The quarterly performance growth rate of the power equipment sector has slowed down

Power grid investment has the function of counter-cyclical adjustment. In 2024, the State Grid Corporation of China (hereinafter referred to as "State Grid") accelerated its bidding process, with a significant year-on-year increase in the bidding volume of smart meters, collection devices, transformers, and other power equipment, which has driven market attention to the industry chain.

On the evening of October 22, leading power equipment companies such as Dongfang Electronics (000682.SZ), Haixing Electric Power (603556.SH), and Huaming Equipment (002270.SZ) released their third-quarter reports. The performance in the third quarter generally showed a sequential decline, leading to a concentrated sell-off of funds. On October 23, Dongfang Electronics and Haixing Electric Power closed down by 6.5% and 7.16%, respectively.

Upon reviewing the financial reports, the First Financial Daily found that the disclosed third-quarter reports of power equipment companies show three major characteristics: 1. The operating income for the first three quarters reached a historical or post-IPO high; 2. The net profit growth rate in the third quarter slowed down sequentially; 3. There is a continuous growth trend in the gross margin for a single quarter. In the first half of the year, leading companies in the power equipment sector generally accumulated substantial gains. Despite the slowing net profit growth rate in the third quarter, institutional investors such as public funds, insurance funds, and social security funds remain enthusiastic about investing in leading stocks in the sector.

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The slowdown in net profit growth rate in the third quarter

Power equipment was the darling of institutions in the first half of this year. Wind data shows that from January to June, Samsung Medical and Haixing Electric Power, two smart meter leaders, led the sector with an increase of more than 60%; China West Electric, Huaming Equipment, Xujie Electric, and Pingao Electric all had increases of more than 50%. From smart meters and transformers to primary and secondary equipment, leading sub-sectors have shown sharp upward trends.

After the valuation was raised, the power equipment sector entered a performance verification period. Overall, against the backdrop of a low base in the first quarter's performance (mainly affected by the Spring Festival holiday), the performance of leading power equipment stocks generally increased sequentially in the second quarter. The high base formed thereby made the sequential growth rate in the third quarter not eye-catching.

A person in charge of a power equipment listed company told the reporter that against the backdrop of accelerated bidding by the State Grid and Southern Grid, the demand for the power equipment industry is "bottom-supported". "However, the bidding limit is also limited, mainly because the characteristics of the power industry itself determine that its demand will not show explosive growth. In most cases, it develops steadily in line with the pace of economic development," the person in charge said.

Dongfang Electronics' product system covers the entire process of "power generation - power transmission and transformation - power distribution and use". The third-quarter report shows that the company achieved a revenue of 4.631 billion yuan in the first three quarters, with a net profit attributable to the parent company of 421 million yuan, with year-on-year growth rates of 12.96% and 22.26%, respectively. In the third quarter, the company achieved a revenue of 1.812 billion yuan, higher than the first two quarters, with a net profit attributable to the parent company of 168 million yuan, and the sequential growth rate slowed down significantly to 11.32%, compared with 49.22% in the second quarter.

Haixing Electric Power's stock price doubled in the first half of the year, while the performance growth rate in the third quarter fell sequentially. According to the financial report, the company achieved a single-quarter revenue of 1.154 billion yuan, a sequential decline of 14.65%, and a net profit attributable to the parent company of 258 million yuan, a sequential decline of 17.02%. Affected by the acceleration of smart meter bidding, Haixing Electric Power's revenue for the first three quarters reached the highest level in history, exceeding the scale of the whole year of 2022.

Pingao Electric's main products are mainly used for ultra-high voltage. This year is the year when the construction of ultra-high voltage is accelerated. The ultra-high voltage AC projects such as Zhangbei-Victory and Sichuan-Chongqing, and the ultra-high voltage DC projects such as Jinshang-Hubei and Longdong-Shandong have started one after another. Pingao Electric achieved the highest revenue since its listing in the first three quarters. Looking at the performance in the third quarter, the company achieved a revenue of 2.843 billion yuan, a year-on-year increase of 8.42%, and a net profit attributable to the parent company of 323 million yuan, a year-on-year increase of 47.72%. The net profit sequential growth rate decreased to 6.49%, the previous value was 32.15%, and the revenue decreased by 5.18% sequentially.In terms of gross margin, Haixing Electric achieved a gross margin of 49.4% in the third quarter, an increase of 6.1 percentage points year-on-year; Dongfang Electronics' gross margin increased from 32.79% to 33.07% quarter-on-quarter; Pingao Electric's comprehensive gross margin for the third quarter was 25.58%, a year-on-year increase of 4.16 percentage points.

