China Securities Co., Ltd.: Mild inflation but expanded production constrained, clear upward signal for lithium battery energy storage sector.

China Securities Co., Ltd. released a research report stating that after summarizing the annual and quarterly reports of the power equipment and new energy industries, it was found that the overall industry is transitioning from deflation to inflation, with only the large storage segment experiencing a year-on-year decline in revenue, while the rest are experiencing year-on-year growth. For example, the photovoltaic industry achieved its first year-on-year revenue growth in 7 quarters, and the growth rate of revenue for lithium batteries accelerated in Q1. This is mainly attributed to the emergence of new demand drivers in energy storage, which has reversed the supply-demand situation or the bottoming-out effect brought about by anti-circular policies. The main points of view of China Securities Co., Ltd. are as follows: On the production expansion side, the industry as a whole remains restrained, which is different from market expectations. Previously, the market believed that the recovery in demand would inevitably lead to a new round of capacity arms race. However, after experiencing painful lessons, most industry participants still have lingering fears, especially in the face of recovering demand for lithium battery materials. Although many companies claim to have grand expansion plans, the expansion on the financial statement side seems tepid. While there was a slight increase in Q1 26, it can be determined as a low-level exploratory slight growth overall. On the demand side, the probability of lithium battery energy storage exceeding expectations is still high (mainly benefiting from both total volume and unit "charged capacity", as detailed in this report). Especially as the business climate strengthens in the second half of the year, an important judgment is madegiven the high base in 2026, the lithium battery industry may still maintain a growth rate of around 25% in 2027 (mainly driven by energy storage). The planned production expansion announced by the lithium battery industry (ranging from 25% to 40% at different levels) overall matches this growth, but the actual implementation of capacity expansion remains to be verified. From an industrial perspective, it is recommended to continue to maintain the current status and avoid blind expansion. In terms of valuation, the overall valuation of the sector falls between 18-40 times the expected performance for 2026. Sectors with high valuations include: thermal engines, AIDC power equipment, gas turbines, lithium battery diaphragms and copper foil, photovoltaics, etc., while sectors with relatively low valuations include: lithium battery aluminum foil, positive and negative electrodes, electrolytes, lithium carbonate, high-voltage power grids (domestic), large storage, etc. The low valuation sectors especially attract attention, and the institution indicates that they will focus more on examining whether there are pricing errors in these undervalued sectors. Investment recommendations: Adhere to the core values of supply and demand first, valuation second. Place greater emphasis on valuation in the supply and demand pricing paradigm, focus on the power shortage industry chain, be bullish on sectors such as lithium battery energy storage, gas turbines, etc., and pay attention to undervalued varieties such as domestically produced high-voltage power equipment. 1. In particular, the large storage sector is the only industry sector that continued to deflate in the first quarter, temporarily impacted by the rising cost of raw materials suppressing performance. Valuation has also been affected, but special attention should be given starting from the second quarter. 2. It is expected that the large storage sector, lithium batteries and materials will continue to show high growth in performance compared to the previous quarter in the second quarter, with a generally moderate valuation level, which is worth continued focus. 3. In the paradigm of order or marginal changes in pricing, pay close attention to changes in orders for companies in the domestic gas turbine industry chain, AIDC, sodium batteries, European offshore wind, etc., as they may serve as direct catalysts. 4. It is recommended to avoid sectors such as photovoltaics and domestic offshore wind (mainly observing policy changes), which have high valuations but are difficult to support based on fundamentals.