Guosen: New elements and new models are reshaping the underlying logic, and the investment in distribution networks is expected to usher in a new cycle.

Guosen released a research report stating that with the continuous increase in the penetration rate of new energy in the power system, the volatility and randomness on the generation side continue to strengthen. The electricity load must match the characteristics of the generation side, and the electricity consumption side will gradually transition from "on-demand usage" to "price-based usage." New models such as electricity trading on the demand side, virtual power plants, demand side response, etc., make users interact with the distribution network in a complex, high-frequency manner in terms of energy, data, and instructions, restructuring the operation logic of the distribution grid. Distribution transformers are an important link to improve energy efficiency and update equipment. Currently, the coverage rate of high efficiency is less than 10%, and it is estimated that the annual average market space will exceed 40 billion yuan with a 10% improvement each year. Communication is the "nervous system" of the distribution network, and the emergence of new elements and models is expected to drive demand for communication modules, chips, gateways, and other equipment. The main points of Guosen are as follows: Trends in distribution networks: New elements and models reshape the underlying logic The installation and generation of distributed new energy continue to increase, the penetration rate of new energy vehicles continues to rise driving the rapid development of charging facilities for peak-valley price differentials in industrial and commercial energy storage. The access of the above "new elements" makes the energy flow and information flow of the distribution network shift from traditional "one-way transmission" to "two-way interaction," posing significant challenges for the power balance, scheduling, protection, safety and stability, equipment management, and data exchange of the distribution network. Since 2021, industrial and commercial users have gradually entered the market, and the proportion of market-based trading electricity volume continues to increase. With the continued increase in the penetration rate of new energy in the power system, the volatility and randomness on the generation side continue to strengthen. The electricity load must match the characteristics of the generation side, and the electricity consumption side will gradually transition from "on-demand usage" to "price-based usage." Virtual power plants are an important way of demand response, and various provinces have launched demonstration operations since 2021. New modes such as electricity trading on the demand side, virtual power plants, demand side response, make users interact with the distribution network in a complex, high-frequency manner in terms of energy, data, and instructions, restructuring the operation logic of the distribution network. Review of historical investment in distribution networks: Objective needs and boosting the economy jointly drive the current early stage of the third cycle. China's distribution network development can be divided into three cycles: 1998-2012, 2013-2019, and 2023-present. In the first cycle, two rounds of rural network transformation basically solved the problem of electricity consumption for the population without electricity. The second cycle witnessed a surge in investment driven by urbanization, improvement in power supply reliability, and steady growth. The third round of rural network transformation and investment explosion was driven by the joint efforts of the three cycles. From 2013 to 2016, the CAGR of distribution network investment reached 22%, and the proportion of grid investment increased from 44% to 57%. Since 2023, a series of heavyweight documents, such as the "Guiding Opinions on the Implementation of Rural Power Grid Consolidation and Enhancement Projects," the "Guiding Opinions on the High-Quality Development of Distribution Networks in the New Situation," the "Action Plan for the High-Quality Development of Distribution Networks," and the "Implementation Plan for Large-scale Equipment Renewal in Key Energy Areas," have been successively introduced. The distribution network is expected to usher in a new cycle of prosperity. In terms of driving factors, this round will be driven jointly by objective demands triggered by the construction of a new type of power system and the demand for economic growth. Future investment direction of distribution networks: Policy and demand jointly drive the emergence of multi-dimensional demand tailored to local conditions. Since the beginning of the year, top-level design documents for distribution networks and rural network transformation have been successively implemented, requiring distribution networks with a capacity of around 500 million kilowatts of distributed new energy and 12 million charging piles by 2025. By 2035, the basic completion of a modern rural power grid, the acceleration of the renewal of old network equipment, and the improvement of disaster prevention and reduction capabilities of distribution networks. Southern Power Grid stated that the investment scale of large-scale equipment renewal from 