25 February 2026 | 4:05PM CST Equity Research CHINA INDUSTRIAL TECH: DATA CENTER ELECTRICALS Asia investor feedback: Eyes on export visibility and execution; Fine-tuning estimates on commodities cost trends/pre-announced results; Buy Kstar We talked with 50+ investors from Hong Kong, Singapore, and Mainland China since our deep-dive reports in mid-January (Kstar, Megmeet, Kehua). While the sector backdrop remains robust, supported by strong 2026E capex guidance from US tech giants as well as order growth an ...

Summary of Eaton Corporation Conference Call Industry Overview - The focus of the conference call was on data center technologies, specifically power and thermal management within data centers [1] - Eaton Corporation is involved in the electrical businesses sector, with significant emphasis on data center build-outs in the US [1] Key Points and Arguments Data Center Build-Outs - Eaton estimates that the cumulative opportunity for data center build-outs in the US will reach approximately 100 gigawatts (GW) by 2028 [2] - As of the end of the previous year, there was an installed capacity of about 35 to 40 GW, with 17 GW planned for 2026 [2] - There is a backlog of over 165-200 GW planned through 2030 and beyond, indicating strong growth potential [2] - The visibility for future installations could extend up to 10 years due to the backlog, despite physical and labor constraints [3] Voltage and Power Management - The transition to 800-volt direct current (DC) in data centers is seen as a significant architectural change, with designs currently being developed [11] - Transitioning to DC power could yield a 5% efficiency gain, potentially providing an additional 5 GW of power from existing infrastructure [12] - Solid-state transformers are crucial for this transition, allowing for direct conversion from medium voltage to DC, thus simplifying the architecture and reducing losses [14][15] Eaton's Position and Technology Development - Eaton has been investing in next-generation power electronics for about 10 years, positioning itself well in the solid-state transformer market [16] - The company has initiated pilots for medium-voltage solid-state transformers and acquired Resilient Power for their technology [17] - Mass adoption of solid-state transformers is anticipated within the next 2 to 3 years, coinciding with advancements in chip technology [18] Circuit Protection and Safety - The shift to higher voltage systems necessitates new circuit protection devices, as direct current requires faster interruption methods compared to alternating current [21][22] - Eaton has been investing in solid-state and hybrid circuit protection to meet these new demands [22] Systems Approach in Data Centers - Customers are increasingly seeking a systems approach to data center design, integrating various components for optimal efficiency rather than selecting best-of-breed products individually [26] - This trend is likened to the Apple ecosystem, where components work seamlessly together [26] Gray Space vs. White Space - The distinction between Gray Space (power systems) and White Space (IT systems) is becoming less relevant as power demands increase and rack densities rise [30] - Eaton is becoming more involved in discussions about power flow from utility to rack, indicating a shift in design considerations [30] Distributed Power Generation - The trend towards bidirectional power flow, including on-site generation, aligns well with Eaton's technology, such as microgrid controllers and energy-aware UPS systems [32][33] Liquid Cooling Technology - Liquid cooling is becoming essential as chip power requirements increase, with advancements in cold plate technology for efficient heat dissipation [34][35] - Boyd Thermal, acquired by Eaton, is positioned well in the market due to its reliability and rapid development capabilities [40][41] Additional Important Insights - Eaton's strong historical performance in the Gray Space is complemented by its growing capabilities in the White Space [30] - The company is focused on maintaining reliability and speed in product development to meet the demands of rapidly evolving chip technologies [49] - There is a positive outlook on Eaton's EPS growth compared to peers, with ongoing M&A and organic investments to utilize excess cash effectively [50]

