Key investment points

The company is a leading energy digital intelligence innovation enterprise under the State Grid. Benefiting from high investment in power informatization, its performance is expected to grow steadily. When the company's major assets were restructured in 2019, the Group made a commitment to address interindustry competition issues, and now the 5-year interindustry competition resolution period is approaching.

The company is a leading energy digital intelligence innovation enterprise under the State Grid

The company, formerly known as Minjiang Hydropower, achieved business transformation through major asset restructuring in 2019. After the restructuring was completed, the controlling shareholder changed to State Grid Information Technology Group. The main business relies on the electricity market, covering the three major sectors of electricity digitalization, enterprise digitalization, and cloud network infrastructure. In 2023, electricity digitalization, enterprise digitalization, and cloud network infrastructure business revenue accounted for 26.8%, 25.5%, and 47.4% respectively. In the first half of 2024, the company adjusted its business caliber and divided it into five major business segments: digital infrastructure, digital power applications, enterprise digital applications, cutting-edge technology innovation, and energy innovation services, accounting for 52.17%, 29.45%, 8.76%, 5.95%, and 3.66% of revenue, respectively.

Backed by the national grid, performance grew steadily, and profits continued to improve

As a member enterprise of the State Grid, the company has been serving the State Grid for a long time. Resource endowments and customer advantages helped the overall performance to grow steadily. In 2020-2023, the company's revenue CAGR was 3.0%, and the net profit CAGR to mother was 10.8%. The company's profitability gradually improved. In 2023, gross margin was 21.56%, up 0.96pp year on year, net profit margin was 10.79%, up 0.26pp year on year; in the first half of 2024, gross margin increased 1.26pp to 20.01% year on year, and net margin decreased 0.17pp to 8.67% year on year.

The target for the full year 2024 is clear, with corresponding revenue growth of more than 10%. In the first three quarters of 2024, the company achieved revenue of 3.747 billion yuan, a year-on-year decrease of 4.89%, a year-on-year decrease of 0.298 billion yuan, a year-on-year decrease of 13.00%, after deducting non-return net profit of 0.293 billion yuan, a year-on-year decrease of 3.22%, mainly due to the fact that the collection business accounted for a large share of the bid amount in the third quarter, but it was not converted into revenue during the execution process. The company has plenty of orders in hand. As of the first half of 2024, the amount corresponding to remaining performance obligations was 3.67 billion yuan, an increase of 30.93% over the previous year, of which the amount to be confirmed during the year was 2.286 billion yuan, an increase of 91.19% over the previous year. In the context of power system reform, demand for digital and intelligent power grid construction is expected to be released at an accelerated pace in the future. As a leading enterprise in power grid digital intelligence, the company is expected to fully seize the opportunities and help performance continue to grow steadily. According to the company announcement, the 2024 revenue target is 8.49 billion yuan, corresponding to a year-on-year increase of about 10.65%.

Investment in power informatization is booming, and the company is expected to fully benefit

The overall investment in the power grid is booming, and the State Grid plans to invest more than 600 billion yuan for the first time in 24 years. In 2023, the total investment in the national grid reached 527.5 billion yuan, an increase of 5.4% over the previous year. From January to August 2024, the national grid completed a total investment of 333 billion yuan, an increase of 23.1% over the previous year. The State Grid plans that the full year of 2024 power grid investment will exceed 600 billion yuan for the first time, an increase of 71.1 billion yuan over the previous year. The new investment will mainly be used for UHV AC/DC engineering construction and digital intelligent upgrading of power grids. Under the influence of factors such as strong policies and the construction of new power systems, power grid investment will maintain a high level of prosperity.

The trend of digital and intelligent transformation of power grids is clear, and the State Grid strategy attaches great importance to it. At the 2024 work conference, the State Grid emphasized serving the goal of “dual carbon” as a strategic guide to promote the construction of a strong digital power grid. At the 2024 second quarter work conference, it was once again emphasized that digital intelligence is the fulcrum for the high-quality development of power grids. It is necessary to focus on application empowerment, focus on the construction of new power systems, and raise the level of digital intelligence of power grids. As a key enterprise supporting the transformation of the State Grid digital intelligence, the company has rich project experience and customer base advantages in the field of energy digital intelligence, and is expected to fully benefit from the acceleration of industry investment.

The UHV project has entered the “14th Five-Year Plan” large-scale construction period. In order to match the construction of major new energy bases during the “15th Five-Year Plan” period, UHV demand is clear and optimistic, which will drive the construction of related communication supporting projects to accelerate. The company's subsidiary CLP Feihua uses communication network construction and operation, communication integrated collection services, and data center construction and operation as its core business, and has fully supported various UHV supporting communication projects and communication engineering construction services such as the State Grid 100GOTN in Qinghai-Henan, Zhangbei-Xiong'an, and Mengxi-Jinzhong. As the UHV project continues to advance, the company is expected to directly benefit.

Virtual power plants and 5G private power grids bring long-term opportunities. Virtual power plants: Virtual power plants can be coordinated and optimized through digital means, and the cost is relatively low. They are an important way to solve the problem of new energy consumption. The company actively participated in the construction of demonstration projects related to virtual power plants to create a virtual power plant operation platform covering the integrated operation of “source network load storage and charging”, which is expected to open up long-term growth space. 5G private network: The digital transformation of electricity puts higher demands on communication networks. 5G is highly compatible with power business application scenarios and is an important cornerstone for empowering new power systems. The company is one of the first technical research units within the State Grid system and is expected to open up a broad market space.

The 5-year interbank competition resolution period is approaching

At the time of the company's major asset restructuring in 2019, Xinshan Group made a commitment to resolve the peer competition issues of its subsidiaries Yili Technology, Zhixin Microelectronics, Shenzhen Guodian and State Grid ICT within 5 years.

The ICT Group has many assets. State Grid ICT is the only listing platform. In 2023, China Grid ICT's total assets accounted for about 29% of the total assets of the ICT Group, and the revenue of the ICT Group accounted for about 39%. 2024 is the last year to resolve competition issues in the industry. According to the company's announcement, the relevant commitments are still being implemented, and the company will continue to actively follow up with shareholders on the progress of implementation of commitments.

Profit forecasting and valuation

Overall investment in electricity is booming, and the structure is biased towards digital intelligence and UHV. As the backbone platform of the State Grid system, the company is expected to directly benefit. In addition, the company actively lays out in fields such as virtual power plants and 5G electricity, and has room for long-term flexibility. We expect the company's net profit to be 0.955, 1.088, and 1.234 billion yuan respectively in 2024-2026, up 15.30%, 13.92%, and 13.46% year-on-year. The current stock price (closing price on November 7, 2024) corresponds to PE 29.02, 25.48, and 22.45 times. Covered for the first time, a “gain” rating was given.

Risk warning

Investment in power informatization fell short of expectations; progress in new business areas fell short of expectations; progress in resolving interbank competition fell short of expectations; market competition intensified, etc.