US policy risk is substantially priced in; Bernstein maintains Outperform on Sungrow

Overview

This report addresses two questions: whether the latest US bulk power system security executive order will exclude Sungrow from the US market, and whether weak first-half revenue can recover in the second half. Bernstein acknowledges that the regulatory scope is more directly relevant to the company's inverter and energy storage products than it was in 2020, but based on historical implementation experience, product interconnection voltages, order visibility, and stress testing, it believes a complete US exit is not the base case. It therefore maintains Outperform after lowering earnings forecasts and the target price.

Core views

US regulation is the report's primary analytical theme. EO 14420, signed on August 26, 2026, authorizes the US Department of Energy to review, restrict, impose conditions on, or prohibit foreign bulk power system equipment and related services deemed to pose national security risks. In principle, it applies to transmission and bulk power systems at 69kV and above, while local distribution facilities are explicitly excluded. The Department of Energy must formulate implementing rules within 120 days, and the affected entities, technologies, projects, and existing equipment are not expected to become clearer until the end of 2026. Therefore, the executive order itself increases uncertainty but does not yet amount to a comprehensive ban. Bernstein uses EO 13920 from 2020 as a historical reference. Both executive orders focus on bulk power facilities at 69kV and above, citing cybersecurity, operational security, and supply chain risks. The 2020 policy ultimately targeted only a small number of utilities serving designated defense facilities and specific equipment. It was subsequently suspended and revoked, and the emergency declaration expired, without resulting in a nationwide ban, widespread removal of existing equipment, or comprehensive exclusion of Chinese suppliers; US imports of large Chinese power transformers subsequently continued to grow. The report believes implementation at the time was constrained by the Department of Energy's lengthy rulemaking process, the need to balance national security against grid reliability and project economics, and US reliance on global supply chains. The United States still requires large-scale investment in power infrastructure, while domestic manufacturing capacity remains under development, so these constraints persist. However, EO 14420 is more directly relevant to Sungrow than the 2020 version: its scope explicitly includes grid-connected inverters, PCS, battery energy storage systems, software, and remote-access capabilities, and it may impose conditions on already installed equipment. Risks are concentrated in US utility-scale photovoltaic inverters, PowerTitan large-scale energy storage systems, and high-power PCS; commercial, industrial, and residential products are more commonly connected to local distribution networks and face less direct risk. FCC restrictions primarily affect future certifications and new-model approvals, while existing certified products can continue to be sold. Management states that US utility products have relatively slow replacement cycles and that existing products have a multi-year sales window. Meanwhile, many solar-plus-storage projects connect at 13.8kV or 34.5kV, below the 69kV threshold, and the ultimate impact will depend on how the Department of Energy distinguishes distribution assets from bulk power facilities. The report's base case is not that the US business will be unaffected, but that Sungrow can continue operating under stricter scrutiny, procurement reviews, and cybersecurity requirements, with the US business potentially declining gradually rather than abruptly falling to zero. The company plans to accelerate growth in Europe, Asia-Pacific, Latin America, and distributed energy markets to reduce reliance on the United States, while exploring ways to continue serving part of North American demand through overseas suppliers and service partners. Bernstein also emphasizes that stricter FCC certification will increase the cost and complexity of maintaining product competitiveness and may constrain new-product iteration and market-share gains over the long term. To quantify tail risk, the report establishes a stress scenario involving the complete loss of US inverter and energy storage sales from 2027 onward, rather than treating it as the most likely forecast. The model assumes the United States accounts for 15% of inverter shipments and 32% of energy storage shipments; US inverter and energy storage selling prices are respectively 25% and 15% higher than in other regions, while their gross margins are respectively 8 percentage points and 5 percentage points above the averages for their corresponding businesses. On this basis, US business revenue is estimated at approximately RMB18.271bn, accounting for 20.5% of group revenue, while gross profit is approximately RMB7.706bn, accounting for 27.1% of group gross profit. If US revenue falls by 50%, group revenue declines by approximately 10.2% and gross profit by approximately 14%; under a complete exit, revenue falls by approximately 20.5%, gross profit by approximately 27%, and group gross margin declines from 31.8% to 29.2%. Long-term forecasts further demonstrate the importance of the high-margin US market. Under the base case, revenue rises from RMB89.184bn in 2025 to RMB151.940bn in 2030, representing an 11% CAGR during 2025-30; net profit attributable to shareholders rises from RMB13.461bn to RMB23.877bn, representing a 12% CAGR. Under a complete US exit, 2030 revenue reaches only RMB117.633bn, reducing the CAGR to 6%; 2030 net profit is