Investment Rating - The report maintains a "Buy" rating for several companies in the Japan Industrial Electronics sector, including Anritsu, Panasonic HD, Hitachi, Sumitomo Electric, Fujikura, SWCC, Mitsubishi Electric, and Daihen. Furukawa Electric and Fuji Electric are rated as "Neutral" [7]. Core Insights - The Japan Industrial Electronics sector is poised for growth driven by technological advancements in AI server power and optics, with companies like Hitachi, Mitsubishi Electric, and Panasonic actively developing new business models to leverage AI's importance [1][12]. - The report anticipates that the implementation of physical AI in social infrastructure will gain momentum, with conglomerates expected to progress in their business portfolio strategies by 2026 [1]. - The sector is experiencing a shift towards higher voltage systems in data centers, which presents opportunities for electrical equipment manufacturers skilled in high voltage applications [22][24]. Earnings Estimates and Target Prices - The report revises FY3/26E-FY3/28E operating profit estimates for the sector by an average of 0%/-1%/-1%, while raising 12-month target prices by an average of 4% [3][7]. - Specific target price adjustments include Anritsu from 2,400 million JPY to 2,600 million JPY, Panasonic HD from 2,100 million JPY to 2,300 million JPY, and Hitachi from 5,900 million JPY to 6,000 million JPY [7][3]. Technological Changes in AI Server Power - Companies like Hitachi and Mitsubishi Electric are increasing their presence in AI server power solutions, focusing on high-voltage DC systems to reduce conversion losses and improve efficiency [12][13]. - The report highlights the importance of battery backup units (BBUs) and hybrid supercapacitors (HSCs) in managing power fluctuations in generative AI data centers, with Panasonic having a strong position in BBUs [16][12]. Technological Changes in AI Server Optics - The report notes a significant shift towards higher communication speeds in data centers, moving from 200-400 Gbps to 800-1.6 Tbps, and the transition to Co-packaged Optics (CPO) [28][29]. - Companies such as Mitsubishi Electric, Sumitomo Electric, and Furukawa Electric are increasing production of optical devices and connectors to meet rising demand [30][31]. Implementation of Physical AI - Hitachi, Mitsubishi Electric, and Panasonic are focusing on integrating AI into industrial applications, with expectations of increased competition as software companies also enter the physical AI space [47][49]. - The report categorizes companies in the sector based on their involvement in AI infrastructure, AI-enabled revenues, and productivity gains, with Hitachi identified as a key beneficiary across all categories [48][49].

Summary of Conference Call Notes Industry Overview - The conference call discusses the performance of the China Industrial Tech sector, focusing on various companies within the industry, particularly in the areas of AI, energy storage systems (ESS), and consumer electronics. Key Highlights 1. **3Q25 Results**: - The sector average revenue and operating profit increased by 18% and 17% year-over-year respectively, with results mostly in-line with expectations [1][2] - Notable performance drivers included: - Capacity buildout by major domestic PCB customers for AI applications, particularly Hans Laser [1] - Capital expenditures in batteries and consumer electronics [1] - Strong demand in AIDC power and ESS, along with export demand [1] - Liquid cooling technology advancements [1] - Market share gains in the industrial automation segment [1] - Effective cost control leading to margin improvements [1] - Expansion into new technology markets such as infrared [1] 2. **Challenges Faced**: - Smaller players struggled with scaling and profitability [1] - Prolonged capital expenditure weakness in process automation sectors like steel and chemicals [1] - Delays in defense orders impacting AVIC Jonhon [1] - Margin deterioration due to high exposure to precious metals [1] 3. **Margin Trends**: - Smaller companies like HCFA are more vulnerable in a deflationary environment with ASP pressure [2] - AVIC Jonhon faced margin deterioration due to precious metal price hikes [2] - Larger players like Sanhua achieved margin beats through stringent cost control [2] - Kstar's ESS segment gross profit margin improved by over 3 percentage points due to a favorable product mix [2] Actionable Investment Ideas 1. **Buy Recommendations**: - Hans Laser: Strong demand in PCB and consumer electronics [3] - Kstar: Beneficiary of AIDC power and overseas ESS growth [3] - Inovance: Resilient performance in industrial automation [3] - Nari Tech and Centre Testing: Defensive plays with stable margins [3] 2. **Sell Recommendations**: - Raycus: Limited military end-market sales [3] - Baosight: Continued weakness in domestic steel industry capex [3] - Sanhua-A: Potential profit-taking pressure due to optimistic market expectations [3] Sector Focus Areas 1. **AI Demand**: - Hans Laser is experiencing strong growth in PCB equipment sales driven by capex expansion from key customers like Victory Giant [6] - Kstar anticipates higher sales growth in data center products due to increasing orders from domestic and overseas customers [6] 2. **Energy Storage**: - Sungrow expects 40%-50% global ESS installation growth in 2026, driven by renewable energy needs and market-driven policies in China [7] - Kstar aims to double its ESS sales growth in 2025, supported by positive demand outlook [7] 3. **Consumer Electronics**: - OPT anticipates stronger demand due to shifts in product form factors, particularly with Apple's upcoming products [8] - Han's Laser is benefiting from solid demand for iPhone 17 and next-generation smartphone equipment [8] 4. **Overseas Expansion**: - Hongfa has a dominant market share in HVDC relays and is expanding capacity in Germany and Indonesia to meet EV demand [10] - Inovance is also expanding overseas to support sales growth in EV powertrain products [10] Additional Insights - The conference call highlighted the importance of product mix and cost control in maintaining margins amid challenging market conditions [2][3] - The outlook for the sector remains positive, particularly in AI and energy storage, despite some challenges faced by smaller players and specific sectors [6][7][8]

