Accelerated power distribution investment 鈥� an overlooked opportunity

Our Internet of Things in Electricity (IoTE) thesis has played out in the past year, evidenced by robust grid digital investment growth and key companies' earnings. Besides digitalisation, we think the power distribution network upgrade is a crucial investment focus under the IoTE build-out, underpinned by grid companies' 14th Five-Year Plan (FYP) targets. We expect grid power distribution investment to have a 10% CAGR in 2021-25 vs. 7% pa overall grid investment growth. We identify three key upgrade aspects:

  1. A safety upgrade, which requires more smart switches to reduce power outages;
  2. An intelligence upgrade that requires more communication modules and gateways to enhance the electricity data communication network; and
  3. Incremental networks constructed and operated by non-SOEs to consume more renewables and support electrification.

Better visibility on policy tailwinds

We are different from the market in two ways. First, we think the sub-sector's growth visibility will improve on some stronger policy tailwinds:

  1. China鈥檚 carbon-neutral pledge since 2020;
  2. The State Council鈥檚 zero tolerance for widespread power outages since May 2022 and grid companies鈥� KPI to reduce power outage time every year;
  3. State Grid鈥檚 target to improve end-user load management capability; and
  4. Electricity market reform and carbon emission monitoring that requires more real-time data captures.

Second, the competitive landscape of power distribution is more fragmented than power transmission by nature, as the bidding authority comes from a large number of city-level grid companies.