in raw material prices; business risk of overseas expansion.