Huaming Power Equipment: Still Built for Growth After Fear Pricing, Maintain Overweight

Overview

This report is Morgan Stanley's company research/earnings review on Huaming Power Equipment. The core conclusion is that the market has become excessively pessimistic due to competitor capacity expansion, slower-than-expected progress in the U.S. market, and pressure on 1Q26 results, while the company's long-term growth thesis is still not fully reflected. The report maintains an Overweight rating, while lowering the target price from Rmb34.50 to Rmb26.40 due to more conservative assumptions on revenue, expenses, and foreign exchange.

Core views

The report believes Huaming Power Equipment's main opportunities come from three angles: first, competitor MR's capacity expansion may not simply mean intensifying competition, but may also reflect TAM expansion driven by global electrification, distribution grid stability, and demand for low- and medium-voltage tap changers; second, the company's overseas expansion is not driven by shortages, but by cost advantages and customers' desire to diversify supply chains, especially supported by China's transformer export backdrop; third, earnings in 2026 are still likely to be better than pessimistic buy-side expectations, and after 2027 growth may return to a higher pace as product mix improves and the drag from FX and equity incentive expenses eases.

Analysis framework

The report uses a combination of earnings forecast revisions, P/E valuation, risk-reward scenarios, and peer valuation comparisons. Earnings forecasting focuses on revenue growth, gross margin, SG&A ratio, FX gains/losses, and product mix; valuation is based on a 25x one-year forward P/E for the target price, and compared against the company's historical range and the global peer average of about 30x.

Methodology notes

• Valuation methodsP/E-based price target

  Price target based on price-to-earnings ratio

  The target price of Rmb26.40 is based on 25x one-year forward P/E, lower than the previous 30.5x assumption and also below the global peer average of about 30x.

• Scenario analysisRisk Reward

  Bull, base, and bear scenarios

  The report sets bull, base, and bear scenarios around UHV market share, direct and indirect export revenue growth, and power equipment gross margin.

• Earnings modelMorgan Stanley ModelWare

  Sell-side forecasting model

  Unless otherwise stated, the financial metrics in the report are based on the Morgan Stanley ModelWare framework, with some consensus data from Refinitiv Estimates.

Asset mapping & comparison

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

• Huaming Power Equipment (002270.SZ)

  Core covered name

  Strengths

  Has cost advantages in the tap changer segment, overseas expansion potential, UHV product opportunities, and strong cash flow and dividend capacity.

  Weaknesses

  Recent 1Q26 performance was weak, non-grid domestic revenue growth assumptions were revised down, and SG&A ratio and FX losses are pressuring earnings.

  Comparison

  The current 19.0x 2027E P/E is below the global peer average valuation of about 30x, and the 25x one-year forward P/E used for the target price is also below the historical peak range of 30-40x.

  Risks

  Intensifying competition, global grid construction slower than expected, longer delivery cycles due to geopolitics, and weaker-than-expected progress in U.S. market testing and customer onboarding.

• Maschinenfabrik Reinhausen (MR)

  Major global competitor and industry demand signal

  Strengths

  Roughly 50% global market share, with plans to double capacity by 2028-30.

  Weaknesses

  Its capacity expansion may intensify competition, but may also indicate industry TAM expansion.

  Comparison

  The market interprets MR's expansion as competitive pressure, while Morgan Stanley believes it may also reflect growing electrification and distribution grid demand.

  Risks

  If the expansion mainly translates into price competition, it could pressure Huaming's margins.

Key data

• Target price revisionRmb34.50 -> Rmb26.40P/E valuation assumptions were lowered due to more conservative revenue, expense, and FX assumptions for 2026-28.
• RatingOverweightPositive rating maintained.
• Current priceRmb19.86Closing price on 2026-07-27.
• Implied upside33%Based on target price of Rmb26.40 and closing price of Rmb19.86.
• 2026-28 net profit forecast revisioncut by 5-10%Reflects more conservative non-grid domestic revenue growth, higher SG&A ratio due to equity incentives, and FX losses from RMB appreciation.
• 2026 net profit growthabout 11%The report believes this is broadly in line with sell-side consensus, but may be above some pessimistic buy-side expectations.
• Post-2027 earnings growth18-20% annualizedDriven by improved product mix, overseas and UHV growth, and easing expense and FX headwinds.
• Export revenue CAGRabout 30%Power equipment export revenue is expected to grow at about a 30% CAGR in 2025-29.
• Overseas revenue mix34% in 2025 -> 54% in 2029Reflects increasing contribution from overseas expansion.
• Valuation19.0x 2027E P/EBelow the global peer average of about 30x.
• Base case key assumptionsIndirect export CAGR 40%, direct export CAGR 15%, average GPM for power equipment 61%Corresponds to assumptions for the relevant 2025-29E or 2026-29E periods.
• Dividend assumption2026-29E payout ratio 80%Implies 2026/27E dividend yield of about 3.5-4.2%.

Impact & implications

The report's investment implication is broadly positive: the current valuation already reflects substantial concerns about competition and slowing growth. If 2Q26 results come in better than pessimistic expectations, if U.S. product testing becomes a catalyst in 4Q26, or if European and global electrification demand drives TAM expansion, the stock may have room for valuation recovery. However, the lower target price also indicates that near-term earnings assumptions have become more cautious, and investors need to watch revenue delivery, expense ratios, and FX risks.

Risks

• Global grid construction is slower than expected, weakening demand for power equipment.
• Intensifying competition pressures gross margins, especially from capacity expansion by major competitors such as MR.
• Geopolitical risks may cause product delivery times to be longer than expected.
• U.S. business development depends on product testing progress, and catalysts may be delayed.
• FX losses from RMB appreciation may continue to drag on profits.
• A higher SG&A ratio caused by equity incentives may pressure near-term earnings.

What to watch

• Whether 2Q26 results beat the market's pessimistic expectations.
• Progress in U.S. product testing and customer onboarding in 4Q26.
• The actual impact of MR's capacity expansion on industry price competition and TAM expansion.
• The boost to distribution-grid tap changer demand from Europe's electrification action plan, renewables, and EV penetration.
• Domestic grid capex and the investment pace of State Grid and South Grid.
• UHV product market share gains and changes in overseas revenue contribution.
• The impact of the RMB exchange rate and SG&A ratio on margins.