15th Five-Year Plan Grid Investment Raised; Equipment Makers Preferred Over Generators

Overview

This report focuses on the impact of China's new power system transition on the power industry chain. Morgan Stanley believes that to accommodate the rising penetration of renewable energy and the demand for 'West-to-East Power Transmission,' China's grid investment will accelerate significantly during the 15th Five-Year Plan period. Based on this, the firm clearly expresses a structural view of 'preferring grid equipment and avoiding independent power producers,' and makes differentiated rating adjustments for covered stocks: favoring equipment leaders with UHV advantages and overseas expansion capabilities, while downgrading some generator ratings due to full valuations and medium-term electricity price pressures.

Core views

Significant Upward Revision of Grid Investment Forecast: The report raises the forecast for China's grid investment during the 15th Five-Year Plan to RMB 4.1 trillion, a 49% increase from the 14th Five-Year Plan, corresponding to a CAGR of 8.4-8.7% from 2026-2030. This forecast exceeds market expectations, primarily driven by the policy determination behind State Grid's RMB 4 trillion investment plan, the continued upward trend in China Southern Power Grid's asset investment, and the inclusion of incremental areas such as smart microgrids. Additionally, the strong start with a 33.5% year-on-year increase in grid investment in the first two months of 2026 validates this acceleration trend. New Power System Reshapes Regulation Needs: China's power system is shifting from a coal-fired base load to a new increment system dominated by wind and solar. To address the integration of intermittent new energy and cross-province transmission issues, the role of coal power is shifting to peak shaving and capacity support, while pumped storage, energy storage, and gas power generation become key sources of system flexibility. The construction of a unified national power market (with a target of 70% of electricity volume traded in the market by 2030) will price flexibility resources through spot and ancillary service markets, further supporting related equipment demand. UHV and Overseas Expansion are Core Growth Drivers for Equipment Makers: More than 25 UHV lines are expected to be commissioned during the 15th Five-Year Plan, with 4 new DC and 2-3 AC projects approved annually. Chinese companies have significant competitive advantages in this field. Meanwhile, against the backdrop of tight global transformer supply, Chinese grid equipment manufacturers are poised to break through overseas certifications and achieve dual-driven growth domestically and internationally based on their mature performance records. In contrast, independent power producers face downward risks to on-grid tariffs due to accelerated centralized trading in the electricity market and medium-term supply oversupply. Significant Divergence in Individual Stock Ratings: The report reiterates its preference for Sieyuan Electric (target price RMB 283.4), valuing its product diversification, market share gain, and overseas order potential; maintains Overweight ratings for Pinggao Electric (target price RMB 27.85) and NARI Technology (target price RMB 32.25), benefiting from UHV delivery. Conversely, it downgrades Xuji Electric to Equal-weight (target price RMB 32.18) due to lower-than-peer earnings growth expectations and rich valuations; maintains an Equal-weight rating for Chint Electrics due to low exposure to grid business; and downgrades CGN Power H-shares and China Resources Power to Equal-weight, mainly because valuations are in a reasonable range and electricity prices are under pressure.

Analysis framework

The report adopts a top-down analysis framework of 'macro policy → industry supply and demand → micro targets.' First, by interpreting the 15th Five-Year Plan of State Grid and China Southern Power Grid and the State Council's power market reform documents, it establishes the overall tone of accelerated grid investment; second, combining the geographical mismatch of 'Western resources and Eastern loads' with new energy penetration data, it deduces the structural demand for UHV transmission and system flexibility regulation; finally, at the stock selection level, it uses relative valuation methods (PE/PB/PEG) for horizontal and vertical comparisons with historical averages and global peers, and makes differentiated rating adjustment decisions based on differences in each company's exposure to grid business, progress in overseas certification, and certainty of earnings growth.

Methodology notes

• Macroeconomic framework

  Five-Year Plan Capex Forecast

  In China's infrastructure research, the five-year plan investment amounts of national-level grid companies are the core anchor for forecasting industry prosperity. This report upgrades the total demand forecast for the grid equipment industry by tracking the '15th Five-Year Plan' targets of State Grid and China Southern Power Grid.

• Industry/Sector Analysis FrameworkSupply and Demand Framework

  Power System Flexibility Supply-Demand Balance

  As the proportion of intermittent sources like wind and solar increases, the core contradiction of the power system shifts from 'energy balance' to 'power balance.' The report thus judges the value re-rating of flexibility resources such as coal power, energy storage, and pumped storage, as well as the rigid demand for cross-regional UHV transmission.

• Valuation MethodPE/PEG valuation

  Historical Valuation Center and Global Benchmarking

  When setting target prices, the report not only references the company's own historical PE/PB averages (such as Xuji Electric's average since 2013) but also introduces PEG metrics of global comparable companies (such as Sieyuan Electric benchmarking against global peers) to judge whether current valuations have overdrawn future growth.

