Preannounced 1H24 revenue +16.3%, attrib. net profit +26.6% YoY

Sieyuan Electric preannounced its 1H24 results, estimating that revenue rose 16.3% YoY to Rmb6.17bn and attributable net profit grew 26.6% YoY to Rmb887mn; operating margin rose 1.4ppt YoY to 17.1%, and net margin grew 1.2ppt YoY to 14.4%. We estimate that 2Q24 revenue rose 12.1% YoY or 32.0% QoQ to Rmb3.51bn, and attributable net profit grew 8.7% YoY or 44.2% QoQ to Rmb524mn.

The amortization expenses for equity incentives will be about Rmb110mn in 2024, and we estimate that about Rmb55.5mn was recognized in 1H24 (vs. Rmb0 in 1H23), which, if added back, implies net profit of Rmb943mn in 1H24 (+34.6% YoY) and Rmb552mn in 2Q24 (+14.4% YoY). We think the firm's preannounced 1H24 results are largely in line with our expectations and consensus.

Trends to watch

Ample orders to support faster revenue growth. In 1H24, revenue rose 16.3% YoY, slightly lower than the full-year growth target of 20%. We attribute this to the pace of delivery of some projects. We expect revenue growth to accelerate gradually in 2H24, given the firm's ample orders on hand (new orders excluding tax totaled Rmb16.51bn in 2023, up 36.22% YoY) and the average order delivery period of about one year.

With steady domestic demand and rapid growth in overseas markets, we expect the firm to meet its target for new orders. The firm targets to secure Rmb20.6bn of new orders (excluding tax) in 2024, up 25% YoY, which shows its confidence in growth. Looking ahead, we expect domestic and overseas demand for electrical equipment to remain strong and the firm's orders to maintain solid growth.

1) On-grid: The total value of State Grid's first three batches of tenders for substation equipment rose 8% YoY. We believe the construction of main grids will remain strong, driven by the demand for renewable energy absorption and the need to ensure power supply. The firm's main products maintained a stable market share at State Grid's tenders. Its 110kV geographic information system (GIS) products hold a 9.4% share in State Grid's first three batches of tenders for substation equipment, ranking third, while its 220kV GIS products hold a 10.5% share, ranking fourth.

2) Off-grid: The installed photovoltaic (PV) and wind power capacity rose 52.2% and 20.5% YoY over January-May.

3) Overseas: Several overseas power grid investors and operators, such as National Grid and Exelon, have raised their capex to upgrade and expand their power grids. Meanwhile, power supply was tight in emerging countries such as the Philippines, Pakistan, and Mexico in 1H24, leading to frequent power outages. China's power equipment exports grew steadily. Data from the General Administration of Customs shows that the export value of major power equipment rose 15.2% YoY over January- May, with transformers and high-voltage switches up 23.1% and 13.4% YoY.

We are optimistic about the new global power system construction cycle and see opportunities for Chinese manufacturers to secure overseas orders. As a leading company with extensive overseas distribution channels and diversified products, Sieyuan's overseas business growth may be more sustainable and have higher growth potential than expected.

Financials and valuation

We keep our 2024 and 2025 net profit forecasts unchanged at Rmb2.06bn and Rmb2.55bn. The stock is trading at 24x 2024e and 19x 2025e P/E. We maintain an OUTPERFORM rating and TP of Rmb76.0, implying 29x 2024e and 23x 2025e P/E and offering 19.6% upside.

Risks

Disappointing power grid investment; rising raw material prices; disappointing overseas business expansion.