Analysts’ Outlook for the Power Equipment Industry in 2010: Overall Prospects Encouraging

Despite certain challenges, the power equipment industry as a whole remains promising for 2010. The power transmission and transformation sector will continue to be the most prosperous sub-industry within power equipment, especially its high-end segments.

Nationwide power grid investment growth may approach 20% in 2010. State Grid Corporation of China, in particular, plans to invest RMB 321 billion in power grid construction, a sharp rise from RMB 260 billion in 2009. Ultra-high voltage (UHV) power grids will be a key investment priority. Taking State Grid as an example, UHV investment stood at merely RMB 2.3 billion and RMB 5.3 billion in 2007 and 2008, accounting for only 1.1% and 2.1% of its total investment respectively. While preliminary construction work on several new UHV projects was carried out in 2009, substantive construction did not kick off due to pending approvals. We estimate UHV investment in 2009 remained roughly on par with that of 2008. Nevertheless, with maturing technology, improved financial conditions of grid operators and expanded production capacity of equipment manufacturers, UHV construction is poised to accelerate and enter a genuine launch and growth phase in 2010. The Huainan-Shanghai UHV AC transmission line and the Jinping-Suzhou UHV DC transmission line are most likely to commence substantive construction, bringing substantial benefits to corresponding equipment suppliers.

As for other sub-sectors, demand for power electronic devices remains robust. For instance, dynamic reactive power compensation devices will account for an increasing share of grid investment. Regarding the widely discussed "smart grid", it will not deliver fundamental technological breakthroughs. Instead, it represents a reclassification of functions within existing power grids, with more communication, monitoring, protection and control functions integrated into hardware such as transformers and switchgears, accompanied by corresponding adjustments to grid operation functions. At the enterprise level, leading manufacturers will continue to capture the benefits.

Although core businesses of large power generation equipment manufacturers have entered a period of phased adjustment, their technological strength and market standing serve as solid underpinnings of their value. Major players are tapping into new growth drivers by expanding into wind power, nuclear power and other fields. In terms of operations, thermal power construction slowed in 2009, yet major manufacturers still hold ample order backlogs sufficient to sustain normal operations over the next three years. With the gradual recovery of domestic and global economies, China’s economy may resume rapid growth, potentially putting power capacity expansion back on a fast track. In addition, the nuclear power installation target for 2020 was raised substantially from 40 GW to 75 GW, while the wind power installation target may reach 100 GW to 120 GW by 2020. All of these create new growth opportunities for industry leaders.

For hydropower within power generation, demand declined in 2009 due to environmental and resettlement issues. In the long run, however, a certain scale of annual hydropower development must be maintained to ensure a balanced power generation mix in China, leaving room for future growth of hydropower equipment manufacturers.

We maintain a cautious stance on new energy sectors such as photovoltaic and wind power. While demand is strong, the increasingly severe overcapacity problem cannot be resolved in the short term. Industry consolidation is inevitable, and only leading enterprises present investment value.