J P M O R G A N Asia Pacific Equity Research 19 November 2025 This material is neither intended to be distributed to Mainland China investors nor to provide securities investment consultancy services within the territory of Mainland China. This material or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. Huaming Equipment - A Key takeaways from JPM Global TMT conference We hosted Huaming Equipment at the 2025 J.P. Morgan Global TMT conference. The ke ...

Core Insights - Huaming Power Equipment Co., Ltd. (Huaming Equipment) has engaged in investor activities, including specific object research, site visits, and conference calls, with a significant number of renowned domestic and international institutions participating [1] Group 1: Overseas Market Performance - The company's overseas business has seen high growth rates, primarily due to a low base, increased market share, and indirect export growth from Chinese transformer manufacturers [2] - Europe, Southeast Asia, and South America are the main contributors to overseas revenue growth, with multiple countries contributing rather than a few [2] - The company indicates that the European and American markets are relatively open, allowing products that meet parameter standards to enter [2] Group 2: U.S. Market Potential - The U.S. market, being the largest single market for power equipment, is a focal point for institutions, driven by grid renovation, manufacturing return, and AI-related electricity demand [3] - Current growth in the U.S. market is mainly from built-in tap changers, with external tap changers undergoing testing [3] - While the U.S. market has potential for revenue growth, significant breakthroughs will depend on localization strategies or policy changes [3] Group 3: Capacity and Competition - The company states that domestic capacity can meet future demand, with assembly capacity being relatively saturated but still operating on a single shift [4] - Overseas factories in Indonesia and Turkey are being established not for capacity reasons but to obtain local production certifications [4] - The company views short-term impacts from competitors' capacity expansions as limited, with a focus on long-term market share growth rather than immediate profits [4] Group 4: Financials and Strategy - Recent increases in product prices are attributed to product structure optimization and a higher proportion of overseas revenue [5] - The company plans to gradually exit the engineering business to focus on power equipment and manufacturing, aiming to reduce financial volatility [5] - The dividend policy stipulates that cash dividends will not be less than 60% of distributable profits annually from 2023 to 2025 [5] Group 5: Challenges and Opportunities - The company faces challenges in product reliability, talent cultivation, brand building, and macroeconomic influences on demand [7] - The Middle East is being considered for local layout due to tender requirements, while the Russian market will expand under compliance [7] - The repair business has seen significant order growth in the first three quarters, with potential for future expansion as overseas holdings increase [7] - New products in power electronics for distribution networks have received positive feedback from overseas clients, indicating potential for small-scale sales [7]

Group 1: Fixed Income Strategy - The central bank has restarted bond purchases, indicating potential short-term opportunities in the bond market [7] - In October, most bond yields declined, with significant decreases in credit spreads and default amounts [7] - The report suggests a structural shift in government policy focus from traditional infrastructure to urban renewal and related service industries [7] Group 2: Food and Beverage Industry - The food and beverage sector's fund holding ratio decreased to 4.73% in Q3 2025, indicating a decline in heavy investment [13][14] - The liquor sector remains the most heavily weighted, but the holding ratio for major brands like Moutai and Wuliangye has decreased [16] - The report highlights a general reduction in fund holdings across various sub-sectors, including soft drinks and snacks [15][16] Group 3: Banking Sector - Changshu Bank reported a revenue of 9.05 billion yuan in the first three quarters of 2025, with a year-on-year growth of 8.15% [17] - The bank's non-performing loan ratio remained stable at 0.76%, with a significant reduction in asset impairment losses [17][18] - The report indicates a slight improvement in loan growth, particularly in personal business loans, although overall retail credit demand remains under pressure [18] Group 4: Potash Industry - Yara International's revenue increased by 55.8% year-on-year in the first three quarters of 2025, driven by both volume and price increases in potash [22] - The average selling price of potash rose to 2,507 yuan/ton, reflecting a 27.9% increase year-on-year [22] - The company is expanding its production capacity, with new projects expected to come online soon, contributing to sustained high demand in the potash market [24][25] Group 5: Oilfield Services - CNOOC Services reported a significant increase in net profit, with a year-on-year growth of 32.09% in the first three quarters of 2025 [28] - The utilization rate of drilling platforms has improved, contributing to higher revenue and profit margins [29] - The report emphasizes the company's strategic shift towards high-return projects and the optimization of its business structure [30] Group 6: Chemical Industry - Hualu Hengsheng's revenue in Q3 2025 was 7.79 billion yuan, showing a year-on-year decline of 5.1% [26] - The company experienced a slight decrease in net profit, attributed to market supply and demand changes for its main products [26][27] - The report notes that the company is focusing on cost control and efficiency improvements amid fluctuating raw material prices [27]

