According to the Zhitong Finance APP, Tianfeng Securities released a research report stating that in 2024, ultra-high voltage will officially enter a period of intensive construction. In addition, multiple ultra-high voltage plans will be announced in 2024, providing support for the demand for ultra-high voltage after the 14th Five-Year Plan. Tianfeng Securities expects that the advancement of related policies is likely to bring about a new growth cycle in distribution network investment (the proportion of distribution network investment in the previous growth cycle increased from 53.2% in 2017 to 63.3% in 2019, then fell to 55% in 2023, and is expected to be the starting point of this growth cycle in 2024).

On the investment main line, Tianfeng Securities prioritizes the important increment in this round of distribution network policies—distribution automation, which has a stable competitive landscape, meets the needs of the development of new power systems, and is expected to grow significantly faster than the growth rate of distribution network investment. It recommends distribution master station system suppliers with better market patterns, including XJEC (000400.SZ), Dongfang Electronics (000682.SZ), and SIFANG (601126.SH); the competitive landscape in the distribution terminal segment is relatively more dispersed, but some related companies' Alpha capabilities are still seen, and it is suggested to pay attention to Willfar (688100.SH).

The main points of Tianfeng Securities are as follows:

Data from the National Energy Administration shows that from January to September 2024, investment in China's grid projects reached 398.2 billion yuan, a year-on-year increase of 21.1%, showing a significant acceleration in growth; overseas, we have sorted out some European grid companies' future grid CAPEX investment plans, which show an upward revision trend. Looking ahead, EPS of related companies in the grid sector is expected to continue to improve, and we are optimistic about the investment value of the sector:

1) Going overseas: With the trend of accelerating investment and construction in the overseas power transmission and distribution sector, we are optimistic about related companies obtaining incremental overseas business revenue.

2) Domestic: The ultra-high voltage direct current projects will enter a period of intensive construction in 2024, and we expect that future direct current projects and even the overall grid investment amount will further increase.

1. Overseas: Grid construction + US industrial reshoring + rising penetration rate of electric meters, the demand for power transmission and distribution construction continues to grow rapidly.

Main grid: Cross-border grid interconnection is key to solving power supply issues and promoting the low-carbon transformation of electricity. Looking to the future, we believe another important trend for the grid is the transition from isolated systems to interconnected systems, and from domestic interconnection to cross-border interconnection development. We expect that the advancement of grid construction plans in related developed and developing countries will continue to drive investment growth in overseas power transmission and distribution-related electrical equipment. For example, in Europe, the acceleration of offshore renewable energy installations and the demand for offshore transmission system construction have become significant increments. According to the report released by Entso-e in 2024, compared to 2025, Europe will need to build an additional 54,000 kilometers of offshore network transmission infrastructure routes (radial + hybrid) by 2050, with an investment of 31-41 billion euros. We are optimistic about related companies obtaining incremental overseas business revenue under the trend of accelerating investment and construction in the overseas power transmission and distribution sector. Key recommendations include main grid & ultra-high voltage related targets such as [Siyuan Electric], domestic leading tap changer manufacturer [Huaming Equipment], internationally renowned manufacturer of composite external insulation products for power systems [Shenma Electric], and domestic leading porcelain insulator manufacturer [Dalian Electric Porcelain] Overseas Distribution Network: Mismatch in Supply and Demand for Distribution Transformers in the U.S. Creates Export Opportunities for Chinese Companies. Driven by multiple fiscal incentive policies, construction spending in the U.S. manufacturing sector accelerated growth in 2022-2023. However, the growth rate of construction spending in the U.S. manufacturing sector slowed from January to November 2024, which we expect to have somewhat impacted the growth of new capacity demand for distribution transformers in the U.S. We believe that the growth rate of U.S. industrial reshoring will slow down in 2024, mainly due to: the rise in the dollar exchange rate and interest rates during the interest rate hike cycle, uncertainty regarding the continuity of subsidy/incentive policies due to the presidential transition, and uncertainty over whether U.S. tariffs will further increase (corresponding to whether domestic manufacturing costs are competitive). Looking ahead to 2025, we expect that the dollar exchange rate, interest rates, the continuity of relevant subsidy/incentive policies, and tariffs are likely to become clearer, which will boost the growth rate of U.S. industrial reshoring compared to 2024, driving accelerated growth in demand for distribution transformers in the U.S. We particularly recommend [Jinpan Technology] and [Mingyang Electric].

