Introduction: The elements of long-term victory within the State Grid system are strategic positioning, drawing on past knowledge, and card holders have fully benefited from the major changes in the State Grid over the years. The State Grid is the largest domestic power grid operator, and its investment volume and strategic direction have a decisive influence on the prosperity of the energy IT sector. Taking history as a guide, the core card players have fully benefited from the major changes in the State Grid. Guodian Nanrui's 14-year revenue and net profit volume to mother jumped 46 and 56 times, respectively, as an example. In summary, Guodian Nanrui's excellent performance in the past has mainly benefited from two points: 1) the company's business is in line with the previous round of intelligent power grid development; 2) the Group's continued asset injection. The deep core reason for this is the company's remarkable positioning advantage as a research and industrialization platform for the State Grid, which enables the company to adapt to the development trend of power grids. Judging from the changes in the historical investment amount of the State Grid, after the separation of the power grid, the State Grid experienced multiple rounds of investment cycles, such as high-voltage one-time equipment construction, strong smart grid construction, and UHV construction. Currently, one of the key construction directions is digitalization.

Top down: building a new power system triggers a new round of change

Digital transformation is imperative in the context of deepening electricity reform, and the dual drive of policy and capital is expected to bring about incremental demand. At present, both the supply and demand sides of the power system and the institutional environment have changed significantly compared to the past: 1) on the supply side, the share of new energy installed capacity continues to increase, and power supply instability is increasing; 2) on the demand side, load volatility and trend complexity are increasing, and demand-side management capabilities need to be improved urgently; 3) on the institutional side, the spot market is changing rapidly, and the transformation of profit models is forcing the grid side to optimize operation and management. To build a new power system, the digital transformation of power grids is imperative. Judging from the digital transformation process of the national grid, traditional digital construction focuses on ERP, cloud platforms, unified communication networks, and centralized and centralized construction, and the degree of intelligence at the actual level of production and operation needs to be improved. Since the 14th Five-Year Plan, China's State Grid has elevated digital transformation to a strategic level, entering the stage of business intelligence. Five major professional systems have been upgraded, piloted, and promoted one after another. Digital construction continues to accelerate, and it is expected that core enterprises will take over the incremental demand.

From the bottom up: the digital pillar of the State Grid, core assets need to be re-evaluated

The company positions itself as the core enterprise of electricity digital intelligence within the State Grid system, and comprehensive digital transformation of the business+competitive solutions in the industry opens up room for growth.

State Grid ICT is a listing platform under the ICT Group, a unit directly under the State Grid. It promotes full digitalization of business in line with the background of electricity reform. The digital power business volume has been growing steadily in recent years. Focus on companies outside of the main business to actively expand business scenarios, including virtual power plants, AI, and power innovation products. Furthermore, in 2019, Xinshan Group promised to ensure that business overlap between the company and listed companies is eliminated within 5 years through business adjustments or asset and business restructuring, etc., and has now ushered in substantial progress. Resolving competition issues in the same industry and rationalizing interests is of great significance to China Grid ICT. It is expected to build a quadruple growth engine for China Grid ICT and help it transition in volume: 1) First priority: increase in volume and acquire Yili Technology. 2) Second level: Concentration of shares, relevant parties no longer carry out communication collection business. 3) Third step: Asset expansion. The internal digital system of the State Grid is complex and needs to be further straightened out. 4) Fourth level:

Expansion outside the system reduces the proportion of related transactions and explores growth potential outside the system in the long term.

Investment advice

The company is expected to achieve net profit of 0.86, 1.373, and 1.603 billion yuan in 2024-2026, corresponding PE of 28.43x, 17.82x, and 15.26x, maintaining a “buy” rating.

Risk Alerts

1. The speed of digital investment and development of power grids falls short of expectations; 2. Off-grid business is progressing faster than expected; 3. The actual resolution of competition issues in the industry falls short of expectations; 4. The risk that profit forecasting assumptions are not true or fall short of expectations.