Core ideas

The company's biggest highlight is energy storage converters (PCS), which are also one of the most flexible targets in overseas markets in the A-share energy storage industry chain, and are scarce. In the future, the global energy storage market will grow at a 5-year compound growth rate of more than 30%. In the process of the global energy storage explosion, competition in the integrator sector will intensify, but after cross-border giants such as Ningde Era and BYD entered, most of the PCS links will have to rely on external procurement, and integrators/EPC+ third-party equipment suppliers have become one of the preferred models for overseas owners. At the same time, the company's excellent product quality and long-term overseas layout have made the company one of the few Chinese third-party independent PCS companies that can now enter the list of qualified suppliers for overseas owners. In recent years, the company has gone hand in hand, in a centralized and structured manner. In the early days, it laid out overseas production capacity with foresight, and finally reaped benefits. Currently, the company is on the singularity of performance growth. Revenue is expected to enter a fast track of growth starting in 2025, which will clearly dilute all expenses and expenses, and there is a high probability that the performance will exceed expectations.

summary

Energy storage is one of the fastest growing sub-sectors in the power equipment and new energy industry. We predict that the world will add 259 GWh of installed capacity in 2025, an increase of 47% over the previous year. Energy storage PCS is expected to become the core of the company's next performance explosion:

1) PCS technology iterates rapidly, has high barriers, a stable pattern, and guaranteed profitability. It is the most beneficial part of the energy storage explosion.

2) The company adheres to the positioning of PCS as an independent supplier. In North America, due to its relatively low value share, outsourced PCS does not affect owners receiving “local manufacturing” subsidies, and independent third-party PCS are favored by owners; in the Middle East, GWH grade energy storage projects have exploded frequently, giants have gone out of business, and energy storage integration is intense, but most PCS must be imported from outside, which is expected to bring a large number of orders to the company.

3) The company has ranked the top two in the domestic energy storage PCS market in recent years. The products cover centralized, string, and household scenarios, adopt a modular design concept, and the new product also has network configuration functions.

The company initially established overseas production capacity cards for the Indian and Middle Eastern markets. The product layout is comprehensive, and it is on top of the singularity of accelerating revenue and diluting expenses, driving performance beyond expectations.

Demand in emerging markets for PV has exploded since this year, and the company's performance has increased significantly:

1) In 2017, the company set up a factory in India. It is one of the few photovoltaic inverter companies with overseas production capacity. Since this year, the company has fully benefited from the outbreak in the Middle East and India, and achieved 10GW overseas shipments.

2) The company's products cover centralized+distributed+string type. The Chinese market is mainly string type, and the Middle East and India markets are mainly centralized. The company has the leading share of listing in both types of markets.

3) Owners in the Middle East market have a high degree of autonomy over equipment suppliers. EPC parties must use equipment suppliers in the short list of owners and must be examined by the owners, so the pattern is better than domestic ones.

4) The company has obtained certification in the European and American markets, and the photovoltaic market is expected to achieve greater breakthroughs.

5) Even in the domestic market, where “serious internal pressure” is common, the gross margin of large storage PCS is still higher than 20% due to relatively high barriers in power electronics and the rapid growth rate of the industry.

6) Overseas markets are more profitable. Overseas storage and photovoltaics have entered the fast track of development. The harvest period for the company's overseas business has arrived. It is expected to enter a rapid revenue growth range in 2025, while expenses will not increase linearly with revenue, and the company's performance has a lot of room to exceed expectations.

We believe that the energy storage sector's supply and demand situation in 2025 is relatively optimal in the power generation industry, while the growth rate is close to 50%, which is outstanding. Looking at the next five years, the energy storage demand space will be 5 to 6 times larger than the current scale. Under global differentiated pricing, the share of overseas business of Chinese companies in the industrial chain will increase, which can bring considerable profit flexibility. Unfortunately, due to the influence of the export chain and current market style, the current valuation of the energy storage sector is only about 15 times, ranking low in the industry. Such pricing is unreasonable. We believe that core leaders, including Shanghai Energy Electric, can rely on continuous performance, fundamentals, and verification for the three quarters of 2024Q4-2025Q2 to fix unreasonable pricing in the current market.

We upgraded our company to a “buy” rating

It is estimated that in 2024-2026, the company's PV inverter shipments (confirmed delivery caliber) will reach 26.3GW, 34.5GW, and 43GW, of which overseas shipments (confirmed delivery calibers) will reach about 7 GW, 13 GW, and 19.5 GW, respectively; energy storage PCS shipments will reach 7.3 GW, 11 GW, and 15 GW, of which overseas shipments will reach 0.8 GW, 2.5 GW, and 5 GW respectively. The expected 2024-2026 earnings will be 0.562, 0.923, and 1.236 billion yuan, respectively, and the valuation will be 28, 17, and 13 times, respectively, raised to a “buy” rating.

risk analysis

1) Demand side: The growth rate of installed domestic energy storage fell short of expectations, and the growth rate of new energy investment declined; overseas energy storage demand fell short of expectations, and overseas carbon neutrality progress was slowing down.

2) Supply side: The supply of power electronic devices such as IGBTs is tight, and the progress of localization falls short of expectations; prices and processing costs of raw materials such as copper, aluminum, and steel have risen.

3) Policy aspects: Support policies related to energy storage fell short of expectations; compensation standards for capacity electricity prices fell short of expectations; electricity spot market progress fell short of expectations; electricity peak and valley price differences fell short of expectations.

4) In terms of the international situation: international trade barriers have deepened, exports have been blocked; local production requirements have increased and costs have risen; international conflicts have led to rising shipping costs and extended delivery times.

5) Market side: Increased competition has led to lower gross profit margins and profitability of energy storage batteries, integrators, and PCS manufacturers than expected; the company's market competition strategy is wrong.