Typesetting/Mung bean soup under the stars

Recently, the Ministry of Industry and Information Technology and other eight departments issued the "Action Plan for the High-quality Development of the New Energy Storage Manufacturing Industry", proposing that by 2027, the international competitive advantage of the whole chain of China's new energy storage manufacturing industry will be highlighted, and six special actions have also been clarified, providing policy guidance and support for the development of the energy storage industry.

Source: State Council departmental documents

Affected by favorable policies, on February 18, many concept stocks such as Kungong Technology (831152) and Kelu Electronics (002121) rose to the limit.

However, what is interesting is that neither Kungong Technology nor Kelu Electronics actually uses energy storage as the main source of income, and 99% of the revenue comes from the energy storage system of Hyperstron (688411), but it closed with an increase of 0%.

This inevitably leads people to wonder whether there is really a genuine benefit behind this wave of rising and falling tides, or is it fueled by public opinion?

Energy storage has always been a hot concept in the capital market, but to this day, the energy storage industry still faces some unsolved problems. From the perspective of enterprises, the market value of Peneng Technology (688063), which is deeply involved in energy storage battery systems, has dropped from more than 70 billion at its peak to about 10 billion.

Source: Yiniu.com-Historical market value of Peneng Technology

Although the energy storage market has broad prospects, it has now fallen off the altar.

First, the competition intensified, and the gross profit of Hipostron declined

Both Hyperstron and Paineng Technology focus on the energy storage track, and energy storage products account for about 99% of the total revenue.

Source: Flush data for the first half of 2024, Hyperstron (left), Paineng Technology (right).

Specifically, Peneng Technology focuses on the R&D, production and sales of lithium iron phosphate cells, modules and energy storage battery systems, and its main products are energy storage battery systems.

The energy storage battery system is one of the core components of the energy storage system, which needs to be integrated with other components such as energy storage converters to form a complete energy storage system and then provided to end users. Because the system integration involves more electrical equipment and is more professional, the system integrator generally integrates the entire energy storage system.

Hyperstron is a professional energy storage system integrator.

In layman's terms, Peneng Technology is engaged in the R&D and production of battery systems, while Hyperstron is engaged in equipment assembly and integration.

Comparatively, the business scale of the integrator is naturally larger, but the gross profit margin is also lower. In the first half of 2024, Hypersitron achieved revenue of 3.687 billion. This scale is about 4 times more than that of Paineng Technology. However, the gross profit margin of Paineng Technology can reach 33%+, while the gross profit margin of Hypersitron is only 19%+.

And from the trend point of view, the gross profit margin of Hipostron is still declining year by year.

Source: Straight Flush - Hyper Strong

On the one hand, in the upstream of Hyperstron, the competition pattern of the energy storage battery industry is relatively concentrated, and the head effect is obvious.

In the first half of 2024, the top five suppliers of Hipostron accounted for 74.29% of the procurement, of which the top two accounted for 35.11% and 20.91% respectively. It can be seen that the upstream suppliers of Hypersitron are in a strong position and have a greater right to speak.

On the other hand, with the rapid development of China's electrochemical energy storage market, major lithium battery companies, new energy companies, and converter companies at home and abroad have begun to increase the layout of electrochemical energy storage products, and the number of market participants has gradually increased.

Especially in the industrial chain, the technical barriers to the integration of energy storage systems are not very high. This can also be seen from R&D investment. In the first three quarters of 2024, the R&D expenses of Peneng Technology will be 289 million, and the R&D expense rate will reach more than 20%. The R&D expenses of Hipostron are 196 million, accounting for only 3.77% of the total revenue.

In recent years, the gross profit margin of Hypersitron has been declining year by year, which is obviously the result of intensified competition.

Second, the inventory is overstocked, and Paineng Technology is operating at a loss

To sum up, the market competition in the energy storage industry is becoming increasingly fierce, but on the bright side, the overall scale of the industry is also maintaining rapid growth. Judging from the data, although the gross profit space of Hipostron is narrowing, its revenue and profit still maintain positive growth.

Source: Hyperstron Prospectus

However, on the other hand, the performance of Peneng Technology has been greatly discounted in the past two years. There are some special reasons behind this.

