Shangneng Electric: Highly flexible target for centralized optical storage, which is expected to increase rapidly in the next two years

Shangneng Electric is a leading domestic centralized photovoltaic inverter and energy storage converter company. At present, the domestic market volume provides a high margin of safety, and the overseas medium to high ROE market layout has entered a harvest period, bringing about an inflection point in profits. We expect the company to increase rapidly within the next two years. From a medium- to long-term perspective, the US and Middle East markets are the first to usher in volume inflection points, and the European market space is also expected to open up. The company's core competitiveness is shifting from cost and products to brands, and from leading domestic PCS companies to global third-party PCS suppliers, and the upper valuation limit is expected to open up.

Company background: Market leader with low fault tolerance, high cost plus product+R&D barriers. The company integrates the Emerson technology team, and R&D innovation is deeply rooted in the company's genes, focusing on the high-power conversion market. The deep accumulation of centralized technology routes and continuous industry-leading power limits bring strong cost competitiveness. In a situation where the large-scale domestic optical storage market is highly internal, the company's market share is stable at the top, and maintaining a high share of the low fault tolerance market fully proves the company's competitiveness.

Low fault tolerance market: Demand for centralized optical storage is high, and the profit of leading PCS companies is supported. From a quantitative perspective, the return of centralized photovoltaics and the increased penetration rate of clusters resonates, leading to a high increase in structural demand when the growth rate of photovoltaic installations is slowing; benefiting from the increase in actual storage ratio+advanced construction of independent energy storage projects+ storage requirements for new scenarios, the reality and expectations of domestic large-scale storage are expected to double in 24. The share is expected to be concentrated on leading PCS companies with cost and product advantages. From a profit perspective, unlike strong deflation in the main optical storage industry chain, the prices of inverters and PCS links are relatively stable. The company's increase in the share of high-profit string products + IGBT supply mitigation + new product release cost reduction + scale effect release all support the company's domestic market profit level.

Mid-ROE market: medium to low fault tolerance market, leading companies have stable shares, directly benefiting from demand amplification

On the demand side, the energy transformation strategies of Middle Eastern countries such as Saudi Arabia and the United Arab Emirates have accelerated and entered the large-scale bidding stage. Benefiting from cost reduction and policy impetus, India's demand for centralized photovoltaics has increased rapidly, and large-scale storage is on the verge of being released. On the supply side, large-scale optical storage projects in the Middle East are mainly obtained by domestic photovoltaic EPC/energy storage integrators. Entering the short list of owners is a prerequisite for receiving orders. While the cost requirements are high, end customers have not reduced the requirements for product performance and indicators, so the main share may only be obtained by leading PCS companies. The company has been deeply involved in domestic and Indian markets with low fault tolerance rates for many years, and has maintained a leading position in the market share, consolidating cost control, project experience and customer resource advantages, and is expected to quickly enter the Middle East market through domestic photovoltaic EPC manufacturers/energy storage system integrators.

High ROE market: all repressive factors have been mitigated, and the company's share is likely to increase

1) US: In the short term, the US has entered a cycle of interest rate cuts, compounded by the mitigation of the problem of delays in connecting to the grid. Demand for large reserves is rising marginally, and demand is supported in 24/25. In the medium to long term, as the energy transformation process in developed countries progresses, the share of wind and solar power generation continues to rise, and the peak and valley load difference curve in Europe and the US widens, driving the long-term storage cycle growth. In terms of marginal changes, the company's North American high-profit PCS orders were shipped in Q3, which is expected to contribute to a considerable increase in performance during the year. In terms of future share, we have reviewed the expansion process of PE, the leading overseas PCS company, in the North American market. We believe that the company is similar to its expansion logic in the North American market. Starting from endowments, the company has stronger cost control capabilities while improving product and brand advantages. Under the increasing demand of North American integrators to reduce costs and a high trend in the non-Carpathian market, it is expected to accelerate its acquisition of market share and gradually grow into the leading specialized PCS company in the US market.

2) Europe and Australia: Large reserves are in the early stages of development, and the inflection point is approaching. At the same time, as a high-ROE market, orders from domestic integrators such as BYD, Ningde Times, and Artes are increasing. As a leading PCS company, the company is expected to go overseas through both channels for domestic integrators and overseas customers, further opening up profit space.

Investment advice

Shangneng Electric is a leading domestic large-scale photovoltaic inverter and energy storage PCS company. The domestic business base is stable, and it is also expanding from the low fault tolerance market to the Chinese ROE market (Asia, Africa and Latin America) and the high ROE market (Europe, America and Australia). Currently, overseas business has entered a harvest period, and the trend of quantitative profit is clearly rising. We expect that the company's net profit for 2024-2026 will be 0.568/0.792/1.006 billion yuan, respectively, and the corresponding PE will be 24.63/17.67/13.92, respectively, covered for the first time, and given a “buy” rating.

Risk warning

Global demand for optical storage falls short of expectations; company order delivery falls short of expectations; changes in overseas trade policies.