Financial Performance - In Q3 2025, the company achieved revenue of approximately 2.013 billion CNY, with a net profit attributable to shareholders of 694 million CNY, representing a year-on-year growth of 15.12% [6] - For the first three quarters of 2025, the net profit attributable to shareholders was 581 million CNY, a year-on-year increase of 17.66% [7] - The company plans to distribute a cash dividend of 2.00 CNY per 10 shares, totaling approximately 179 million CNY [7] Revenue Breakdown - The power equipment business generated revenue of 1.535 billion CNY in the first three quarters, a year-on-year increase of 16.51%, with overseas revenue reaching 486 million CNY, up 45.43% [7] - Domestic revenue was 1.049 billion CNY, reflecting a growth of 6.7% [7] - Overseas revenue accounted for over 31% of the company's revenue from the busbar switch business [7] Market Dynamics - The company noted that the growth in overseas revenue is influenced by several factors, including a low base, gradual market share increase, and stable overseas demand [10] - The company expressed confidence in the sustainability of overseas revenue growth despite potential fluctuations in copper prices and year-end procurement rhythms [11] Strategic Initiatives - The company is focusing on localizing its overseas operations, with established assembly and testing plants in Turkey and Indonesia, which have proven successful in capturing local market share [45] - Future plans include enhancing the sales and service teams in Europe and exploring opportunities in the Middle East and the U.S. markets [17] Competitive Landscape - The company maintains a competitive edge in delivery speed and product stability, with 80% of components produced in-house [46] - The pricing strategy remains stable, with no significant changes in domestic pricing, while overseas prices are generally higher due to market conditions [41] Industry Outlook - The company anticipates that the demand for transformers and related equipment will continue to grow, driven by infrastructure investments and the expansion of renewable energy projects [36] - The company is cautious about predicting significant changes in demand trends, emphasizing the need for a comprehensive understanding of market dynamics [11]

Investment Rating - The investment rating for the company is "Outperform the Market" [5][27][31] Core Views - The company has shown steady growth in the first three quarters, with a significant increase in profitability driven by a higher proportion of high-margin export business and a reduction in low-margin power engineering business [2][6][19] - The company's revenue from power equipment reached 1.535 billion yuan, up 16.51% year-on-year, with overseas revenue growing by 45.43% [2][23] - The company is expanding its overseas operations, with new facilities in Singapore and Indonesia, and has established a presence in Turkey, the US, and Brazil, indicating a strong potential for continued export growth [2][23] Summary by Sections Financial Performance - In the first three quarters, the company achieved revenue of 1.815 billion yuan, a year-on-year increase of 6.87%, and a net profit of 581 million yuan, up 17.66% [6][19] - The gross profit margin for the first three quarters was 55.44%, an increase of 5.55 percentage points year-on-year, while the net profit margin was 32.51%, up 3.14 percentage points [6][19] - For Q3, the company reported revenue of 694 million yuan, a year-on-year increase of 20.13%, and a net profit of 213 million yuan, up 18.51% [19] Revenue Breakdown - The company's revenue from power equipment business was 1.535 billion yuan in the first three quarters, with domestic revenue at 1.049 billion yuan (up 6.7%) and overseas revenue at 486 million yuan (up 45.43%) [2][23] - The export revenue from tap changers accounted for 32% of total revenue, reflecting an ongoing optimization of the revenue structure [2][23] Profit Forecast - The profit forecast for the company has been adjusted upwards, with expected net profits of 744 million yuan, 886 million yuan, and 1.037 billion yuan for 2025, 2026, and 2027 respectively [3][27] - The current stock price corresponds to a price-to-earnings ratio (PE) of 33, 27, and 23 for the years 2025, 2026, and 2027 [3][27] Valuation Metrics - The projected revenue for 2023 is 1.961 billion yuan, with a growth rate of 14.6%, and net profit is expected to reach 542 million yuan, reflecting a growth rate of 50.9% [4][29] - The company is expected to maintain a strong return on equity (ROE) of 16.2% in 2023, increasing to 26.7% by 2027 [4][29]

