Industry and company fundamentals:

High voltage switches are one of the core equipment of substations. They are widely used in all aspects of power systems, and their reliability directly affects the stability of power grids. Demand for high voltage switches continues to expand due to diversified demand such as domestic main grid expansion, off-grid new energy power plant & industrial enterprise construction, and overseas power grid investment. The domestic high voltage switch industry is estimated to be about 50 billion yuan.

The company has been deeply involved in high voltage switches for more than 50 years and has maintained a leading position in the field of switches. In 2023, the company's shares were transferred to China Electric Equipment Group, continuing to carry out changes to improve quality and efficiency, and achieve significant improvements at the management level. In the first three quarters of 2024, the company achieved net profit of 0.86 billion yuan, a year-on-year increase of 55.1%, and maintained rapid growth.

Investment logic:

Recommended logic 1: UHV is at the peak of construction, and the “15th Five-Year Plan” is expected to maintain a high level of investment.

Since 23, UHV has been intensively approved for construction, and the “three transfers and nine straight” projects have continued to advance. It is expected that UHV will approve the commencement of 2 transfers and 2 direct in '24. The State Grid has revealed that reserve projects include “five transmissions and nine direct”. The Scenic Area Project has a large gap in delivery channels. It is estimated that there will be more than 20 UHVDC plans during the “15th Five-Year Plan” period. According to data from the State Grid e-commerce platform, since 2022, the company has won 44%/36% of the bid amount for UHV combination electronics/1000kV combination appliances. It is estimated that 1000kV&750kV GIS will contribute 0.32/0.53/0.58 billion yuan to the company in 24-26 years. In the future, the company will continue to improve the layout of DC transmission equipment such as wall bushings; iteratively improve the performance of switching equipment in the direction of high speed and environmental protection.

Recommended logic 2: Growth in power generation & electricity consumption drives the expansion of the main network, and steady growth in transmission and transformation tenders.

From January to November '24, grid investment was +19%, and the first six batches of power transmission and transformation equipment had a cumulative total of 72.9 billion yuan in tenders, +8% over the same period. Grid investment accelerated to catch up with power investment. The company's core product portfolio of electrical appliances, isolators, and circuit breakers accounted for 20.4%/19.6%/25.4% of the bid amount for the State Grid transmission and transformation project respectively, ranking first among listed companies.

Recommended logic 3: With the rising popularity of the Internet, going overseas contributes to new growth. Since 2024, distribution network policies have been intensively introduced to emphasize the transformation and upgrading of distribution grids, and the company's medium- and low-voltage and distribution network product layout has gradually improved. Among them, the switch cabinet market dominates. The company's overseas business covers more than 70 countries and regions around the world. As the company strengthens exports of stand-alone equipment and accelerates the expansion of overseas markets with China Electric Equipment Group, international business is expected to provide new impetus for the company's development.

Profit forecasting, valuation, and ratings

The company continues to improve quality and efficiency. As an absolute leader in the switch sector, it fully benefits from the accelerated expansion of domestic main networks, rising distribution network prosperity, and accelerated investment in overseas power grids. We expect the company to achieve net profit of 1.27/1.51/1.73 billion yuan in 24-26, +56%/+19%/+14% over the same period, with a 25-year PE valuation. The target market value for 25 years is 31.7 billion yuan. The target price is 23.4 billion yuan per share, giving the first coverage a “buy” rating.

Risk Alerts

Power grid investment/UHV construction/overseas expansion falls short of expectations, industry competition intensifies risks