China Securities Co., Ltd.: Securities: The electric power equipment sector continues to be in a high boom cycle and is expected to enter a phase of resonance between performance and orders in the second half of the year.

date
07/09/2024
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GMT Eight
China Securities Co., Ltd. released a research report stating that, based on the fitting of the fixed asset growth rates of various sectors in the next year due to the addition of new construction projects, it was found that the supply growth rate in the power equipment industry, especially in the ultra-high voltage direction, is relatively low. With high certainty in industry demand growth, it is expected that the power equipment sector will continue to be in a high period of prosperity, and will enter a phase of performance and order resonance in the second half of this year. Among other sectors, the global household storage and large storage industries are expected to remain in a high period of prosperity, with good supply-demand patterns in the wind industry but requiring attention to how demand will be released on the demand side. Currently, demand growth for photovoltaics, lithium batteries, and land wind is still lower than supply growth, with a focus on the timing of industry supply-demand marginal improvement and downstream demand growth rates. The main views of China Securities Co.,Ltd. Securities are as follows: Inventory review of the current situation of the electrical industry: In the second quarter, the financial indicators of the power equipment industry performed better than other electrical industries. From a supply-demand perspective, the prosperity of the power equipment sector, especially in the ultra-high voltage and offshore directions, is relatively high in the next year. Capital expenditure growth rates in sectors such as photovoltaics and lithium batteries have significantly declined, awaiting a return to balance in industry supply and demand. Financial indicators show that in the second quarter, the revenue of the power equipment and energy storage sectors increased year-on-year, with the power equipment sector showing a more significant increase. Due to falling product prices, the revenues of industries such as photovoltaics and lithium batteries have slightly decreased year-on-year. In terms of profitability, the gross profit margin and net profit margin of the power equipment sector have slightly increased year-on-year, while the profitability of lithium battery leaders has improved due to their industry position. However, the profitability of most other sectors has declined year-on-year. Looking at the order growth reflected in contract liabilities, the year-on-year growth rate of the power equipment sector is also significantly higher than in other sectors. Additionally, looking at capital expenditure, construction projects, and fixed assets as indicators of industry supply growth, the fixed asset growth rate in the power equipment sector is low, especially in the ultra-high voltage direction where fixed assets have almost not grown at all. Due to the clear decline in profitability in industries such as photovoltaics, lithium batteries, and European household storage, capital expenditure growth rates have significantly decreased, indicating a substantial weakening of industry expansion intentions. China Securities Co.,Ltd. Securities assumes that the new construction projects in each sector will be converted into fixed assets within the next year, and calculates the fixed asset growth rate of each sector for the next year, comparing it with the demand growth rate of each industry. The conclusion drawn is that the demand growth rates for the power equipment, offshore wind, large storage, and global household storage sectors are faster than the supply growth rates, and they are expected to continue to remain in a high period of prosperity. For lithium batteries, photovoltaics, and European household storage, the fundamental situation is currently at an L-shaped bottom position. The demand for lithium batteries may see a significant improvement in the industry supply-demand situation in the second quarter of 2025. Due to industry expansion inertia, the year-on-year growth rate of industry fixed assets in the next year is expected to remain at 25%-30%. Although there may be a slight decline in the first and second quarters of 2025, it is not expected to be significant. The industry is expected to achieve supply clearance between the second half of 2025 and 2026. European household storage needs to pay attention to changes in inventory margins and local household storage demand. Power equipment: With increasing investment in the power grid and continued high prosperity in overseas operations, rapid growth in performance and profitability, the sector is expected to enter a resonance zone of orders and performance, and remains highly valued. Demand side: In the domestic market, investment in the power grid is increasing, especially in the construction of ultra-high voltage lines, with forecasted investments exceeding 600 billion RMB in 2024, an increase of over 71.1 billion RMB compared to the previous year, achieving a growth rate of over 10%, maintaining rapid growth in the double digits, and sustaining high prosperity in the industry. In the overseas market, upgrading and construction of power grids have become important global issues, leading to high demand for power equipment worldwide. The overall supply-demand balance is tight. First-half 2024 performance: Maintaining fast growth in performance, profitability is increasing, overseas operations are growing in volume and profit. Domestic and overseas demand is positive, with core company revenues steadily increasing, maintaining fast growth in performance (strong demand for primary equipment, large orders for electricity meters in the second quarter, etc.). The profitability of primary equipment and electricity meter companies is on the rise, mainly due to cost reduction, product upgrades/digitization, and increased sales of high-margin products (such as high voltage, overseas, and pure equipment categories). Profitability of overseas operations remains high, with growth in volume and profit. Investment recommendation: China Securities Co., Ltd. Securities believes that the power equipment sector remains the most certain direction in the electrical industry, with strong certainty that the second half will see both order and performance growth, potentially leading to a valuation switch. Energy storage: Large storage and household storage sectors witness global breakthroughs, with the Asian, African, and Latin American markets leading energy storage development. Reviews of the development of global energy storage promote a global breakthrough in energy storage demand, with the market gradually realizing the potential of the Asian, African, and Latin American markets. In the second quarter, sales of large storage and household storage showed a significant increase compared to the previous quarter. Simultaneously, the unexpected release of volume is expected to offset the decline in profits. Recommended stocks include leading integrated energy