Summary of Huaming Equipment Q3 2025 Conference Call Industry and Company Overview - **Company**: Huaming Equipment - **Industry**: Electrical Equipment and Power Systems Key Points and Arguments Market Performance - The **tap changer business** showed strong performance in both domestic and international markets, with **over 40% growth** in overseas revenue maintained in Q3 2025, and domestic market revenue growth faster than the first half of the year, expecting stable growth for the year [2][3][4] - **North American market** operations are normal, generating tens of millions in revenue annually, while the **Middle Eastern market** is progressing faster with local layout considerations, though significant revenue increases are not expected in the short term [2][6] Financial Performance - Q3 2025 financial performance was impacted by the first-time recognition of **share-based payment expenses**, leading to an increase in sales expenses due to rapid overseas business growth [3] - The **acquisition of power station assets** has no significant immediate financial impact as risks were previously accounted for, but it may lower interest costs and accelerate cash flow recovery over 15 to 20 years [5] Order and Revenue Trends - **Maintenance orders** have seen significant growth, exceeding a **20% compound growth rate** from previous years, although seasonal factors have affected actual revenue growth [7] - The **numerical control equipment** business is rapidly growing due to increased industry demand, technological innovation, and effective marketing strategies, becoming a new important revenue source [8] Export Business Outlook - The outlook for future quarters and next year's export business remains optimistic, although order conditions in Q4 and next year need monitoring, with copper price fluctuations potentially affecting delivery schedules [4] Domestic vs. Overseas Revenue - Overseas revenue is growing rapidly, while domestic market prices and gross margins are declining, limiting the domestic market's support for overall performance [9] - The ratio of **direct to indirect exports** is approximately **1:1**, indicating a balanced approach to international sales [10] Impact of Overseas Projects - Participation in overseas data center projects has limited impact on overall performance, as the number of tap changers required per project is small, but these projects could enhance electricity demand and drive upstream generation capacity [11] Strategic Focus and Future Goals - The company is focusing on consolidating and developing existing regions, particularly in **Europe and Asia**, with no major investment plans in North America and the Middle East at this stage [12] - Current production capacity is sufficient, with good order feedback from Indonesia and Turkey, and domestic capacity is not yet at full utilization [13] - The **gross margin** for tap changers remains stable with slight improvements, indicating no significant changes [14] - The goal for 2025 is to achieve **break-even** and aim for faster growth thereafter, with steady progress on shareholder plans [15]

Core Insights - The rapid proliferation of AI applications is driving a surge in global electricity demand, presenting unprecedented growth opportunities for the power equipment industry [1] - Chinese companies, leveraging advantages in cost and technology, are reclaiming the domestic mid-to-high-end product market and accelerating overseas expansion [1] Industry Overview - The demand for power equipment is expected to maintain double-digit growth, driven by the dual carbon strategy and significant investments in power infrastructure [6][8] - The State Grid has completed fixed asset investments exceeding 420 billion yuan in the first three quarters of 2025, with expectations of reaching 650 billion yuan for the entire year [6] Company Analysis - Huaming Equipment has established itself as a leader in the transformer tap changer market, achieving over 80% self-sufficiency in component production, enhancing production efficiency [3][5] - The company has a gross profit margin of 56.52% in its manufacturing business, ranking among the top in the power equipment sector [4] Technological Innovation - Continuous improvement in manufacturing processes is crucial for Huaming Equipment's competitiveness, with 70% of R&D investment focused on specialized process technologies and proprietary materials [4] - The company has successfully broken foreign monopolies in high-voltage tap changer technology, achieving significant milestones in product development and market validation [8] Market Expansion - Huaming Equipment's global market share has reached 35%, making it the second-largest tap changer manufacturer worldwide [10] - The company is actively expanding into Southeast Asia, the Middle East, and North America, with significant progress in establishing local operations [10][11] Future Outlook - The company aims to enhance its global market presence by exporting production capacity and developing localized manufacturing capabilities [10] - The overall competitive strength of Chinese power equipment companies is expected to improve, with a projected increase in profitability in international markets [11]

