NARI TECHNOLOGY(600406)：PREANNOUNCED RESULTS IN LINE;A GOOD PICK FOR LONG-TERM INVESTMENT AMID POWER GRID UPGRADE

Preannounced 2021 net profit up 16.29% YoY, in line with our forecast
NARI Technology (NARI) has preannounced its 2021 results, estimating that revenue increased 10.15% YoY to Rmb42.41bn and net profit attributable to shareholders grew 16.29% YoY to Rmb5.64bn; recurring attributable net profit rose 19.25% YoY to Rmb5.53bn. In 4Q21, revenue rose 4.21% YoY to Rmb19.18bn and attributable net profit increased 6.35% YoY to Rmb2.45bn; recurring attributable net profit grew 8.52% YoY to Rmb2.41bn. The preannounced results are in line with our forecast.
Trends to watch
Power grid investment to recover; structural changes in investment to benefit NARI. According to the data released by the National Energy Administration, China’s investment in power grid construction reached Rmb495.1bn in 2021, up 1.1% YoY, 7.3ppt higher than the growth rate in 2020. In 2H21, the State Grid and the China Southern Power Grid drew up their development plans during the 14th Five-Year Plan period, deciding to promote the construction of new power systems. We believe the two companies will focus their investment in core segments, and the CAGR of their investment will likely recover to about 7%. We think energy transition and power grid upgrade will take time. NARI’s business layout is in line with the major directions of power grid investment. The firm’s power grid automation products cover several segments including power dispatch, transformation, distribution and use, and it accounts for a leading share of the market. In the information and communication industries, the firm is involved in the top-level design of the power and energy internet.
Construction of ultra-high voltage (UHV) power lines further accelerates; we expect NARI to fully benefit from the trend. Recently, XIN Baoan, chairman of the State Grid, proposed increasing the current interprovincial and cross-region electricity transmission capacity from 240mn kW to 370mn kW by 2030, through stepping up efforts during the 14th Five-Year Plan and 15th Five-Year Plan period. In addition, the State Grid plans to support the construction of large-scale wind power and PV farms in deserts, and promote the development of all sorts of clean energy sources with its competitive power grids. We expect the planning of UHV direct-current (DC) power transmission lines during the 14th Five-year Plan period to further exceed our previous expectations, considering accelerated construction of large wind and solar farms and the counter-cyclical investment in new infrastructure. Given the long construction cycle of UHV DC power transmission lines, we expect most of the firm’s power line projects to gain approval in 2022-2023. In addition, as the firm enjoys a high market share in core equipment, converters, and DC protection equipment, we think it will likely benefit from the accelerated construction of UHV power transmission lines.
Equity incentive plan shows confidence in the company’s development. The company plans to grant no more than 39.98mn shares (0.72% of its equity base) to a total of 1,300 core employees. The preconditions for the incentive plan are that the firm’s net profit should grow at a CAGR of no less than 10% over 2022-2025 compared with 2020, and should not fall below five times the average net profit of comparable companies. We are upbeat that the incentive plan will fully motivate employees, supporting the healthy growth of the company in the long term.
Financials and valuation
We maintain our 2021 and 2022 EPS forecasts of Rmb1.07 and Rmb1.26, and introduce a 2023 EPS forecast of Rmb1.48. The stock is trading at 25.7x 2022e and 21.9x 2023e P/E. We maintain OUTPERFORM and our target price of Rmb48.00, implying 38.1x 2022e and 32.4x 2023e P/E, offering 47.9% upside.
Risks
Weaker-than-expected power grid investment; worsening profitability.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。