Public funds and insurance capital continue to "buy, buy, buy"

Despite a decline in sequential growth in the third quarter, the enthusiasm of institutions such as social security funds, insurance capital, Shanghai-Hong Kong Stock Connect, and public funds for power equipment stocks has not significantly waned.

Dongfang Electronics was once a favorite of the social security fund. As of the end of the second quarter this year, three national social security fund portfolios appeared among the top ten shareholders of Dongfang Electronics. By the end of the third quarter, only the National Social Security Fund 503 portfolio remained, which increased its holdings by 5 million shares in the third quarter, bringing its total holdings to 58 million shares, accounting for 4.33% of the total share capital. At the same time, public funds such as Huaxia, Xingquan, and Penghua appeared among the top ten shareholders. As of the end of the third quarter, four funds - Huaxia Energy Innovation, Xingquan Business Model Selection, Penghua Emerging Industries, and Xingquan New Vision Flexible Allocation - newly entered the top ten shareholders of Dongfang Electronics.

Pingao Electric was targeted by insurance capital and Shanghai-Hong Kong Stock Connect. As of the third quarter, Shanghai-Hong Kong Stock Connect has increased its holdings in Pingao Electric for five consecutive quarters. The institution became one of the top ten shareholders in the second quarter of 2023 and has been continuously "buying, buying, buying" since then. Currently, it holds a total of 163 million shares, accounting for 12.04% of the total share capital. The holdings of the National Social Security Fund 107 portfolio remained unchanged, China Life - Traditional - General Insurance Products newly entered as the sixth largest shareholder, and two dividend insurance products under Qianhai Life Insurance increased their holdings by a total of 11.38 million shares. Huaxia Energy Innovation newly entered as the tenth largest shareholder of Pingao Electric.

The leader in ultra-high voltage tap changers, Huaming Equipment, was also targeted by insurance capital. Taikang Life - Dividend - Individual Dividend increased its holdings in the company by 657,000 shares, and Taikang Life - Investment Connection - Industry Allocation newly entered as the tenth largest shareholder. In addition, the Government of Singapore Investment increased its holdings by 8.911 million shares. However, Shanghai-Hong Kong Stock Connect reduced its holdings by 8.6951 million shares in the third quarter, currently holding 116 million shares, accounting for 13.05% of the total share capital.

Haixing Electric was reduced by several shareholders in the second quarter, while Shanghai-Hong Kong Stock Connect has continuously increased its holdings for three consecutive quarters within the year. In the third quarter, it bought 4.0863 million shares, becoming the fourth largest shareholder. Bank of Communications Schroder Advantage Industry Flexible Allocation slightly increased its holdings by 76,900 shares; Heyuan Xin Zheng Yu Hong Private Equity Fund and Dongfang Hong Qiyuan Three-Year newly entered the top ten shareholders.

"The actual number of ultra-high voltage bids in 2024 was not as good as expected, but it also exceeded the bidding volume of ordinary years. 2025 is the closing year of the 14th Five-Year Plan, and grid investment should still accelerate. Specifically for this year, in late October and early November, ultra-high voltage will announce the fifth round of equipment bidding, which is closely linked to the performance of related listed companies next year," a private fund manager in the East China region told reporters.

A research report from Haitong Securities shows that the State Grid's smart meter bidding volume increased by 25% year-on-year in 2024. The smart meter industry is in an upward phase of upgrading and replacement. The export value of transformers, high and low voltage switches, and wires and cables increased year-on-year in the first nine months. The export of power equipment may become the second growth curve for the performance of related companies.