storage companies, household storage inverter leaders, and flexible overseas targets: Energy storage batteries: Lithium carbonate prices have dropped to below 8,000 RMB per ton, and energy storage batteries are being traded at prices below 0.3 RMB/Wh. Energy storage battery shipments in the second quarter have generally increased, but profitability has been slower to recover due to impairments. Inverters (household storage): In the second quarter, household storage inverters showed a significant increase compared to the previous quarter, with energy storage demand in Asia, Africa, and Latin America growing beyond expectations, maintaining high levels of profitability. PCS (large storage): High growth in revenue and shipments in the second quarter, stable gross profit margins, with further shipment growth expected in the second half of the year and substantial progress in overseas sales. Integration: Major contracts in the Middle East have been secured, and the market is gradually realizing the broad overseas demand for large storage, although profitability is lower than in the US, it still significantly outperforms domestic levels. Wind power: The turning point in wind turbine profitability is approaching in the second quarter, with high stabilization in offshore cables, while tower and component profitability remains low. First-half 2024 market and fundamental performance: Reviewing the wind power market in the first half of 2024, the sector showed a decline, with the wind power index falling by 23%, and the offshore wind index falling by 15%, with leading companies in offshore wind showing increases but overall decline in the sector. Reasons for the decline include insufficient construction leading to low shipments by companies (with offshore wind conditions worse than onshore wind), resulting in a significant year-on-year decline in performance in the first and second quarters. While historically, bidding volumes determine stock price trends, the increase in bidding volumes in 2024, although significant, has led to lower unit profitability for companies.Still under pressure, the current market is paying more attention to "profit" in addition to "volume".Performance of various links in the industrial chain in the first half of 2024: - Hosts: Shipments from various host companies increased or decreased compared to the same period last year, with Sany showing a significant increase in shipments. The gross profit margin of many host companies has improved year-on-year in the first half of the year. - Tower: Domestic market shipments were sluggish, except for Taisheng, the revenue and profit of listed companies did not decline year-on-year, other companies all saw a decrease. - Cable: The first half of the year is the off-season for cable delivery/receipt, but the gross profit margin of the cable sector remains high and stable. - Castings and forgings: Overall revenues, gross profit margins, and net profit margins have shown a significant decline due to price declines and weak shipments (this link is the most sensitive to capacity utilization rates). - Blades: In the first half of the year, revenue from Sinoma Science & Technology blades decreased, while revenue from ZhuZhou Times New Material Technology remained the same, with expected market share increase. Sinoma Science & Technology saw a 1.7% year-on-year decrease in blade business gross profit margin, which was better than expected. Key areas of focus in the future: Bidding and installation growth in 2024, with Landwind having a certain amount of certainty. Focus on profit changes: host gross profit margin, price changes; price negotiations for components; offshore wind power installation is a core contradiction, need to focus on specific implementation and events that will enhance valuation of Qingzhou Fan Shi project commencement, bidding for other offshore wind projects; deep-sea policy, overseas order acquisition. Lithium batteries: Overall capacity utilization rate increased compared to the previous quarter in 2024 Q2, but profitability remains at the bottom due to price declines in middle downstream materials and impairment pressure. In terms of volume, benefiting from a 30% increase in electric vehicle sales, shipments at various stages of lithium batteries achieved a similar growth rate, with capacity utilization rates increasing from 40%-60% in Q1 to 60%-80% in Q2, and some stages and companies achieving full capacity in May and June. In terms of profitability, increased utilization rates have reduced depreciation pressure and unit costs, leading to improvements in unit profits for batteries, cathodes, and anodes (cathodes saw slight improvements due to impairment effects), while electrolytes and separators faced downward pressure on prices in Q2 and a decrease in unit profits. Solar energy: Revenue and profits are under pressure, with significantly reduced startup rates and capital expenditures, showing signs of bottoming out in the industry. Since Q2, the oversupply situation in the industry chain has worsened, with most stages' operating income and net profits under pressure. In Q2, due to continuous price declines, primary materials such as silicon materials, silicon wafers, and cells started to incur gross profit losses, and all four primary material stages saw net losses. Receivables risks have gradually increased at the secondary materials end, with credit impairment losses in Q2 having a significant impact on net profit margins. Due to significant operational pressures, most stages have reduced their startup rates and slowed down their capital expenditure plans, with secondary material stages focusing on strengthening collections. Since June, the industry's startup rates have continued to decline, with Q2 capital expenditures remaining low as of in-progress projects gradually decrease. Secondary materials such as glass and films have seen positive cash flows since June, mainly due to companies strengthening collections and accounts receivable management. Looking ahead, China Securities Co., Ltd. predicts that the industry's clearance time may be between late 2025 and 2026, considering current effective silicon material capacity (based on July startup rates) of about 800GW. Assuming industry demand growth of around 20%, global demand is expected to cover effective capacity by 2026. If demand exceeds expectations or silicon material capacity exits accelerates, clearing could happen by the end of 2025. Risks: - Cost: If renewable energy generation costs do not decrease and the installation scale falls short of expectations, then renewable hydrogen production could be hindered. - Technological iteration: If electrolyzer technology developments do not meet expectations, it could hinder the advancement in green hydrogen production costs. - Market demand: Industry standardization based on market demand could affect the R&D and production side's cost sharing. - Policy: Effective policy promotion in the hydrogen energy industry's early stages of industrialization can have a positive effect on the industry's development. If policy support is lower than expected, it will affect the industry's development.

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