According to the report released by Everbright Securities, the Asian, African, and Latin American markets are benefiting from the accelerated construction of local economy-driven power grid infrastructure and the continuous progress of the Belt and Road Initiative. The export of China's power equipment is expected to continue to perform well. The European and American markets will also see increased prosperity due to the development of AI, reshoring of manufacturing industries, power grid updates, and accelerated new energy construction. Currently, China focuses more on main grid investment, but there is significant pressure for distributed energy to be connected to the grid. With the acceleration of domestic power grid investment, the start of a new round of rural power grid transformation, the acceleration of digital transformation, and the continuous implementation of incremental distribution network policies, it is expected that China's distribution network construction will continue to improve. The focus will be on the driving forces brought by the replacement of old infrastructure with new ones and digitalization.

The main points of view of Everbright Securities are as follows:

The power grid sector has strong counter-cyclical adjustment attributes, and China's power grid investment is expected to continue to grow.

Since 2023, the power grid has opened up growth space in the subdivided areas of power absorption and export. Relevant companies have achieved steady and robust growth in profitability, resulting in continuous excess returns in the power grid sector. By reviewing the historical correlation between the growth rate of China's power grid investment and GDP, as well as the relationship between power grid investment and power generation investment, it is believed that increasing power grid investment is one of the important means to stimulate economic development, and the rapid construction of power sources also requires corresponding power grid construction. Currently, China's power grid investment is expected to continue to accelerate, with State Grid and Southern Power Grid being the main driving forces.

Global power grid investment continues to be strong, with both main and distribution networks resonating with export prosperity.

Power equipment exports: In recent years, China's power equipment exports have maintained a high level of prosperity. On the one hand, transformer exports to Europe and the United States can still maintain a fast growth rate due to factors such as the rapid development of AI driving the accelerated construction of data centers, the reshoring of American manufacturing industries, the aging of power grids, and the high prosperity of new energy construction. On the other hand, due to the impact of the high base in 2023, the overall growth rate of exported electricity meters has declined in 2024, but the growth rate in the Asian, African, and Latin American markets remains strong. From the perspective of power equipment orders from overseas companies, the demand remains high, and China's power equipment exports are expected to continue to benefit.

Ultra high pressure: In 2023, it will be a big year for the official start of ultra high pressure construction in our country, and in 2024, the 'two trades and three straights' ultra high pressure project will start construction. In the next few years, ultra high pressure construction will continue to be in a high prosperity period, and ultra high pressure equipment companies have a strong certainty of performance growth. The key focus will be on transformers, converters, and combination electrical components. In addition, our country's export of ultra high pressure technology already has sufficient accumulated experience, and the application of flexible direct current (DC) technology for ultra high pressure has entered an accelerated development stage, with significant growth potential in the future.

Distribution side: Building a new type of power system is the main task of the new era power reform, and the construction of the distribution side is also a key focus. In 2023, the investment in China's distribution network amounted to 290.2 billion yuan, a year-on-year increase of 5.37%, reaching a phase of relative low. In the future, benefiting from overall electricity network investment growth, the start of a new round of rural network transformation, accelerated digital transformation, and the promotion of incremental distribution network reform, China's distribution network construction is expected to gradually accelerate.

Investment advice: From ultra high pressure to the distribution side, electricity network investment and security will continue to increase, and it is recommended to continue to focus on investment opportunities in electricity equipment exports, ultra high pressure, and the distribution side.

Electricity equipment exports: The Asian, African, and Latin American markets benefit from the accelerated development of local economies driving electricity network infrastructure construction, as well as the continuous advancement of the Belt and Road Initiative. China's electricity equipment exports are expected to continue to improve. In the European and American markets, driven by artificial intelligence (AI) development, industrial reshoring, electricity network renewal, and accelerated new energy construction, the prosperity will continue to rise. The prosperity of China's electricity equipment exports is expected to continue, and still has long-term investment value. It is recommended to pay attention to Ningbo Sanxing Medical Electric (601567.SH), Sieyuan Electric (002028.SZ), Hexing Electrical (603556.SH), Jinpan Technology (688676.SH), and Huaming Power Equipment (002270.SZ).

Ultra high pressure: The current construction of ultra high pressure in our country is a certainty, and the construction of large bases can therefore continue to make progress. In 2023, it will be a big year for the official start of ultra high pressure construction in our country, and in the next few years, ultra high pressure construction in our country will continue to be in a high prosperity period, with related companies having strong certainty of performance growth. In addition, the future of overseas ultra high pressure construction and flexible direct current (DC) also has significant growth potential. It is recommended to pay attention to Henan Pinggao Electric (600312.SH), XJ Electric Co., Ltd. (000400.SZ), China XD Electric (601179.SH), Baoding Tianwei Baobian Electric (600550.SH), and Nari Technology (600406.SH).

Distribution side: Currently, China focuses more on main network investment, but the integration of distributed energy poses significant pressure. Against the background of accelerated domestic electricity network investment, the start of a new round of rural network transformation, accelerated digital transformation, and the continuous promotion of incremental distribution network policies, it is expected that China's network construction will continue to improve. Subsequently, key focus should be on the driving force brought about by equipment replacement and digitalization. It is recommended to pay attention to Dongfang Electronics (000682.SZ), Willfar Information Technology (688100.SH), Beijing Sifang Automation (601126.SH), Acrel Co., Ltd. (300286.SZ), Ningbo Sanxing Medical Electric (301162.SZ), and State Grid Information & Telecommunication (600131.SH).

Risk analysis: Risks of electricity network investment falling short of expectations, ultra high pressure construction falling short of expectations, overseas geopolitical risks, digitalization of the distribution side and electricity network falling short of expectations, and intensified competition.