Leader in Composite Insulators, Riding the Tailwinds of Grid Upgrades

Overview

This is Nomura Securities’ initial coverage report on Shenma Electric (603530.SS). The report assigns a Buy rating with a target price of RMB 84.32, representing 48.8% upside from the current price of RMB 56.66. The core conclusion is that Shenma Electric, as the leader in composite insulators, will fully benefit from accelerated grid investments during China’s 15th Five-Year Plan period—particularly in UHV projects—and from global grid upgrade demand driven by energy transition and AI data center construction. The report forecasts compound annual revenue and net profit growth of 33% and 32%, respectively, from 2026 to 2028, supported by operating leverage and overseas expansion leading to continuous gross margin improvement.

Core views

The report’s central thesis is that Shenma Electric is positioned at a favorable point in the power grid investment cycle, with growth drivers stemming from both domestic and international markets. Domestically, grid and UHV investments are set to increase significantly during China’s 15th Five-Year Plan, creating strong downstream demand for the company’s composite insulator products. Shenma Electric possesses long-standing operational experience and leading technical capabilities in this segment, with a solid customer base and an entrenched industry position that is difficult to challenge. Citing disclosures from the company’s investor relations, the report notes that transformer and switchgear customers lack economies of scale if they attempt to produce insulators in-house, reinforcing Shenma’s role as an indispensable specialized supplier capable of consistently securing incremental orders. Internationally, global energy transition and AI data center development are driving large-scale grid upgrades and capacity expansions, offering new growth opportunities for Shenma’s overseas business. The report highlights the company’s strategic push into external insulation and sealing products for power transmission and transformation equipment as a future growth engine, forecasting 41% compound annual revenue growth for this segment from 2026 to 2028. On the financial front, gross margin is projected to improve from 46.2% in 2025 to 46.7%/46.8%/47.4% in 2026/27/28, primarily due to operating leverage from revenue growth and continued overseas expansion. However, SG&A expenses are expected to rise to 20.5% in 2026 due to overseas channel expansion and the U.S. factory ramp-up, before slightly improving to 20.2%–20.4% in 2027–28 as operational efficiency increases. Based on these assumptions, net profit is forecast at RMB 588 million / RMB 802 million / RMB 990 million for 2026/27/28, respectively. In terms of valuation, the report selects Chinese electrical equipment peers—including Sieyuan Electric, Jinpan Technology, Huaming Equipment, Pinggao Electric, and XD Group—that also benefit from overseas expansion and AI data center-related grid upgrades. The average consensus 2026 P/E ratio for these peers is 36x, while the report assigns Shenma Electric a target P/E of 62x—a significant premium. This premium is justified by two key factors: (1) Shenma’s 32% EPS CAGR from 2026–28 exceeds the peer average of 28%, and (2) its forecast ROE of 27.8%–32.9% is substantially higher than the peer average of 16.5%–20.0%.

Analysis framework

The report follows a clear demand-driven analytical framework: starting from the macro backdrop of the grid investment cycle, it traces the resulting demand growth for the company’s core products, integrates the company’s competitive moat and new business initiatives, and ultimately translates this into financial forecasts and valuation. Specifically, the analysis unfolds in four steps: First, it identifies industry catalysts—accelerated grid and UHV investment under China’s 15th Five-Year Plan, coupled with global grid upgrade demand from energy transition and AI data centers—which together form the external drivers of revenue growth. Second, it validates the company’s competitive moat by citing IR disclosures showing that in-house insulator production by downstream customers is economically unviable, thereby confirming Shenma’s irreplaceable role as a specialized supplier. Third, it breaks down growth drivers by identifying external insulation and sealing products for power transmission equipment as a new growth vector beyond traditional composite insulators, with a 41% revenue CAGR forecast for 2026–28. Fourth, it builds a financial model and valuation—using volume-price segmentation and expense assumptions to project segment-level revenue and profit, then applying a relative P/E valuation methodology with a premium over peers to arrive at the target price. For valuation, the report employs the P/E relative valuation method, commonly used in the electrical equipment sector. The assigned 62x P/E (versus a 36x peer average) reflects the analyst’s strong confidence in the company’s growth quality and profitability.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Deriving demand growth for composite insulators from the power grid investment cycle

  The report’s core logic is demand-driven: accelerated grid investment during China’s 15th Five-Year Plan and global energy transition/data center build-outs will directly boost demand for composite insulators. This top-down approach—from macro investment to micro product demand—is a classic application of the supply-demand framework.

