Sungrow Power Supply: Initiating With No-Moat Rating and CNY 86 Fair Value Estimate

We initiate coverage of Sungrow Power Supply 300274, one of the largest solar inverter and energy storage system suppliers in the world, with a no-moat rating. Although Sungrow is leading peers in both solar inverters and energy storage systems, we do not have high conviction that it can maintain its lead for at least the next 10 years. We think the shares are fairly valued relative to our CNY 86 fair value estimate.

Sungrow is best known for its solar inverters. It had more than 20% market share by global solar inverter shipment in 2022, with Huawei being its closest competitor. We think Sungrow is well positioned to ride the rapid growth in solar installations. We forecast solar inverter revenue to grow at a 22% CAGR from 2022 to 2027, driven by a 25% shipment CAGR. On the other hand, we forecast gross margin for solar inverters to decline to 30.0% by 2027 from 33.2% in 2022 as we believe competition is intensifying.

According to the China Energy Storage Alliance, Sungrow is the largest Chinese supplier of energy storage systems by global shipment volume in 2022. Energy storage system only accounted for 25% of revenue in 2022, but we expect it to overtake solar inverter as the largest revenue contributor in 2024 and project a 52% revenue CAGR over the next five years. While we expect exponential revenue growth, we are less optimistic with its gross margin trend due to fierce competition. We forecast gross margin for energy storage system to decline to 18.0% by 2027 from 23.2% in 2022.

Sungrow shipped more than 60% of solar inverters and 80% of energy storage systems overseas in the first half of 2023. The U.S. and Europe are the two major overseas markets for Sungrow. In the near term, the elevated channel inventory in Europe remains the major uncertainty. Sungrow expects the channel inventory to normalize by end of the third quarter, but we see risk that the destocking may last till year-end.