Vacuum arc extinguishing chamber faucet, transferred to China Electric Equipment to embark on a new journey

Baoguang Co., Ltd. was founded in 1997 by Baoguang Group in conjunction with 5 other founders. It is one of the earliest domestic companies engaged in vacuum arc extinguishing chambers; in 2022, China Electric Equipment Group became the company's indirect controlling shareholder. We believe that after entering China Electric Equipment Group, the company is expected to achieve further growth acceleration. Looking at historical operations, the company has achieved continuous revenue and profit growth over the past 20 years; we believe it has benefited from domestic grid construction driving demand for the core product vacuum arc extinguishing chamber and the company's continuous expansion in business. Looking forward to the future, we believe that the company's main business, vacuum arc extinguishing chambers, will continue to grow rapidly. On the one hand, it comes from the boom in power grid industry construction and the empowerment of China Electric Equipment Group, and on the other hand, from the company's own deepening development and product structure upgrades, and new businesses such as energy storage are also continuing to be cultivated, which is expected to contribute to future growth potential.

Seize high pressure and import substitution to open up new space for the main business

Vacuum arc extinguisher products are the core products of Baoguang Co., Ltd., and the company's market position is stable. We believe that in the context of accelerated power grid construction, demand for traditional products has growth support; at the same time, as the company continues to innovate, high-voltage products and imported alternative products are expected to contribute to a considerable increase in demand, and continue to improve the company's product structure to help the vacuum arc extinguisher business volume rise rapidly.

First, in terms of market pattern, the company already occupied the number one market position for vacuum arc extinguishers in China before going public and has maintained it, with a market share of about 30%. We believe that the reason behind this comes from multi-dimensional advantages: 1) technical advantages. The company has undertaken many key national R&D projects, and has taken the lead in completing the 126KV vacuum arc extinguishing chamber type test and network operation to fill the domestic gap; 2) cost advantage, thanks to leading intelligent production lines and lean management, etc., the company's gross margin of arc extinguishing chambers is about 20% in recent years, which is significantly higher than other companies.

Second, in terms of business development, 1) Traditional products: Vacuum arc extinguishing chamber products are one of the most critical components of power switches. Vacuum circuit breakers have the advantages of environmental protection and energy efficiency, small size, long life, long maintenance cycle, low maintenance costs, safe and reliable operation, etc., and are widely used in 12KV and 40.5KV medium and low voltage distribution networks; therefore, traditional product demand is closely related to distribution grid construction; we believe that with the increasing pressure of distributed consumption and diversified electricity demand, domestic distribution grid construction is expected to reach an inflection point in the future. 2) Innovative products: On the one hand, the company began to lay out research on high-voltage vacuum arc extinguishers in 2005, and has now achieved batch delivery of 126KV vacuum arc extinguishers, and the national heavy project research and development of 252KV vacuum arc extinguishers is progressing smoothly; at present, the global trend of green and environmentally friendly power equipment is clear, and policies have been introduced in many places to limit the development of SF6 power switches. The popularity of environmentally friendly high-voltage power switches will directly drive the demand for 126KV vacuum arc extinguishers; we expect that in the future, if all environmentally friendly power switches are used, domestic 126KV vacuum arc extinguishers are likely to occur every year The new demand is about 0.06 million units, and the unit price and profit are expected to be higher, and the space is considerable. On the other hand, the company has overcome the problem of localizing vacuum arc extinguishers for UHV converter and variable load tap switches, helping to make the entire UHV converter industry chain autonomous and controllable, and is expected to benefit in the context of rapid domestic UHVDC construction.

Continue to lay out new businesses and build future growth potential

In addition to its main business, vacuum arc extinguishing chamber products, the company has also been actively exploring business development over the past few years and setting up subsidiaries to lay out energy storage and hydrogen energy-related businesses. We believe that although these businesses are currently still in the development layout stage, they are expected to contribute to long-term growth in the future.

Investment advice

The company's net profit attributable to shareholders of the parent company in 2024 and 2025 is estimated to be 0.1 and 0.12 billion yuan, respectively, and the corresponding PE is 34 and 28 times, respectively. First coverage, giving a “buy” rating.

Risk warning

1. The speed of domestic grid construction falls short of expectations; 2. The development of new products falls short of expectations; 3. The risk of increased market competition; 4. The risk that profit forecasting assumptions are not true or fall short of expectations.