RMB15.746bn, representing a CAGR of only 3%, while gross margin is approximately 28.3%-28.4% during 2027-30. The corresponding DCF value falls from RMB151/share under the base case to RMB96/share. The report therefore believes that even if Sungrow exits the United States completely, it can remain profitable and continue growing, but its long-term earnings capacity and valuation would be significantly impaired. The RMB96/share valuation is also close to the RMB98.84 share price at the time of the report, indicating that the market has already priced in a severe deterioration scenario. Operationally, global photovoltaic installations in 1H26 were approximately 177GW, down 43% year over year. Installations in China fell to 72GW, down 66% year over year, mainly due to Policy No. 136, while overseas installations reached 105GW, up 8% year over year, accounting for nearly 60% of the global total compared with approximately 30% one year earlier. Over the same period, global lithium battery energy storage installations exceeded 140GWh, up 30% year over year; China reached 69GWh, up 21%, while overseas markets exceeded 89GWh, up 40%, with Europe growing approximately 70%-80% and Asia-Pacific nearly doubling. Global wind power installations were broadly flat year over year. These changes in demand structure explain the pressure on the company's domestic photovoltaic revenue, the improvement in its overseas business mix, and the relatively stronger industry backdrop for energy storage. Sungrow's 1H26 revenue was RMB30.9bn, down 29% year over year, affected by weak Chinese photovoltaic demand, reduced new-energy development activity, and fewer deliveries of large-scale energy storage projects in the Middle East. 2Q26 revenue was approximately RMB15.3-15.4bn, down approximately 37% year over year and significantly below the market expectation of RMB24.3bn. However, gross margin was approximately 38%-39%, rising sharply from 33% in 1Q26 and exceeding the 29% expectation; net margin rose from 14% to 19%, while net profit of approximately RMB3.0bn was broadly in line with expectations. Inverter shipments in 1H26 fell from 76GW a year earlier to 66GW, with revenue of RMB10.8bn, but a higher overseas share and an improved product mix supported stronger profitability. Energy storage shipments reached 25GWh, up 28% year over year, but revenue fell 13% year over year to RMB15.4bn due to a lower contribution from Middle Eastern projects and declining industry prices; energy storage gross margin rose from approximately 30% in 1Q26 to 35% in 2Q26. The report expects 2H26 to be significantly stronger than the first half. Contract liabilities rose to RMB11.7bn, equivalent to approximately 19% of annualized revenue; inventory increased by RMB4.9bn to prepare for subsequent deliveries, while cash collection improved. Because contract liabilities have historically been a good leading indicator of the company's revenue, and because the 25GWh of energy storage shipments in 1H26 represented less than 40% of the full-year total, with more than 60% of annual energy storage deliveries scheduled for 2H26, management guidance implies FY26 energy storage shipments of approximately 63-70GWh. Europe's expected energy storage demand in 2026 was also raised from approximately 60GWh to 74GWh and is expected to maintain annual growth of more than 50% over the next three years. The report also cautions that longer timelines for large-scale energy storage projects, lithium price volatility, and competition will continue to place gradual pressure on gross margin. Although competition has begun to ease, the industry may still require another 1-2 years of consolidation. AIDC is a key medium-term growth theme. The company divides the opportunity into data center energy storage and data center power infrastructure. The former includes co-location with grid-side projects and on-site energy storage used for power quality, reliability, load balancing, and energy arbitrage, while the latter includes solid-state transformers and next-generation power supply solutions. Management disclosed that it has secured approximately 2GWh of AIDC-related energy storage orders, with a pipeline under negotiation exceeding 10GWh, and believes demand could grow by more than 100% annually over the next several years, with meaningful adoption potentially beginning in 2027. Regarding SST, the company has delivered several units to customers and expects them to enter commercial operation in data centers in 4Q26. Existing commercial products target 10kV and 13.8kV applications, while a prototype 35kV platform is expected to be completed in 2027. Management positions 2027 as a period of small-scale commercial deployment and customer validation, with commercialization expected to expand during 2028-30 as data centers shift toward higher-voltage DC power distribution architectures. However, the report also notes that global SST remains at an early stage, with industry standards, technology architectures, and customer preferences yet to be finalized. Due to weaker Chinese photovoltaic demand, lower energy storage price assumptions, and competitive pressure, Bernstein lowered its 2026 and 2027 earnings-per-share forecasts from RMB8.22 and RMB9.33 to RMB6.93 and RMB7.95, respectively, and reduced its target price from RMB185/share to RMB151/share. At the same time, WACC was reduced from 8.6% to 8.2%, partially offsetting the earnings revisions. The DCF uses a 2% perpetual growth rate and annual free cash flow forecasts through 2050. The target price corresponds to approximately 3.3 times 2026E price-to-sales, 16.9-17 times EV/EBITDA, and 21.8-22 times P/E. The stock was then trading at approximately 12.4 times 2027E P/E, a level the report describes as a trough; Bernstein therefore maintains Outperform.