Summary of Shenzhen Kstar Science & Tech (002518.SZ) Earnings Call Company Overview - **Company**: Shenzhen Kstar Science & Tech (002518.SZ) - **Industry**: Electric power conversion technology, focusing on data centers and energy storage systems (ESS) Key Financial Highlights - **3Q25 Results**: - Revenue: Rmb1,446 million (+42% YoY) - Gross Profit: Rmb404 million (+27% YoY) - EBIT: Rmb207 million (+62% YoY) - Net Income: Rmb190 million (+38% YoY) - Gross Profit Margin (GPM): 28% (-3pp YoY) - Operating Profit Margin (OPM): 14% (+2pp YoY) - Net Profit Margin (NPM): 13% (0pp YoY) - Results exceeded guidance estimates (GSe) by 13% for revenue and 5% for net income [1][2][21] Growth Projections - **2026 Sales Growth**: Management anticipates a 35% YoY growth in data center product sales, up from a 19% growth expected in 2025, driven by new domestic and overseas customers [1][2] - **Energy Storage System (ESS)**: - Sales in 3Q25: Rmb335 million (+179% YoY) - Management targets to double ESS sales growth in 2025, with a positive outlook for 2026 [16][18] - **Solar Inverter Sales**: - Sales in 3Q25: Rmb150 million (+5% YoY), primarily driven by overseas markets [17] Customer Acquisition and Market Expansion - **Domestic Customers**: Significant orders expected from Alibaba, Bytedance, Kuaishou, and JD.com, with a focus on UPS systems [1][19] - **Overseas Markets**: Contributed over 50% of segment sales in 3Q25, with strong growth compared to domestic sales [2] - **New Product Development**: Ongoing R&D for high-voltage direct current (HVDC) products and solid-state transformers, with potential shipments to Europe by 2026 [19] Financial Forecasts and Valuation - **Revised EPS Forecasts**: 2025E-2030E EPS forecasts increased by an average of 8% [1][18] - **Target Price**: Revised to Rmb48.5 (+5% from previous Rmb46.2), based on a 28x P/E for 2026E [20][23] - **Valuation Ratios**: - P/E for 2025E: 34.4 - P/B for 2025E: 4.7 - Dividend Yield: 1.0% for 2025E [10][22] Risks and Considerations - **Downside Risks**: - Lower-than-expected growth in data center revenue - Weaker outlook for new energy revenue - Margin pressures in new energy segments [23] Conclusion - **Investment Rating**: Reiterated Buy rating based on strong growth prospects, solid customer acquisition, and positive market dynamics in the data center and energy storage sectors [1][20][22]

Core Viewpoint - Natron Energy, a U.S. sodium-ion battery company, has ceased all operations, closing its factories in Michigan and California, and laying off 95 employees due to underperformance and high production costs [2][3] Group 1: Natron Energy's Situation - Natron Energy had announced a $1.4 billion investment to build a 24GWh sodium-ion super factory in North Carolina a year ago, but failed to secure sufficient customer orders, leading to a rapid deterioration of its financial situation [2] - The company faced engineering challenges with Prussian blue materials, which, despite their theoretical advantages, struggled with synthesis processes, cycle stability, and energy density [2] - The targeted markets for Natron's batteries, such as UPS and industrial energy storage, are highly safety-sensitive but also price-sensitive, making it difficult for new technologies to penetrate without clear performance or cost advantages [2] Group 2: Future of Sodium-Ion Batteries - Despite Natron's failure, the sodium-ion battery technology is not considered dead, as companies in China, including CATL, BYD, and others, continue to advance research and production in this field [3] - These companies aim to leverage mature supply chains and cost control capabilities to find differentiated markets in specific applications like two-wheelers, low-speed electric vehicles, and energy storage [3] - The mainstream adoption of sodium-ion batteries will depend on achieving a balance between cost, performance, and lifespan [4]