2024 to 2027 will reach 195.3 billion yuan, of which 100 billion yuan will be used for rural network transformation, striving for a 52% growth in investment scale by 2027 compared to 2023. State Grid revised its annual budget for grid investment in the middle of the year, and for the first time, annual grid investment exceeded 600 billion yuan. In June 2024, the new edition of the technical guidelines for planning and design of distribution networks was officially implemented, adding technical requirements for secondary systems of distribution networks after the access of distributed power sources and charging facilities, and adding technical requirements for the access of microgrids, charging facilities, and new types of energy storage. There are significant differences in the grid structure, load characteristics, degree of intelligence, and penetration rate of distributed energy in different regions of the distribution network, with different main contradictions. The transformation of distribution networks needs to be tailored to local conditions. Economically developed regions mainly in East and South China have carried out demonstration applications of new technologies and equipment. "Four can" is an important direction for the future development of distribution networks, and solutions centered on low-voltage substations are expected to become important means, and the national stock transformation market space can reach 50-65 billion yuan. At present, medium-voltage distribution networks mainly use three-level current protection, but in the future, it is necessary to introduce current differential protection to improve protection accuracy and timeliness. The automatic level of regional distribution switches of State Grid is about 34%, and the market space for transformation is about 60 billion yuan. Distribution transformers are an important link to improve energy efficiency and update equipment. Currently, the coverage rate of high efficiency is less than 10%, and it is estimated that the annual average market space will exceed 40 billion yuan with a 10% improvement each year. Communication is the "nervous system" of distribution networks, and the emergence of new elements and models is expected to drive demand for communication modules, chips, gateways, and other equipment. Analysis of distribution network bidding situation and market structure: Demand sources are relatively dispersed, and listed companies still occupy an important position. The main source of distribution network equipment bidding of State Grid comes from provincial tenders, while that of Southern Power Grid mainly comes from unified tenders. The average annual bidding amount of State Grid is about 50-70 billion yuan, and that of Southern Power Grid is about 8-10 billion yuan, with transformers accounting for 35%-40%, complete sets of equipment accounting for 45%-50%, and column-mounted circuit breakers accounting for 8%-10%. From a regional perspective, the top provinces (cities) for distribution network equipment procurement from State Grid include Jiangsu, Shanghai, Henan, Zhejiang, Shandong, Hunan, etc., with the top ten provinces accounting for 65% of State Grid's distribution network equipment procurement amount; procurement in Southern Power Grid's operating area mainly comes from Guangdong Province, accounting for nearly 50% of the equipment procurement in Southern Power Grid's distribution network. The competition structure of the main products in the distribution network is relatively fragmented, but listed companies still occupy an important position, with listed companies and their subsidiaries accounting for about 70%-80% of the amount awarded to the top ten companies in distribution network equipment for State Grid and Southern Power Grid in 2022-2023. Review of listed companies in distribution networks Distribution network equipment companies can be divided into regionally dominant companies and comprehensive companies. Regionally dominant companies focus on specific regions, with relatively single products, but in recent years.Leading companies actively promote the expansion of their advantageous regions and product lines. Typical companies include Guangdong Mingyang Electric (301291.SZ), Chongqing Wangbian Electric (Group) Corp., (603191.SH), Beijing Creative Distribution Automation (002350.SZ), ShiJiaZhuang Kelin Electric (603050.SH), Shanghai Holystar Information Technology (688330.SH), etc. Comprehensive companies are generally large-scale power equipment enterprises, with businesses covering both internal and external networks, main grid and distribution grid, primary and secondary directions. Typical companies include Dongfang Electronics (000682.SZ), NARI Technology (600406.SH), Beijing Sifang Automation (601126.SH), State Grid Yingda (600517.SH), Xj Electric Co., Ltd. (000400.SZ), Ningbo Sanxing Medical Electric (601567.SH), etc.Risk warning The total amount and pace of investment in the distribution network are lower than expected; the growth rate of distributed energy installations is lower than expected; the growth rate of the number of charging piles is lower than expected; the economic growth rate and electricity consumption growth rate are lower than expected; industry competition is intensifying, and the profitability level is lower than expected.