Preannounced 2021 results largely in line with expectations
State Grid Information & Communication (SGIC) has preannounced its 2021 results, estimating that revenue increased 6.49% YoY to Rmb7.47bn, attributable net profit rose 11.57% YoY to Rmb677mn, and recurring attributable net profit grew 20.46% YoY to Rmb649mn. In 4Q21, revenue rose 14.1% YoY to around Rmb3.20bn, but attributable net profit dropped 3.0% YoY to Rmb306mn. The results are largely in line with our forecasts.
Trends to watch
Focusing on digitized power grids; steady growth in 2021. Cloud network infrastructure: State Grid FibrLINK Communications carried out pilot application of the convergence between public networks and wireless private networks. It took charge of the construction of high-efficiency cloud computing data centers, and the Baihetan-Jiangsu and Nanchang-Changsha ultra-high voltage communication engineering projects. Digitalization of electricity systems: China Power Information Technology took the lead in the R&D and construction of the state grid marketing 2.0 system, which came online in Jiangsu in January 2022. The system will be rolled out in Zhejiang, Tianjin, Shandong, Shanghai, Anhui, Fujian in 1Q221. In addition, the company is expanding its presence in markets for online state grid platforms, energy and electricity transaction, and virtual power stations. Digitalization of power companies: Aostar Information Technologies started to develop the iState Grid app, so as to enable digitized smart patrols, smart operation and maintenance, and grassroots power supply stations.
SOE reform to accelerate; shareholding structure to continue improving. 1) State Grid Information & Telecommunication Group, SGIC’s controlling shareholder, plans to transfer a 4.77% stake in SGIC to China Telecom Investment for free (previously, China Telecom transferred a 2.4% stake in subsidiary China Communications Holdings to State Grid Information & Telecommunication Group). We believe the move can propel the cooperation between SGIC and China Telecom in building and operating data centers and constructing 5G infrastructure. 2) SGIC released its first restricted equity incentive plan in 2021. The condition for unlocking the restricted shares is that the firm’s net profit should grow at a CAGR of no less than 16% over 2022-2025 compared with 2020. We think that the plan can align the interests of the firm with those of its core employees. We are upbeat on the growth potential of the company in the long term.
Digital transformation of power grids to accelerate during the 14th Five-Year Plan period. We think the shift toward digital and intelligent power grids is a future trend amid increasing renewable energy installations. SGIC and China Southern Power Grid have both announced their plans to step up efforts in building digitized power grids. We expect investment in these projects to exceed 10% of total investment, and reach more than Rmb50bn per year during the 14th Five-Year Plan period over 2021-2025, with a CAGR of 15%. Judging from the firm’s tendering in 2021, China’s digital power grid market is dominated by state grid enterprises, with the market share of SGIC standing at 21%. Specifically, the company’s market shares in digital equipment and services are 17% and 25%. Therefore, we expect SGIC to fully benefit from the shift toward digitized power grids.
Valuation and recommendation
As the firm’s businesses are well on track after its restructuring, we raise our earnings forecast by 5.4% to Rmb678mn for 2021 and 5.7% to Rmb835mn for 2022, and introduce a 2023 forecast of Rmb1bn. We maintain an OUTPERFORM rating. The stock is trading at 29.1x 2022e and 24.2x 2023e P/E. Considering accelerated digital transformation of power grids and the firm’s leading position in the industry, we raise our TP 5.0% to Rmb20.81, implying 29.8x 2022e and 24.8x 2023e P/E, offering 2.4% upside.
Risks
Disappointing investment in digitized power grids; excessive exposure to a single client; intensifying competition.
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