China Securities Co., Ltd. Semi-Annual Report Overview on Power Equipment and New Energy Industry: Prosperity Realized but Valuation Pressured, Seeking Positive Variables for Demand

China Securities Co., Ltd. released a research report stating that in Q2, lithium battery energy storage recorded high prosperity in revenue, while offshore wind and photovoltaic sectors have declined, reflecting that the industry is currently hovering at the bottom. The power equipment sector continues to enter a prosperous cycle, particularly with the export chain performing well. However, concerns about the future have depressed the valuation of the sector. On the expansion front, the industry remains overall mild. Investment suggestions include: The large-scale energy storage, household energy storage sectors, lithium batteries, and materials have started to see performance growth in the second quarter, with supply and demand conditions remaining favorable. Recently, however, challenges from changes in the external environment have significantly lowered the valuation levels, making it worthy of continued attention. In terms of orders or pricing based on marginal changes, focus should be on companies in the domestic gas turbine industry chain, AIDC, and the European offshore wind projects regarding changes in orders. The main points from China Securities Co., Ltd. are as follows: By organizing the semi-annual reports of the power equipment and new energy sectors, a clear divergence within the industry was found. Lithium battery energy storage realized high revenues (primarily impacted by delivery schedules for major stocks like Sungrow Power Supply in the first half of the year). The decline in offshore wind and photovoltaics reflects that the industry is currently at a bottom, while the power equipment industry continues to enter a prosperous cycle, especially with the export chain performing well. However, concerns regarding the future have led to a decrease in the sector's valuation. In terms of expansion, the overall industry remains mild. From various indicators (newly constructed projects and cash expenditures for acquiring fixed assets), the sequential growth rate in Q2 does not show significant improvement. On the demand side, lithium battery energy storage has fulfilled its high prosperity as expected, maintaining the prior judgment that the lithium battery industry may still achieve around 25% growth rate by 2027 (primarily driven by power recovery, with energy storage showing a more pronounced drive). The announced expansion volume in the lithium battery industry (ranging between 25%-40% across different segments) matches this overall scenario. Currently, due to weak growth expectations in demand, the overall valuation of the sector has fallen to a PE of 15-20X based on expected performance in 2026, with the 2027 performance expectation at 10-15X. If subsequent demand expectations are fulfilled, there will be significant potential for valuation recovery. Overvalued sectors include: AIDC power equipment, gas turbines, copper foil, photovoltaics, etc.; while sectors with relatively lower valuations include: lithium batteries, lithium carbonate, etc. Risk warnings Photovoltaics and energy storage: 1. The upstream raw material supply increases, and the midstream manufacturing sector accelerates expansion, leading to intensified competition in the industry. Currently, capacities across the main industrial chain are large, and some new players plan to expand capacity. If upstream raw materials remain abundant and expansions across segments can be realized, industry competition is expected to intensify; 2. Bottlenecks in grid absorption and related segments may result in demand falling short of expectations. In recent years, the speed of new energy installations and grid connections in China, the U.S., and Europe has been rapid, which may impact grid absorption capacity and slow the growth rate of new photovoltaic installations; 3. Rapid diffusion of new technologies may lead to decreased profitability. The current expansion plans for TOPCon batteries in the photovoltaic industry are substantial. If there is a subsequent acceleration in industry expansion and minimal disparity between players, this may result in a risk of decreased profitability for TOPCon. Lithium batteries: 1. Downstream new energy vehicle sales and production may fall short of expectations: sales may be affected by weak demand; production may be impacted by significant fluctuations in upstream raw material prices and repeated power restrictions, thereby affecting the profitability and valuation of the industry chain; 2. Raw material price rises beyond expectations: since 2021, raw material prices have been on a continuous rise, with significant volatility, and high and unstable prices can impact end demand and affect the profitability of related companies; 3. Progress on key projects in the lithium battery industry chain may fall short of expectations: advancement of key projects is crucial for sustaining revenue and profits for related companies and reflects growth capability. If progress falls short, it will impact both current and long-term performance, as well as the stability of the industry chain. Wind power: 1. Wind power planning policies may not drive progress as expected; 2. Progress on deep-sea wind power projects may not live up to expectations: delays in the scale and progress of construction will affect the industry's large-scale development; 3. Increased competition in the industry may damage profitability across segments: competition in the wind power sector is relatively fierce, and if competition intensifies, aggressive price wars may harm profitability for industry players; 4. Industry cost reduction may not meet expectations: large-scale development in deep-sea wind necessitates cost reductions from various upstream components, such as floating platforms and subsea cables, which can hinder large-scale promotion and development; 5. Raw material price volatility risks: The main upstream raw material for wind power is steel, and significant fluctuations in steel prices pose risks to the profitability stability of enterprises. Power equipment: 1. Demand aspects: Changes in national infrastructure policies may lead to power investment scale falling short of expectations; grid investment scale may also be less than anticipated; decreasing growth rates in new energy installations will diminish demand for power equipment; declining growth in overall electricity consumption, etc.; tendering progress for the two networks may not meet expectations; progress in ultra-high voltage construction may not be as expected; 2. Supply aspects: Rising prices of copper resources, steel, and other bulk commodities; tight supply of power electronic components; progress in domestic production may fall short of expectations; 3. Policy aspects: Support for new electricity markets may be less than expected; progress on electricity price mechanisms may lag behind expectations; progress on the electricity spot market may not meet anticipations; the peak-valley price differential may not be as anticipated; 4. International situation: Rapid alleviation of the energy crisis and a swift drop in energy prices; deepening international trade barriers; 5. Market aspects: Significant changes in competitive landscape; increased competition may cause profitability in various aspects of power equipment to fall below expectations; rising costs for transportation, etc.; 6. Technological aspects: Progress in cost-reduction technologies may lag expectations; it may be challenging to further enhance technological reliability; 7. Mechanism aspects: Progress on electricity market mechanisms may not meet expectations; supporting services for the spot market, capacity compensation, peak-valley price differentials, etc., may be lower than anticipated; emerging market mechanisms such as virtual power plants and demand-side management may also not meet expectations.