27 August 2025 | 11:40PM HKT NARI Technology (600406.SS): 2Q25 GPM under pressure, yet positive progress in overseas; maintain Buy (on CL) Post market close on Aug 27, Nari Tech announced 2Q25 results, with revenue above expectations, but GPM under pressure. 2Q25 revenue/gross profit/EBIT/net profit came in at Rmb15,348mn/4,260mn/2,636mn/3,137mn, +24%/+8%/+12%/+7% yoy, +8%/-2%/+4%/-4% vs. GSe. GPM/OPM/NPM came in at 28%/17%/15%, -4pp/-2pp/-2pp yoy, -3pp/-1pp/-2pp vs GSe. GPM was under pressure in 1H25 (-2.6 ...

Summary of NARI Technology (600406.SS) Conference Call Company Overview - **Company**: NARI Technology - **Industry**: Hydropower and Electrical Equipment Key Points Yarlung Zangbo Hydropower Project - The Yarlung Zangbo River Hydropower Project officially commenced on July 19, 2025, with an expected capacity of over 60GW and an investment of approximately Rmb1.2 trillion over 15 years, significantly surpassing the Three Gorges Dam project [1][6] - The annual investment for the Yarlung Zangbo project is estimated at Rmb80 billion, representing 7% of China's power generation investment and 13% of power grid investment in 2024 [1][6] NARI Technology's Position - NARI Technology is positioned as a key beneficiary of the Yarlung Zangbo project due to its leading market share in hydropower generation control technology (70%) and UHV converter valves (37%) [1][15] - If selected as a supplier, NARI's long-term EPS could increase by approximately 4% beyond 2030, driven by opportunities in hydropower generation control, UHV converter valves, and secondary equipment for transformation stations [1][8] Revenue Opportunities - NARI is projected to generate around Rmb7.7 billion in revenue from the hydropower control system, compared to Rmb1.8 billion in segment revenue in 2024, based on an average selling price (ASP) of Rmb184 million per GW [2][8] - The expected revenue from UHV converter valves is estimated at Rmb7.9 billion, with a timeline of 6+ years for realization [9][8] Investment and Market Analysis - The total investment for UHV transmission lines for the Yarlung Zangbo project is estimated at Rmb216 billion, with NARI expected to capture a significant portion of this market [9][11] - The project is anticipated to have a substantial impact on domestic power generation and grid investment, with NARI's revenue from the project expected to contribute to a 4% boost in EPS beyond 2030 [1][8] Timeline and Comparisons - The timeline for the Yarlung Zangbo project includes key milestones such as the start of turbine generator bidding in 2028 and UHV construction/tendering in 2030, with project completion expected by 2040 [11][12] - The Yarlung Zangbo project is projected to have three to four times the power generation capacity of the Three Gorges and Baihetan projects [11][12] Risks and Price Target - The 12-month price target for NARI Technology is set at Rmb31.80, indicating a potential upside of 38.7% from the current price of Rmb22.93 [18][16] - Key risks include lower-than-expected fiscal support and delays in UHV project approvals [16] Additional Insights - NARI's dominant market position and the scale of the Yarlung Zangbo project present significant growth opportunities, making it a compelling investment in the hydropower sector [1][15] - The expected increase in demand for secondary equipment related to transformation stations could further enhance NARI's revenue potential [1][15]

Investment Rating - The report rates NARI Technology as a "Buy" with a 12-month target price of Rmb31.8, implying a 39% upside based on an unchanged 25X 2026E P/E [1][12][15]. Core Insights - NARI Technology is expected to achieve a revenue growth of 13% year-on-year (yoy) in 2025E, surpassing its target of 12% yoy growth, supported by a backlog of Rmb50.7 billion and a strong order intake of over 50% yoy in 1Q25 [1][2][15]. - The company anticipates that its Ultra-High Voltage (UHV) revenue will double in 2025E, driven by significant project execution and new contracts [1][4][7]. - NARI Technology is positioned to benefit from China's structural smart grid needs, with a focus on overseas markets and new growth drivers such as AI integration and market-based electricity price reform [1][5][10][15]. Summary by Sections Revenue and Growth - The company targets Rmb64,500 million in revenue for 2025E, indicating a 12% yoy increase, marking a shift in guidance to a more conservative growth outlook after eight years [2][15]. - The 1Q25 revenue growth was reported at 16% yoy, with power grid automation growing by 25% yoy, primarily due to UHV revenue recognition [1][4]. Segment Performance - **Grid Automation**: Revenue in this segment was Rmb28.5 billion in 2024, with a growth expectation of over 10% yoy in 2025E, driven by UHV revenue [4]. - **Grid Digitalization**: This segment recorded Rmb12.4 billion in revenue in 2024, with a projected growth of close to 10% in 2025E, supported by national policies promoting AI integration and virtual power plants [5]. - **Power Generation**: Revenue reached Rmb12.2 billion in 2024, with a growth expectation of 14% yoy in 2025E, despite a moderation in installation growth [8]. - **Industrial Internet**: The segment faced a decline of 24% yoy in 2024 but is expected to return to growth in 2025E [9]. Overseas Business - NARI Technology's overseas revenue reached Rmb3.28 billion in 2024, a 135% yoy increase, contributing 6% to total revenue, with expectations for continued growth in 2025E [10][15]. Expense Management - The company guided an expense of Rmb7,741 million for 2025E, indicating a 19.6% yoy increase, primarily due to increased R&D investments [11][15]. Valuation and Financial Metrics - The report maintains earnings forecasts unchanged, with a focus on a stable margin profile supported by necessary investments in R&D and a reclassification of interest income [12][15].