Paineng Technology is a global leader in residential energy storage, deeply cultivating the residential energy storage market, and overseas revenue accounts for more than 90%. In 2022, affected by geopolitical factors, problems such as energy supply shortages in Europe will become more and more intense, resulting in an explosion of demand for household storage in Europe, with the supply of household storage products in short supply, the price of which has risen sharply, and the sales volume has increased rapidly.

Affected by this, the performance of Paineng Technology took off. In 2022, revenue tripled and profits quadrupled.

But such an opportunity is hard to come by. Since 2023, electricity prices in Europe have fallen sharply along with natural gas prices, resulting in a decrease in the economics of household storage projects. In addition, the decline of household savings subsidies in some countries and regions has also suppressed market demand.

Not only that, the popularity of the household storage market in 2022 has made downstream companies overly optimistic about the market prospects, and the inventory of household energy storage products is high. However, market demand in 2023 has not continued to grow at a high rate as expected, resulting in a serious inventory backlog.

Affected by the continuous destocking of downstream enterprises, in the first three quarters of 2024, the revenue of Peneng Technology has dropped to 1.412 billion. In the first three quarters of 2021, the revenue of Paineng Technology has reached 1.295 billion. After three years, the energy storage industry has grown explosively, but Peneng Technology has returned to its original place.

Source: iFinD-Pine Technology

Strictly speaking, it's not as good as it used to be. In the past, at least it was profitable, but nowadays, R&D expenses are getting bigger and bigger. In the first three quarters of 2024, Peneng Technology has begun to reduce R&D expenses, but it still accounts for more than 20% of total revenue. In terms of net profit, in the first three quarters of 2024, the net profit margin of Peneng Technology is only 2.60%, and it has a net loss of 12.8738 million after deducting non-profit.

Moreover, referring to the annual performance forecast, the non-net profit deducted by Paineng Technology in 2024 is expected to be -44 million to -32 million. Based on this, the scale of the loss in the fourth quarter is even greater than before.

Source: Paineng Technology's 2024 performance forecast

Third, overcapacity, production shutdown dilemma

In general, the energy storage market has entered a stage of fierce competition. For example, the gross profit margin has only been compressed, but the overall upward trend of revenue and profit is already good. But if there is a lack of technical moat, this track will inevitably become more and more rolled.

As for Paineng Technology, the sudden change in performance is to some extent also the inevitable result of the sudden outbreak of the household savings market. As the industry's inventory is gradually cleared, it may be able to improve to a certain extent.

However, it is easy to clear inventory, but production capacity is not something you don't want if you don't want it.

Based on the optimistic expectation of the energy storage prospects, Peneng Technology continues to expand its production capacity. According to the data, by the end of 2021, Paineng Technology has formed an annual production capacity of 3GWh of battery cells and 3.5GWh of system capacity. By the end of 2022, Peneng Technology has formed an annual production capacity of 7GWh of battery cells and 8.5GWh of system capacity.

In just one year, production capacity has more than doubled.

Not only that, as of the end of the third quarter of 2024, Peneng Technology has 477 million projects under construction. This also means that there are still new projects under construction, and the production capacity will continue to increase.

In 2023 and the first half of 2024, the actual product sales of Paineng Technology will only be 1875MWh and 571MWh respectively (1GWh=1000MWh). It is clear that there is a serious overcapacity.

The continuous expansion of production capacity has also brought greater pressure on inventory. If it is produced, it may lead to a backlog of inventory. However, if the production is stopped, it will also incur a large depreciation loss. Therefore, judging from the data, although the production and sales volume of Paineng Technology will decline sharply year-on-year in 2023, it will not fall to the extent that it can digest the stock inventory, and the inventory will increase instead of falling.

Source: Paineng Technology's 2023 annual report

Fundamentally speaking, compared with the occasional sharp rise and fall of previous performance, the contradiction between today's continuously expanding production capacity and limited market demand is the key to the long-term development of Paineng Technology.

Note: This article does not constitute any investment advice. The stock market is risky, and you need to be cautious when entering the market. There is no harm in buying and selling.

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Personal opinion, for reference only