• Competition and Strategy FrameworkMoat / competitive advantage

  UHV Technology Barriers and Overseas Certification

  In the logic of grid equipment going global, breakthroughs in overseas certification tests are seen as key competitive barriers. The report emphasizes that Chinese companies' mature performance records in the UHV field are their core moat for securing overseas orders against the backdrop of tight global supply.

Asset mapping & comparison

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

• Sieyuan Electric (002028.SZ)

  Top pick, benefiting from product diversification, domestic market share gain, and order growth amid tight global transformer supply

  Strengths

  Improvement in product and sales regional structure, potential for sustained earnings and gross margin beats

  Comparison

  2026E PEG 1.1x, reasonable valuation compared to global peers

• Pinggao Electric (600312.SS)

  Maintain Overweight, directly benefiting from accelerated UHV product delivery and grid investment growth

  Strengths

  Core UHV supplier, strong order certainty

  Comparison

  Target price raised by 36% to RMB 27.85, 2026E PE of 25.6x still below historical average of 36.3x

• NARI Technology (600406.SS)

  Maintain Overweight, benefiting from grid intelligence investment and UHV supporting demand

  Strengths

  Leader in grid automation, stable performance

  Comparison

  Target price raised by 22% to RMB 32.25, 2026E PE of 27.5x above historical average of 22.3x

  Risks

  Valuation slightly above historical center

• Xuji Electric (000400.SZ)

  Downgraded to Equal-weight, although an important participant in UHV DC, earnings growth is expected to lag peers

  Strengths

  Leading technology in UHV DC field

  Weaknesses

  Earnings growth below expectations, valuation becoming reasonable

  Comparison

  Target price raised by 19% to RMB 32.18, 2026E PE of 25.0x above historical average of 23.0x

  Risks

  Valuation premium lacks sufficient growth support

• Chint Electrics (601877.SS)

  Maintain Equal-weight, relatively low exposure to grid customer business

  Strengths

  Leader in low-voltage electrical appliances, strong distribution channels

  Weaknesses

  Low proportion of grid business, limited benefit

  Comparison

  Target price raised by 34% to RMB 33.12, 2026E PE of 16.6x above historical average of 15.2x, insufficient attractiveness

• CGN Power (1816.HK) / China Resources Power (0836.HK)

  Downgraded to Equal-weight, valuation has reached reasonable range and faces downside risk to electricity prices

  Strengths

  Stable nuclear/thermal power operations, good cash flow

  Weaknesses

  Accelerated centralized trading in power market, medium-term supply oversupply may suppress on-grid tariffs

  Comparison

  CGN H-shares 2026E PB 1.1x flat with historical average; China Resources Power 2026E PB 0.8x below historical average of 0.9x

  Risks

  Downside risk to on-grid tariffs, impact of power market reforms

Key data

• 15th Five-Year Plan Grid Investment ForecastRMB 4.1 trillion49% increase from the 14th Five-Year Plan, CAGR of 8.4-8.7% from 2026-2030
• Grid Investment in First Two Months of 2026RMB 43.6 billion33.5% year-on-year increase, showing a strong start
• 15th Five-Year Plan UHV Commissioning ExpectationMore than 25 linesExpected annual approval of 4 DC + 2-3 AC projects
• Sieyuan Electric Target PriceRMB 283.4Corresponding to 2026E PEG of 1.1x
• Pinggao Electric Target PriceRMB 27.85Raised by 36%, corresponding to 2026E PE of 25.6x
• NARI Technology Target PriceRMB 32.25Raised by 22%, corresponding to 2026E PE of 27.5x
• Marketized Trading Volume Target70%State Council proposes achieving this ratio by 2030

Impact & implications

For grid equipment manufacturers, the acceleration of investment during the 15th Five-Year Plan means significantly improved order visibility, especially for core UHV suppliers and companies with overseas delivery capabilities, which will see opportunities for dual repair in performance and valuation. For independent power producers, although there is still installed capacity growth in the short term, the deepening of power market reforms and potential medium-term supply oversupply may compress on-grid tariff space, making their investment attractiveness relatively lower. Overall, the investment focus of China's power industry chain is shifting from the 'generation side' to the 'grid side,' with more emphasis on solving system flexibility and cross-regional resource allocation.

Risks

• Accelerated promotion of centralized trading in the power market may lead to lower on-grid tariffs
• Potential supply oversupply in China's power system in the medium term
• Actual execution progress of grid investment falls short of plan expectations
• Breakthroughs in overseas certification or order landing slower than expected

What to watch

• Actual pace of UHV project approval and commissioning
• Implementation of distribution-side capital expenditure in new scenarios such as AI data centers and microgrids
• Progress in the construction of the unified national power market and spot market price signals
• Breakthrough progress in overseas certification tests for Chinese grid equipment enterprises
• Dynamic adjustments to annual investment plans of State Grid and China Southern Power Grid