Analysis framework

The report first interprets the legal scope of EO 14420, the 69kV threshold, and the Department of Energy's rulemaking process, and then compares these with the language, implementation timeline, and actual procurement outcomes of EO 13920 from 2020. It subsequently assesses Sungrow's business exposure by product type and interconnection voltage, and estimates the revenue and gross profit contribution of the US business using regional shipments, selling-price premiums, and gross-margin premiums, establishing sensitivity analyses for varying proportions of lost US sales. Finally, the report revises earnings forecasts based on global photovoltaic and energy storage demand, company orders, and segment operating data, then applies a discounted free cash flow model to derive valuation results for the base case and a complete US exit scenario. Principal data sources include company data, the White House, the US government, the United Nations, Bloomberg, and Bernstein estimates.

Methodology notes

• Event Games and Behavioral FinanceEvent-driven analysis

  Analysis of the US bulk power system executive order

  Starting with the executive order as the triggering event, the report breaks down the timing of rulemaking, scope of coverage, enforcement authority, and potential transmission to Sungrow's various products, rather than directly equating the policy announcement with a commercial ban.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Regional demand analysis for global photovoltaic and energy storage markets

  The report compares installation growth rates in China, overseas markets, Europe, and Asia-Pacific to explain the company's revenue structure, overseas business mix, and outlook for second-half energy storage deliveries.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Shipment, selling-price, and gross-margin decomposition for inverters and energy storage

  The report separately examines shipment volumes, revenue, regional selling-price premiums, and gross margins to explain why energy storage shipments increased while revenue declined, and why the US business contributes a higher proportion of gross profit.

• (Method outside the vocabulary)

  US business exit scenario and sensitivity analysis

  The report calculates changes in revenue, gross profit, and gross margin under 25%, 50%, 75%, and 100% losses of US sales, and explicitly positions the complete exit scenario as a stress test for the valuation floor rather than a base-case forecast.

• Valuation MethodDCF Discounted Cash Flow

  Discounted free cash flow valuation

  The report uses an 8.2% WACC, a 2% perpetual growth rate, and annual free cash flow forecasts through 2050 to derive RMB151/share under the base case and RMB96/share under the complete US exit scenario.

Asset mapping & comparison

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

• Sungrow Power Supply Co., Ltd (300274.CH)

  US bulk power system policy is directly related to its utility-scale inverter, PCS, and large-scale energy storage businesses; Chinese and overseas energy storage demand, AIDC orders, and SST commercialization constitute sources of operating growth.

  Strengths

  The report emphasizes the company's leading market share, strong financial position, and capital returns, as well as relatively stable inverter margins. Contract liabilities, the overseas business mix, and technological capabilities spanning renewable energy, energy storage, and power electronics provide growth visibility.

  Weaknesses

  Weak Chinese photovoltaic demand, declining energy storage prices, and fewer deliveries of large Middle Eastern projects weighed on revenue. The US business has higher profitability than the group average, making the policy risk's impact on gross profit greater than its impact on revenue.