Overseas Electricity: Developed Countries Focus on Updating Meters, While Developing Countries Rapidly Increase Smart Meter Penetration Rate from Below 10%.

Around 2022, leading domestic companies gradually established a foothold overseas. We also compared the overseas revenue data of Lanjier and Aichuang over the past four years. The revenue growth rate of Lanjier, representing European and American companies, has been stable in recent years (corresponding to the demand for updates in Europe and America), with weak revenue growth in Europe, Africa, and Asia (North America is relatively strong, contributing major growth). In contrast, domestic companies, after a period of dormancy from 2015 to 2020, began to gradually increase overseas revenue starting in 2022. The core logic behind this is: 1) Overseas factories steadily contribute significant increments (Samsung Willfar); 2) The integrated AMI capability is gradually recognized by overseas power companies, leading to replacements (Haixing).

Sustainability and Growth of Overseas Demand: We believe there are three layers of logic for going overseas, ensuring medium to long-term growth. 1) Domestic companies replace European and American companies, increasing market share; 2) Continuous exploration at the national level, which is not achieved overnight but through prolonged initial connections, ensuring deep cooperation with local power companies, thus promoting localization through factory establishment; 3) Product category expansion—electric meters - AMI & M2C solutions - distribution market. Under these three layers of logic, we believe leading companies are likely to enjoy high growth potential with a doubling of overseas revenue scale over three years.

Barriers to Going Overseas Ensure High Profitability: Barriers mainly manifest in: 1) Product level: Distribution and utilization products require high stability, software/communication capabilities, and increasingly demand mature project experience with integrated AMI; 2) Channel level: Customers are on the ToG side rather than ToB, making the channel structure for distribution and utilization products relatively stable. Additionally, countries like Brazil and South Africa have multiple power companies, requiring significant time for initial connections before having the opportunity to win bids. Moreover, going overseas has high localization requirements; stable operation of overseas factories, continuous order acquisition, earning considerable profits, and maintaining robust cash flow demand high overall operational capabilities from companies Key recommended leading stocks for overseas power distribution are [Haixing Electric Power], [Weisheng Holdings], and it is suggested to pay attention to [Samsung Medical].

2. Domestic: UHV enters a period of intensive construction, and the "14th Five-Year Plan" project planning is expected to continue; a new round of distribution network investment cycle is expected to start.

Domestic UHV: In 2024, UHV officially enters a period of intensive construction. In addition, multiple UHV plans will be announced in 2024, providing support for UHV demand after the "14th Five-Year Plan." In terms of quantity, 2 DC and 2 AC projects were actually approved to start construction in 2024, with the number of DC approvals slightly lower than in 2023. The remaining 3 lines are expected to be approved for construction in 2025; all AC projects have been approved for construction and are in the construction phase by the end of 2024. In addition to the UHV projects planned in the early stage of the "14th Five-Year Plan," a total of 15 new UHV lines are planned in 2024 (including 9 DC and 6 AC); offshore wind soft direct and DC transformation will also continue to contribute to incremental growth. Key recommended leading enterprises with high winning shares are [Guodian Nari]; for converter valves, it is recommended to focus on [XJEC], and pay attention to [China XD Electric]; for combination electrical appliances, it is suggested to focus on [China XD Electric] and [Pinggao Electric].

Domestic distribution network: A new round of distribution network investment cycle is expected to start, with incremental growth seen in distribution network automation. We expect the promotion of relevant policies to bring about a new round of growth cycle in distribution network investment (the proportion of distribution network investment in the previous growth cycle increased from 53.2% in 2017 to 63.3% in 2019, and fell back to 55% in 2023; we expect 2024 to be the starting point of this growth cycle). On the investment main line, we prioritize the important increment in this round of distribution network policies—distribution automation, where the industry competition pattern is stable, meets the needs of the new power system development, and is expected to grow significantly faster than the distribution network investment growth rate. We prioritize recommending distribution master station system suppliers with better market patterns: [XJEC], [Dongfang Electronics], [SIFANG]; the competition pattern in the distribution terminal segment is relatively more dispersed, but we still see the Alpha capabilities of some related companies, and suggest paying attention to [Willfar]