Prosperity Forecast Analysis of the Future Power Equipment Industry

The stock with the highest investment rating at present is Jinlong Co., Ltd., which has ranked first for two consecutive weeks. The top 20 stocks by investment rating are relatively scattered across industries, mainly covering chemicals, tap water, power equipment, construction engineering, textiles and apparel. Multiple signals indicate that power grid investment will reverse its sluggish performance in the first half of the year and roll out intensively in the coming months. The operating conditions of the electrical equipment sector will improve, and earnings will gradually rise. This paper presents a brief analysis of the power equipment industry.

The power equipment industry will maintain strong prosperity in the fourth quarter. First, power consumption demand keeps improving and the power mix continues to adjust. Second, new energy develops rapidly and power grid investment will accelerate. Third, stronger expectations for energy conservation and environmental protection policies will drive equipment demand. Corporate earnings have entered an upward trajectory. Revenue growth slowed in the first half of the year, yet gross profit margins improved. Revenue growth in the second half will outpace that of the first half, and high growth will resume in 2010.

New energy development is shifting from "quantity" to "quality". Concerns raised by the China Electricity Council over quality defects in wind power development, together with warnings issued by the State Council against low-level redundant construction in sectors such as polysilicon, show that greater emphasis is placed on quality improvement in new energy development. The state’s commitment to new energy development will remain unchanged, but financial and policy support will shift from projects to research. Market share will be determined by technical capabilities. In the short term, nuclear power remains the core of new energy, and nuclear power equipment manufacturers will enjoy substantial growth opportunities.

Power grid investment will speed up, with UHV development taking the lead in smart grid construction. Power grid investment from January to August fell short of expectations, yet the 6th State Grid procurement saw a notable month-on-month increase and a 17% year-on-year rise. In smart grid development, UHV will be prioritized. The "robustness" segment of smart grids is dominated by TBEA, Tianwei Baobian, Pinggao Electric and other firms. After State Grid acquired Xuji Electric and Pinggao Electric, the "State Grid-affiliated group" became the biggest winner in the "intelligent" segment of smart grids. Analysts are highly optimistic about earnings growth prospects supported by technological and market monopolies.

The energy conservation and environmental protection sector still holds untapped potential. As a weakly cyclical industry, it boasts a fairly definite market size. Earnings upside beyond expectations mainly stems from three sources: first, policy-driven order growth exceeding forecasts; second, revenue upside from lower costs or demand recovery; third, sustained order growth backed by technological monopoly advantages.

Century Securities stated that given the industry’s strong prosperity in the fourth quarter, it assigns an "Outperform" rating to the power equipment sector. As overall valuations of power equipment stocks are relatively high, investors are advised to seek investment opportunities from low valuations and better-than-expected earnings: 1) new energy equipment manufacturers with core competitive strengths; 2) enterprises with technological and market advantages engaged in UHV and smart grid construction; 3) opportunities brought by stronger-than-projected earnings growth in the energy conservation and environmental protection sector. In addition, attention should be paid to trading opportunities arising from major events related to low-carbon economy, higher-than-expected power grid investment and electricity price reform. Recommended stocks include TBEA, Rongxin Co., Ltd. and Huaguang Co., Ltd., while moderate attention may be paid to NARI Technology, Xuji Electric and Dongfang Electric.