  Risks

  Further tightening of US regulation, restrictions on FCC certification of new products, energy storage pricing and inventory pressure, loss of market share due to industry competition, and weaker-than-expected AIDC-related energy storage demand.

Key data

• Rating and target priceOutperform; RMB151/shareRating maintained; target price lowered from RMB185/share
• Closing price and potential upsideRMB98.84; 53%August 27, 2026 closing price and upside implied by the target price
• Earnings-per-share forecasts2026E RMB6.93; 2027E RMB7.95Previous forecasts were RMB8.22 and RMB9.33, respectively
• 1H26 revenueRMB30.9bnDown 29% year over year
• 2Q26 revenue and gross marginRevenue approximately RMB15.3-15.4bn; gross margin approximately 38%-39%Revenue was below the RMB24.3bn expectation, while gross margin exceeded the 29% expectation
• Contract liabilitiesRMB11.7bnEquivalent to approximately 19% of annualized revenue and viewed by the report as a leading indicator of 2H26 revenue recognition
• FY26 energy storage shipment guidanceApproximately 63-70GWh1H26 shipments were 25GWh, with more than 60% of full-year deliveries expected in 2H26
• Estimated US business contributionRevenue RMB18.271bn; gross profit RMB7.706bnAccounting for 20.5% of group revenue and 27.1% of gross profit, respectively
• Impact of complete US exit stress scenarioRevenue -20.5%; gross profit approximately -27%; gross margin declines from 31.8% to 29.2%Stress test based on 2025 financial data
• 2030 base and complete exit scenariosBase-case revenue RMB151.940bn and net profit RMB23.877bn; exit-scenario revenue RMB117.633bn and net profit RMB15.746bn2025-30 revenue CAGRs are 11% and 6%, respectively, while net profit CAGRs are 12% and 3%, respectively
• AIDC orders and pipelineSecured orders of approximately 2GWh; pipeline under negotiation exceeding 10GWhManagement expects demand could grow by more than 100% annually over the next several years
• Key DCF assumptionsWACC 8.2%; perpetual growth rate 2%; target price RMB151/shareWACC was previously 8.6%; value under the complete US exit scenario is RMB96/share

Impact & implications

The report believes investors should not directly interpret the announcement of EO 14420 as Sungrow being completely expelled from the US market, because the ultimate commercial impact depends on the Department of Energy's implementing rules regarding the scope of the bulk power system above 69kV, existing equipment, and specific products. The current share price is close to the RMB96/share valuation under the complete US exit scenario, while the base case retains US sales, 2H26 order conversion, and AIDC growth, so Bernstein maintains a positive rating. However, the importance of the United States as a high-margin market means that even if the company maintains growth through other regions, a stricter policy outcome would still significantly weaken long-term earnings and valuation.

Risks

• Reduced AI spending could slow AIDC-related energy storage demand.
• Further increases in US tariffs could weaken the cost competitiveness of Chinese-manufactured products.
• High inventory levels and continuing price competition in energy storage could pressure margins.
• The company could lose market share if the industry becomes more fragmented and price-sensitive.
• Policy changes targeting Chinese suppliers could restrict access to the US market or increase compliance costs.

What to watch

• Monitor the implementing rules expected from the US Department of Energy within 120 days of the executive order, likely by the end of 2026, and their specific definitions of equipment, projects, and existing installations.
• Monitor how the Department of Energy defines bulk power facilities above 69kV and whether solar-plus-storage projects at 13.8kV and 34.5kV are included within the restricted scope.
• Track the impact of FCC restrictions on future product certifications and new-model approvals, as well as the actual sales window for existing certified products.
• Assess whether RMB11.7bn of contract liabilities, increased inventory, and more than 60% of full-year energy storage deliveries can translate into 2H26 revenue.
• Track whether FY26 energy storage shipments reach approximately 63-70GWh and whether Europe's expected 74GWh of demand in 2026 materializes.
• Monitor the conversion of approximately 2GWh of AIDC orders and a pipeline exceeding 10GWh, as well as the progress of SST commercialization in 4Q26, 2027, and 2028-30.
• Monitor large-scale energy storage gross margins, lithium price volatility, and the industry consolidation process over the next 1-2 years.