Key points of investment

1. One-sentence logic

Siyuan Electric: leading private power equipment. The products focus on core equipment such as high voltage switches and transformers. Benefiting from high demand for overseas power equipment, future overseas orders and profit margin levels are expected to exceed expectations.

2024H1's performance was good, and profitability continued to improve: in the first half of 2024, it achieved revenue/net profit of 6.17/0.89 billion yuan, an increase of 16.3%/26.6% year on year. Strong demand for core products such as high voltage switches and coils (represented by transformers) and an increase in overseas revenue share led to an increase of 2.7 pct to 31.8% year on year.

Overseas business development is on the fast track: in 2021-2023, the CAGR for overseas orders reached 34%, and gross margin increased by 11.4pct to 38.6%; in the first half of 2024, the company's overseas business revenue was 1.51 billion yuan, up 40.0% year on year; among them, stand-alone (transformer, etc.) /EPC revenue was 1.14/0.37 billion yuan respectively, up 46%/25% year on year.

High performance certainty: The company's order revenue conversion rate is high. The conversion rate of the previous year's order from 2021-2023 to the next year's revenue was 103%/102%/103%, respectively, and the order growth rate was 23%/17%/36%, respectively. Furthermore, the company's annual revenue and order targets have been fulfilled with a high degree of fulfillment. Since 2021, the completion rate of orders and revenue targets has been over 95%, and growth is highly deterministic and sustainable.

II. Logic that exceeds expectations

(1) Market expectations:

A. In terms of profitability, the company's profit level is relatively stable, and there is little room for improvement; B. The company's overseas business is developing steadily, and the growth rate of revenue and profit margins is extrapolated linearly.

(2) We predict:

A. The company accounts for a high proportion of overseas transformer orders and strong overseas demand for high-voltage switching products, which has led to an increase in the share of overseas business, an increase in gross margin, and a rise in the company's overall profitability.

B. The company has complete product and project capabilities overseas. In the context of the global interest rate cut cycle, demand for overseas power equipment is strong, and business revenue from core products (transformers, etc.) is expected to exceed expectations.

Product level judgment: Demand for high-voltage switches and transformers for the core main equipment of substations is strong at home and abroad, and gross margin has increased; the gross margin of 2024H1 high-voltage switches and coil (core product transformers) products increased by 3.8/0.7 pct year-on-year to 35.2%/33.7%, respectively. Judgment basis:

Demand side: Global power infrastructure construction is speeding up. On the power generation side, the installed capacity of wind power photovoltaics has increased dramatically, and there is a demand for boosting the Internet; on the electricity consumption side, benefiting from the increase in electricity consumption of new energy vehicles, fast charging, and AI data computing power centers, there is a demand for transformer to reduce voltage from the power grid; on the power grid side, the replacement of power transmission and transformation equipment in developed countries in Europe and America has brought about incremental demand.

Supply side: At the equipment level, transformer products expand overseas production for a long time. Overseas transformer manufacturers are cautious in their decisions to expand production, leading to supply shortages, and China's transformer exports are growing rapidly; at the project level, entering overseas power grid systems requires qualification certification, and enterprises with technical barriers and first-mover advantages are more competitive.

Overseas business judgment:

i) Rapid growth in overseas revenue and orders: Overseas businesses, such as building substations and providing GIS projects, continued to advance. The 2021-2023 orders were 2.25/2.99/4.01 billion yuan, respectively, up 50.0%/32.9%/34.1% year on year. Under high order-to-revenue conversion rates, overseas revenue grew rapidly. Overseas revenue in the first half of 2024H1 was 1.51 billion yuan, up 40% year on year, accounting for 25% of total revenue.

ii) Overseas business development judgments:

Macro background: According to the IEA, for every 5% increase in borrowing costs, the leveling cost of wind or solar energy projects increases by 50%, which is more sensitive to interest rates. As the interest rate cut cycle approaches, loan costs for PV, wind power, and consumption-related power equipment for overseas projects are low, and project construction is expected to accelerate.

Central demand: There is strong demand for power transmission and distribution equipment replacement in developed countries such as Europe and America, and developing countries such as Southeast Asia, the Middle East, and Africa are speeding up the construction of power infrastructure.

Microscopic capabilities: The company has been operating overseas for more than ten years and has complete product and solution capabilities. Currently, its export business covers more than 100 countries and regions, and overseas business may accelerate development.

iii) Determination of overseas profitability:

The company accounts for a high share of overseas transformer orders, which has led to an increase in the gross margin of overseas business. Overseas orders in 2023 were 4.01 billion yuan, an increase of 34% over the previous year, of which overseas orders for transformers already accounted for more than 50%.

2024H1's overseas gross profit margin was 33.8%, up 1.5pct year over year.

III. Inspection and Catalysis

1. Inspection indicators: the company's overall and overseas revenue and order situation, gross margin situation; revenue and gross margin situation of high-voltage switches and transformers.

2. Possible catalysts: The growth rate of domestic and foreign power grid investment exceeded expectations, the growth rate of company orders exceeded expectations, the expansion of the company's profitability exceeded expectations, and the growth rate of overseas business exceeded expectations.

IV. Research value

1. Unique understanding: The market's judgment on the company's overseas business is based on linear extrapolation, and believes that there is not much room for improvement in profitability; in fact, benefiting from the upward replacement and construction of global power infrastructure, the company's overseas business development is on the fast track, and overseas revenue in 2023/2024H1 increased 16%/40%, respectively.

In terms of profitability, the gross margin of core products such as switches and transformers continues to rise; high voltage switching voltage levels continue to rise, technical barriers continue to rise, and the shortage of transformer products is difficult to ease in a short period of time, and the gross margin of the company's products is expected to increase further.

2. A different understanding from before: the interest rate cut cycle is approaching, loan costs for overseas photovoltaic and wind power projects are reduced, and project construction is expected to accelerate; the company has been operating overseas for more than ten years and has complete product and solution capabilities, and overseas business may accelerate development.

5. Profit forecast and valuation

The company's 2024-2026 revenue is estimated to be 15.258/18.656/23.009 billion yuan, YOY 22.5%/22.3%/23.3%; 2024-2026 net profit to mother is 2.08/2.6/3.17 billion yuan, YOY is 33.1%/25.2%/22.0%, EPS is 2.68/3.36/4.10 yuan/share, corresponding PE is 27.74X/22.16X/ 18.16X, maintaining a “buy” rating.

6. Risk Reminder

Investment in power grids falls short of expectations; risk of overseas expansion falling short of expectations; risk of rising raw material prices; increased risk of industry competition.