Goldman Sachs upgrades Huaming to Buy, seeing more attractive risk-reward after the correction

Overview

This is a Goldman Sachs company research and rating change report on Huaming (002270.SZ). The core conclusion is that after a significant share price correction, Huaming's valuation has become attractive, while its overseas growth thesis remains intact. The report views it as a relatively defensive name participating in a multi-year global grid upgrade cycle, benefiting from replacement of aging grid infrastructure, renewable energy grid connection, overseas market share gains, and higher gross margins in overseas business.

Core views

Goldman Sachs believes the market had previously traded Huaming together with the U.S. power shortage and high-beta AI infrastructure theme, but the company's fundamentals are only limitedly and indirectly affected by the U.S. power shortage, and there is no clear supply shortage in on-load tap changers. After the share price correction, the current 18.1x 12-month forward P/E is slightly below the historical average, leaving room for re-rating relative to 17% EPS CAGR in 2026E-2030E. Fundamentally, the company holds a dominant position in China's OLTC market and is expected to increase global share through product quality close to international competitors, faster delivery, and pricing advantages. Overseas business gross margin is 5-10 percentage points higher than domestic business, and a higher export mix should drive margin expansion and compounded earnings growth.

Analysis framework

The report uses a combination of fundamental forecasting, peer valuation regression, and a target P/E framework. Earnings forecasts focus on revenue growth, overseas mix, gross margin improvement, net profit growth, and cash returns; on valuation, it maintains a 2028E P/E framework, applying 22x 2028E P/E and discounting back to 2027E at a 9.5% cost of equity to derive a 12-month target price of Rmb23.9. The report also validates the reasonableness of the target multiple through regressions of long-term EPS growth and target-price-implied P/E among global grid equipment peers and China's industrial technology sector.

Methodology notes

• Valuation methods2028E P/E target multiple method

  Uses 22x 2028E P/E as the target multiple and discounts it back to 2027E at a 9.5% cost of equity.

  Goldman Sachs believes this multiple is broadly consistent with the relationship between long-term EPS growth and target-price-implied P/E in China's industrial technology sector and among global grid equipment peers, while also reflecting Huaming's earnings quality, domestic leadership, cash conversion, and barriers in a global duopoly market.

• Fundamental forecastingRevenue, share, and margin decomposition

  Derives revenue and net profit CAGR through global grid investment, overseas share, export mix, and gross margin changes.

  The report forecasts global grid investment CAGR of 7% in 2024-2035E, Huaming's global share rising from 13% in 2026E to 16% in 2030E, and OLTC export contribution increasing from 41% to 59%, driving 14% revenue CAGR and 17% net profit CAGR in 2026E-2030E.

• Factor and quality assessmentGS Factor Profile

  Compares the company's position relative to the market and industry in terms of growth, financial returns, valuation multiples, and composite indicators.

  The report notes that Huaming's ROE and CROCI rank in the top quartile of the coverage universe, supporting its relatively higher quality and stable growth characteristics.

Asset mapping & comparison

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

• Huaming (002270.SZ)

  The report's core covered name, upgraded to Buy by Goldman Sachs.

  Strengths

  Dominant position in China's OLTC market; higher gross margin in overseas business; product quality close to MR; faster delivery and more competitive pricing; ROE and CROCI rank in the top quartile of coverage; expected to maintain about a 70% payout ratio.

  Weaknesses

  Limited direct benefit from the U.S. power shortage theme; domestic market share is already high, so room for domestic business to further outperform industry growth may be limited.

  Comparison

  The maximum peak-to-trough share price drawdown was 52%, deeper than the correction seen in peers such as Sieyuan and Yingliu; the global OLTC market has a duopoly competitive structure with Maschinenfabrik Reinhausen GmbH (MR).

  Risks

  Slower-than-expected overseas share gains, lower-than-expected gross margin, and weaker-than-expected domestic revenue growth.

• Global grid equipment industry chain

  Huaming's medium- to long-term growth comes from the global grid upgrade cycle and expanding OLTC demand.

  Strengths

  Global grid investment is expected to continue growing, driven by replacement of aging infrastructure, renewable energy integration, and changing power demand.

  Weaknesses

  Some markets are still dominated by incumbent international suppliers, and customer certification cycles are long.

  Comparison

  Compared with high-beta AI infrastructure stocks, Huaming offers more defensive exposure to grid upgrades.

  Risks

  The pace of global grid investment, customer certification progress, competitive intensity, and regional demand changes may affect growth realization.

Key data

• Rating actionUpgraded from Neutral to BuyBased on attractive valuation after the correction and about 33% target-price upside.
• 12-month target priceRmb23.9Target price unchanged, based on 22x 2028E P/E and discounted at a 9.5% cost of equity.
• Current priceRmb17.99Closing price on 15-Jul-26 in the target price history table.
• Implied upside33%The report states that the target price implies about 33% upside.
• Current valuation18.1x 12-month forward P/ESlightly below the historical average of 20.3x since 2015.
• Share price drawdown-36% year-to-date, maximum peak-to-trough drawdown of -52%The drawdown was larger than peers such as Sieyuan and Yingliu.
• Global grid investment growth2024-2035E CAGR 7%Citing forecasts by Siemens Energy / Hitachi Energy for global grid investment.
• Global market share13% in 2026E to 16% in 2030EDriven by product quality, delivery lead time, and pricing advantages.
• OLTC export contribution41% in 2026E to 59% in 2030EA higher overseas business mix is an important source of revenue and gross margin expansion.
• Revenue CAGR2026E-2030E 14%Supported by global grid upgrades and overseas expansion.
• Net profit CAGR2026E-2030E 17%Driven by revenue growth plus higher gross margins in overseas business.
• Gross margin56.0% in 2026E to 57.5% in 2030EOverseas business gross margin is 5-10 percentage points higher than domestic business.
• Dividend yieldabout 3%The report expects the company to maintain a payout ratio of about 70%.

Impact & implications

The investment implication of the report is that Huaming can be viewed as a relatively defensive A-share name under the global grid upgrade theme, rather than one purely dependent on the elasticity of the U.S. power shortage or AI infrastructure themes. If overseas certification, delivery, and share gains materialize as expected, the company's valuation could recover from below historical average levels, supported by high-quality earnings, strong cash conversion, and a relatively high dividend payout.

Risks

• Overseas market share gains are slower than expected: if customer certification cycles are longer, product adoption is slower, or competition from incumbent global suppliers is stronger, overseas expansion may fall short of expectations.
• Gross margin is lower than expected: stronger pricing pressure, unfavorable product or regional mix, and rising overseas expansion costs may lead to margins below forecasts.
• Domestic revenue growth is weaker than expected: slower grid investment, weak non-grid demand, or the company's already high market share may limit its ability to continue outperforming the industry.

What to watch

• Changes in overseas OLTC orders, customer certification progress, and delivery cycles.
• Whether OLTC business export contribution increases along the path from 41% in 2026E to 59% in 2030E.
• Global grid investment growth and demand related to replacement of aging infrastructure and renewable energy grid connection.
• Whether gross margin improves from 56.0% in 2026E to 57.5% in 2030E as the overseas business mix rises.
• Whether valuation recovers from 18.1x 12-month forward P/E toward the historical average or target multiple.
• Changes in pricing, delivery, and market share of competitor Maschinenfabrik Reinhausen GmbH (MR).