Report summary:

A high-quality high-voltage switch company, “one, two wings, one support” helped to increase its performance. The company was founded in 1970 and has been deeply involved in the power equipment industry for 50 years. It has now formed a “one, two wings, one support” pattern, which mainly covers the four major sectors of UHV, medium and low voltage, overseas, and operation and maintenance. The company was transferred to China Electric Equipment Group in early '23. The actual controller is the State Council's State-owned Assets Administration Commission, opening a new chapter in development. As of 24Q3, the company achieved revenue of 7.885 billion yuan in the first three quarters of 24, +5.88% year on year; net profit to mother of 0.857 billion yuan, +55.13% year over year, continuing to maintain a high growth trend.

Based on the high voltage business, it fully benefits from UHV & power transmission and transformation construction. In terms of UHV, the construction of a major scenic base has spawned electricity transmission demand across provinces. The State Grid plans to build a “24 to 14 direct” UHV project during the “14th Five-Year Plan” period. The “three transmission and nine direct” UHV project progressed smoothly in 22-23, and a new “five transmission and nine direct” additional line was added in 24. It is expected that UHV investment will remain high in 2025. In the 4th State Grid UHV equipment bid in 2024, the company won a total bid amount of 1.66 billion yuan, accounting for 9.26% of the total tender amount for UHV equipment. In terms of power transmission and transformation, combined appliances accounted for the largest share of the total tenders for transmission and distribution equipment of the State Grid in 2024, at 25.45%. Among them, the company showed a high market share, and the winning bid amount accounted for 23.58% of the total bid amount for six batches. As the cornerstone of the company, the high voltage sector is expected to fully benefit from UHV & transmission and transformation construction to help the company achieve high performance growth.

Distribution network investment has ushered in a boom, and the profitability of both internal and external repairs has continued to increase. A large proportion of distributed energy access is driving the demand for distribution network construction. In terms of investment, the total investment scale for power grid construction is expected to exceed 600 billion yuan in 2024, of which the distribution grid portion is expected to exceed 300 billion yuan. In terms of the market, the company has a complete product matrix for medium- and low-voltage distribution network transmission and distribution equipment, and is leading the market share industry in the bidding process for State Grid switch cabinets and circuit breakers integrated into primary and secondary columns. In terms of gross margin, the company focuses on improving internal quality and efficiency. The gross margin of the distribution network business has increased markedly in recent years and is expected to increase further.

Investment in global power grids is accelerating, and stand-alone equipment is on the rise when going overseas. Following the general trend of global new energy transformation, global grid investment reached 374.4 billion US dollars in 2023, an increase of 8.93% over the previous year. At the end of '23, the European Union announced an investment of 584 billion euros to carry out the largest grid transformation program in history. The company has been operating overseas for many years and actively integrated into the “Belt and Road” construction. It has successfully entered the high-end European market and laid out other overseas markets, gradually transitioned from overseas EPC construction to stand-alone equipment exports, and achieved market development with high-quality equipment. The overseas power equipment market has broad space and high gross margin is expected to become a new growth point for the company's performance.

Based on operation, maintenance and repair of switchgear, diversified business expansion is realized. The company is based on the operation, maintenance and repair of switching equipment and gradually extending it to the entire station, distribution network, transmission line, diversified expansion to create a new growth point for maintenance.

Profit forecast: The company's net profit for 2024-2026 is expected to be 1.201/1.565/1.884 billion yuan, respectively, and the corresponding PE is 22/17/14 times, respectively, maintaining a “buy” rating.

Risk warning: International operating risks, profit forecasts and valuation judgments fall short of expectations