Power Equipment Industry: A Standout Performer

Power grid investment may remain flat year-on-year: The power grid investment announced by State Grid, in our view, excludes UHV and smart grid pilot projects. When these two segments are included, total power grid investment will stay unchanged from the previous year. UHV, distribution networks and smart grids are key investment priorities.

Investment opportunities in smart grids have only just begun: The smart grid represents a technological revolution and is a sunrise industry. Smart grid construction remains at the pilot stage this year with estimated investment of RMB 24 billion. Full-scale construction will kick off next year, and the two major grid operators are expected to make an average annual investment of RMB 55 billion in grid intelligence. Manufacturers of smart grid equipment will see a sharp rise in earnings starting next year. Investment opportunities in smart grids are just unfolding. Key recommended stocks: NARI Technology, Xuji Electric, Siyuan Electric, Nanjing SAC Power Grid Automation, Jicheng Electronics, Zhongyuan Huadian.

Energy conservation and emission reduction is a huge market opportunity: Fossil fuels will remain the primary source of primary energy in the future. Pressure on major carbon-emitting nations, national commitments to energy conservation and emission reduction, and requirements for economic restructuring have prompted the government to roll out a series of relevant policies. Companies engaged in energy conservation and emission reduction benefit from government subsidies and an expanding market. Key recommended stocks: Rongxin Power Electronic, Inovance Technology, Hiconics Drive Technology, Wolong Electric.

New Energy. Photovoltaics: After the boom in Q4 last year and H1 this year, the German PV market will enter at least a period of sluggish wait-and-see adjustment around 2011. Global new PV installations are projected to decline quarter-on-quarter in the second half of the year. Wind Power: We raise our forecast for new wind power installations in 2010 to 20 GW. Attention should be paid to investment opportunities brought by onshore wind projects in Xinjiang and offshore wind power. Nuclear Power: Nuclear power will achieve leapfrog development, with revenue recognition set to multiply in 2010. Key recommended stocks: Xiangtan Electric Manufacturing, Goldwind Science & Technology, Dongfang Electric.

UHV may present trading opportunities: Price competition for main power grid equipment is nearing an end, while prices of bulk raw materials have started to ease, laying the groundwork for earnings recovery of main grid equipment manufacturers. Following the successful UHV AC pilot project, tenders for subsequent lines may be launched this year. Implementation of the massive UHV power grid plan will inject new momentum into leading primary equipment manufacturers. Key recommended stocks: Pinggao Electric, China XD Electric, TBEA.

Investment Strategy & Industry Rating: We maintain an "Outperform-B" rating for the power equipment and new energy sector. Recommended segment order: smart grids, energy conservation & emission reduction, new energy, UHV.