Core Insights - The company has a high market share in domestic sales of distribution switches, but its share in the high-end product segment remains low, with sales revenue market share lower than sales volume market share [1] - The overall market share in overseas markets is low, and the company is advancing its international development through localization efforts [1] Domestic Market - The company’s distribution switches have a strong sales volume market share domestically [1] - However, the sales revenue market share in the high-end product category is still underdeveloped [1] International Expansion - The company is working on internationalization by establishing assembly and testing factories in Turkey and Indonesia [1] - Recruitment of sales personnel is ongoing in Europe and South Korea, with operational bases established in Singapore and Indonesia [1] - Future plans include expanding into the European, Saudi Arabian, and American markets, while maintaining a steady pace of growth [1]

Core Insights - The company recently engaged in a deep discussion with Baron Capital and Federated Hermes regarding its market share, domestic and international market development, and product technology [1][2] Group 1: Market Position and Competition - The company's market share in domestic sales volume for distribution switches is relatively high, but its sales revenue market share is lower due to a lower proportion of high-end products [3] - Competitors have advantages in high-end products and export markets, particularly in areas such as 500kV and above, industrial rectifiers, and ultra-high voltage products [3] - The domestic market has potential for growth as traditional oil-immersed switches transition to vacuum switches, but the high-end market replacement will take time due to the current high proportion of lower-end products [3] Group 2: Business Development and Strategy - The company has made progress in its ultra-high voltage business, with previously delivered products now operational and stable [3] - The domestic revenue growth was approximately 5% in the first half of the year, influenced by last year's delayed projects and rapid installation of new energy [3] - The company is expanding its overseas presence, with plans to establish local sales and service teams in markets that can contribute stable revenue [3] Group 3: Financial Performance and Capital Expenditure - The company maintains a fixed annual capital expenditure for R&D and production upgrades, with significant investments made in 2020-2021 for a comprehensive upgrade of its production base [3] - The company has a healthy financial status, with annual collections often exceeding sales, and plans to use part of its cash for dividends or suitable overseas acquisitions [3] - The company has committed to a cash dividend of no less than 60% of distributable profits in its 2023-2025 shareholder return plan, supported by strong cash reserves and performance growth [3]

Market Position and Competition - The company's market share in domestic sales volume for tap changers is relatively high, but the sales revenue share is lower due to a low proportion of high-end products, which are mainly imported [2][3] - Competitors have advantages in high-end products, particularly in the 500kV and above, industrial rectifiers, and ultra-high voltage markets [3][4] - The company is gradually increasing its market share in the domestic 500kV segment and has begun mass operation of ultra-high voltage products [3][4] Domestic Market Growth Potential - Transitioning from traditional oil-immersed switches to vacuum switches and increasing the proportion of high-end products could drive domestic market growth [3][4] - The overall growth in domestic demand is crucial for achieving good growth rates, especially given the current weakening trend in non-grid sectors [3][4] High-End Market Development - The development of high-end markets is a lengthy process due to the high replacement costs for users and the established relationships with existing suppliers [3][4] - The company has demonstrated its technical capabilities with successful mass operation of ±800kV ultra-high voltage products, indicating no significant technical gap with competitors [3][4] Overseas Market Strategy - The company is pursuing a localized approach to expand its overseas market presence, establishing assembly and testing facilities in Turkey and Indonesia [7][10] - The overseas market strategy includes hiring sales personnel in Europe and other regions, with plans to expand into Saudi Arabia and the U.S. when conditions are favorable [7][10] Challenges in Overseas Expansion - The company faces challenges in overseas markets due to the long-established presence of competitors and the need for brand recognition [8][9] - Language barriers and the difficulty of maintaining a long-term presence in foreign markets are additional challenges [8][9] Financial Performance and Projections - Domestic revenue growth was approximately 5% in the first half of the year, influenced by last year's delayed projects and rapid growth in new energy installations [6][10] - The company maintains a cautious approach to capital expenditure, focusing on gradual improvements in production processes and facilities [19][20] Cash Management and Dividends - The company aims to retain sufficient cash reserves for risk management and potential strategic acquisitions, while also committing to a minimum annual cash dividend of 60% of distributable profits [21][23] - Recent high dividends were attributed to a strong cash position following a targeted capital increase and the recovery of funds from overseas investments [27][28]