China Securities Co., Ltd. has released a research report indicating that the second quarter saw robust revenue growth in the lithium battery and energy storage segments, while offshore wind and solar sectors experienced declines, reflecting a sector still navigating its bottom. The power equipment industry, however, continues its upward cycle, with export-oriented chains performing notably well. Despite these positive operational trends, concerns about future prospects have weighed down valuations across the board. On the expansion front, overall industry capacity additions remain moderate.
The report's primary recommendations highlight two key areas: Firstly, large-scale storage, residential storage, lithium battery, and material companies have begun realizing earnings growth from the second quarter onward. With supply-demand fundamentals remaining solid, recent external challenges have pulled valuations down significantly, making these segments worthy of continued close attention. Secondly, in markets where order flow or marginal changes drive pricing, investors should focus on order pipeline developments for domestic gas turbine supply chains, AI data centers, and European offshore wind players.
A comprehensive analysis of half-year reports across the power equipment and new energy sectors reveals clear divergence. Lithium battery and storage segments have delivered on their high-growth promises in terms of revenue, though large-scale storage figures are notably influenced by the significant weight of Sungrow Power's individual performance and its delivery schedule in the first half. Offshore wind and solar declines suggest these industries remain at a cyclical bottom. Power equipment continues its recovery cycle, particularly excelling in export markets. However, apprehension over future conditions has suppressed sector valuations. Capacity expansion remains measured, with indicators like new construction-in-progress and fixed asset capital expenditure showing no significant quarter-on-quarter or year-on-year acceleration in Q2.
On the demand side, lithium battery and storage performance has met expectations. The report maintains its earlier projection that the lithium battery industry could sustain approximately 25% growth through 2027, driven primarily by power battery recovery and even more pronouncedly by storage demand. This aligns with announced industry capacity expansion plans across different sub-segments (ranging from 25% to 40%). Current sector valuations reflect weaker demand growth expectations, with price-to-earnings ratios on 2026 projected earnings falling to 15-20x, and 10-15x on 2027 estimates. Should demand materialize as expected, there exists substantial room for valuation recovery.
Segments currently commanding high valuations include AI data center power equipment, gas turbines, copper foil, and solar. Conversely, lithium battery and lithium carbonate names trade at comparatively lower valuation levels.
Risk warnings
Solar and storage: 1) Upstream raw material supply increases and midstream manufacturing capacity expansions could intensify industry competition. Current production capacity across the main supply chain is substantial, and with new entrants planning expansions, industry competition may escalate if raw materials remain available and all expansion plans come to fruition; 2) Grid integration bottlenecks such as consumption capacity constraints could lead to weaker-than-expected demand. The rapid pace of new energy grid connections in China, the U.S., and Europe may strain grid absorption capabilities, potentially slowing new solar installation growth; 3) Rapid technology diffusion could erode profitability. Given the extensive TOPCon battery expansion plans in the solar industry, accelerated capacity additions with minimal differentiation among players could compress TOPCon profitability.
Lithium battery: 1) Downstream new energy vehicle production and sales may miss expectations due to weak demand, while production could be hampered by significant raw material price fluctuations and repeated power restrictions, affecting the entire supply chain's profitability and valuations; 2) Raw material price increases could exceed expectations. Prices have been climbing since 2021 with periodic sharp volatility, and high, unstable prices impact terminal demand and significantly affect supply chain company profitability; 3) Key project execution in the lithium battery supply chain may fall short of expectations. These projects are crucial for revenue and profit support and reflect growth prospects; delays would impact both current and future earnings and disrupt supply chain stability.
Wind power: 1) Wind power planning policies may not advance as expected; 2) Deep-sea wind project development could be delayed, with project scale and progress shortfalls impacting large-scale industry growth; 3) Intensified competition could damage segment profitability. The wind industry faces intense rivalry, and further price wars would harm corporate earnings; 4) Cost reduction may underperform expectations. Large-scale deep-sea development relies on upstream component cost reductions for floating platforms, integration, and submarine cables; shortfalls would hinder widespread adoption; 5) Raw material price risks. Steel is the primary upstream material, and significant price swings could undermine corporate earnings stability.
Power equipment: 1) Demand-side risks: Changes in national infrastructure policies could lead to power generation investment scales below expectations; grid investment may fall short; reduced new energy installation growth would lower power equipment demand; overall electricity consumption growth could slow; grid bidding may lag; ultra-high-voltage transmission project progress could be delayed; 2) Supply-side risks: Copper, steel, and other commodity price increases; tight supply of power electronic components with slower-than-expected domestic substitution; 3) Policy risks: Weaker-than-expected support for new power market mechanisms; slower progress in electricity pricing mechanisms; delays in spot market development; unexpected peak-valley price differentials; 4) International risks: Rapid resolution of energy crises and sharp energy price declines; deepening international trade barriers; 5) Market risks: Significant competitive landscape shifts; intensified competition driving profitability below expectations across power equipment segments; rising transportation and other costs; 6) Technical risks: Cost reduction progress falling short; difficulty in further improving technical reliability; 7) Mechanism risks: Power market mechanism development lagging expectations; ancillary services, capacity compensation, and peak-valley pricing underperforming in spot markets; emerging market mechanisms like virtual power plants and demand-side management not meeting expectations.
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