• Competition & Strategy FrameworkMoat / competitive advantage

  Downstream customers lack economies of scale in producing insulators in-house, forming the company’s moat

  By referencing company IR disclosures, the report argues that in-house insulator production by customers is uneconomical, thereby demonstrating Shenma’s irreplaceable position as a specialized supplier. This analysis essentially evaluates the sustainability of the company’s competitive moat.

• Valuation MethodPE/PEG valuation

  Using relative P/E valuation with a premium over peer average

  The report applies P/E-based valuation: first calculating the peer average P/E, then assigning a premium to Shenma due to its faster growth and higher ROE. P/E valuation is one of the most common methods, and the premium rationale—growth rate and profitability—is central to its proper application.

• Industry/Industrial Analysis FrameworkVolume-Price Breakdown

  Decomposing revenue growth into drivers across different business segments

  In financial forecasting, the report splits revenue into segments—substation insulation, rubber seals, transmission line insulation—and provides independent revenue projections for each. This granular approach helps clarify each segment’s contribution to overall growth and is a standard modeling technique in industry analysis.

• Company Fundamentals & Financial FrameworkOperating/Financial Leverage Analysis

  Revenue growth drives operating leverage, boosting gross margin

  The report explicitly states that gross margin improvement partly stems from operating leverage due to revenue growth. Operating leverage—where fixed costs remain constant while revenue rises, amplifying profit growth—is a critical lens for analyzing manufacturing profitability dynamics.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Shenma Electric (603530.SS)

  Core subject of the report, benefiting from dual demand cycles of domestic UHV construction and overseas grid upgrades, as the composite insulator leader poised to capture incremental orders directly.

  Strengths

  Market leader in composite insulators with superior product performance and a stable customer base; downstream customers cannot economically produce insulators in-house, creating a deep moat; actively expanding overseas, with U.S. factory ramp-up expected to accelerate high-value product shipments.

  Weaknesses

  High SG&A expense ratio, projected to reach 20.5% in 2026 due to overseas channel expansion and U.S. factory ramp-up; accounts receivable turnover days exceed 145; free cash flow turned negative in 2025.

  Comparison

  Compared to peers, Shenma Electric’s EPS CAGR (32%) exceeds the industry average (28%), and its ROE (27.8%–32.9%) is significantly higher than the peer average (16.5%–20.0%). The report cites these as the core justification for its valuation premium.

  Risks

  Product quality risk, foreign exchange fluctuation risk, raw material price volatility risk

Key data

• Current Share PriceRMB 56.66As of May 26, 2026 closing price
• Target PriceRMB 84.32Based on 2026E EPS of RMB 1.36 × 62x P/E
• Implied Upside+48.8%Upside potential relative to current share price
• 2026–28E Revenue CAGR33%Report’s own forecast, above Wind consensus
• 2026–28E Net Profit CAGR32%RMB 588M / RMB 802M / RMB 990M for 2026/27/28
• Gross Margin Forecast (2026/27/28)46.7%/46.8%/47.4%Gradual improvement from 46.2% in 2025
• Target P/E Ratio62xBased on 2026E earnings; peer average is 36x
• Peer Average P/E Ratio36x2026E consensus average for Sieyuan Electric, Jinpan Tech, Huaming Equipment, Pinggao Electric, and XD Group
• ROE Forecast (2026–28)27.8%–32.9%Significantly above peer average of 16.5%–20.0%

Impact & implications

The report concludes that Shenma Electric offers clear investment value at this juncture, based on three key points: First, the company is positioned within dual demand cycles—domestic UHV construction and overseas grid upgrades—with high order visibility. Second, its leadership in composite insulators is solid, with high customer switching costs and a durable moat. Third, the ramp-up of its U.S. factory and faster-than-expected overseas sales of high-value products could lead to earnings outperformance. Notably, the report’s revenue forecast exceeds Wind consensus, reflecting optimism about the pace of U.S. factory ramp-up; however, its 2026 and 2028 net profit forecasts are slightly below consensus, indicating cautious assumptions regarding raw material cost volatility and other expense pressures.

Risks

• Product Quality Risk: Insulators are critical components for grid safety. Major quality issues could cause localized or even widespread blackouts, damaging the company’s brand and product reputation.
• Foreign Exchange Fluctuation Risk: The company exports to the U.S., Europe, India, Brazil, and other markets. Fluctuations in major foreign currencies may impact profitability.
• Raw Material Price Volatility Risk: Key raw materials include winding yarn, silicone rubber, and aluminum ingots. Significant price increases without timely product price adjustments would compress margins.

What to watch

• Whether the ramp-up speed of overseas factories—especially the U.S. facility—exceeds market expectations
• Whether actual progress of domestic UHV projects accelerates beyond expectations