Equity Research: Sungrow Power Supply (300274 CH)

Date: August 26, 2025
Sector: New Energy / Photovoltaic Manufacturing & Energy Storage
Analyst: Wen Hao, CPA; Wallace Cheng
Rating: BUY
Current Price: CNY 102.60
Target Price: CNY 119.00
Potential Upside: +16.0%

Executive Summary

Sungrow Power Supply Co., Ltd. ("Sungrow" or the "Company") has delivered a second-quarter performance that significantly exceeded market consensus, driven by robust demand in its energy storage systems (ESS) and favorable geopolitical developments regarding US trade tariffs. In 2Q25, the Company reported revenue of CNY 24.5 billion and net profit attributable to shareholders of CNY 3.91 billion, representing year-on-year (YoY) growth of 33% and 37%, respectively. This outperformance was partly attributed to accelerated shipments to the United States ahead of potential tariff implementations, alongside a structural shift towards higher-margin overseas markets.

The investment thesis for Sungrow is undergoing a fundamental re-rating based on three core pillars:
1. Operational Excellence & Margin Expansion: The Company demonstrated resilient gross margins of 33.8% in 2Q25, supported by a significant rebound in ESS and inverter profitability. The strategic pivot towards high-margin international markets, which now constitute 58% of total revenue, has structurally enhanced the Company’s earnings quality.
2. De-risking of US Operations: Recent diplomatic developments, including the suspension of reciprocal tariffs by the US administration and the enactment of the "Big and Beautiful Act" extending Investment Tax Credits (ITC) for storage projects through 2036, have substantially mitigated regulatory risks. Sungrow has resumed normal shipments to the US, securing near-term revenue visibility while capitalizing on the rush to commence projects before stricter foreign entity restrictions take full effect.
3. New Growth Vector: AIDC Power Solutions: Sungrow is aggressively expanding into the Artificial Intelligence Data Center (AIDC) power supply sector. Leveraging its deep expertise in power electronics, this new business line addresses the explosive demand for high-efficiency, stable power infrastructure required by AI computing clusters. This diversification opens up a new Total Addressable Market (TAM) and provides a compelling narrative for valuation multiple expansion.

Consequently, we have revised our earnings forecasts upwards by 16-17% for 2025-2026. We are also upgrading our valuation benchmark from 12x to 17x 2025E P/E, reflecting the improved risk profile and the premium associated with the AIDC growth story. Our target price is raised to CNY 119.00, maintaining a BUY rating.

Key Takeaways

1. Financial Performance: Strong Beat Driven by Storage and Overseas Mix

2Q25 Results Overview
Sungrow’s 2Q25 financial results underscore its market leadership and operational agility. Revenue reached CNY 24.5 billion, a 33% YoY increase and a 29% quarter-on-quarter (QoQ) increase. Net profit attributable to parent company shareholders stood at CNY 3.91 billion, up 37% YoY and 2% QoQ. These figures significantly surpassed street estimates, indicating strong execution capabilities.

Source: Company Data, BOCOM International Estimates

Margin Analysis
The consolidated gross margin for 2Q25 was 33.8%, representing a 2.2 percentage point (pp) improvement YoY, although it declined slightly by 1.4 pp QoQ. The QoQ decline is typical of seasonal product mix shifts but remains at a historically healthy level. The YoY expansion is primarily driven by:
* Product Mix Shift: A higher proportion of revenue from Energy Storage Systems (ESS), which carry higher margins than traditional solar inverters in certain segments.
* Geographic Mix: A substantial increase in overseas revenue, which commands premium pricing due to brand strength and localized service capabilities.

Expense Control and R&D Investment
Operating expenses were well-managed despite the revenue surge.
* Selling Expenses: Ratio decreased by 0.2 pp YoY to 5.4%, indicating economies of scale in global sales channels.
* Administrative Expenses: Ratio increased slightly by 0.4 pp YoY to 2.1%, likely due to organizational scaling.
* R&D Expenses: Ratio increased by 0.5 pp YoY to 5.1%, reflecting the Company’s commitment to innovation, particularly in new areas like AIDC power solutions and next-generation storage technologies. Absolute R&D spend rose significantly to CNY 1.24 billion in 2Q25, up 49% YoY.
* Financial Expenses: The financial expense ratio improved by 1.2 pp YoY to -0.8% (net income), benefiting from favorable exchange rate movements and efficient cash management.

Balance Sheet Indicator: Contract Liabilities
Contract liabilities decreased by 9% QoQ at the end of 2Q25. While this indicates strong revenue recognition in the quarter, it may also signal a potential moderation in order intake momentum heading into the second half of 2025. Investors should monitor 3Q25 order books closely to assess whether this is a temporary fluctuation or a trend reversal. However, given the strong backlog from previous quarters and the US shipment acceleration, we believe the immediate revenue pipeline remains secure.

H-Share Issuance Plan
The Company announced plans to issue H-shares. This move is strategic for several reasons:
1. International Capital Access: It broadens the investor base, attracting global institutional capital that may have restrictions on A-share investments.
2. Currency Diversification: Raises funds in HKD/USD, aligning with the Company’s significant overseas revenue stream and hedging against currency risks.
3. M&A War Chest: Provides liquidity for potential international acquisitions or capacity expansion without diluting A-share shareholders excessively in the short term.

2. Segment Analysis: Storage Surge and Inverter Resilience

The first half of 2025 (1H25) revealed a clear divergence in growth trajectories across business segments, with Energy Storage emerging as the primary growth engine.

Energy Storage Systems (ESS): The Growth Catalyst
* Revenue: CNY 17.8 billion in 1H25, a massive 128% YoY increase.
* Gross Margin: 39.9%, down 0.2 pp YoY but up 4.8 pp QoQ.
* Analysis: The sequential margin recovery is a critical positive signal. It suggests that the intense price competition observed in late 2024 and early 2025 is stabilizing. Sungrow’s ability to maintain nearly 40% margins in a competitive landscape underscores its technological moat (e.g., liquid cooling technology, grid-forming capabilities) and brand premium. The doubling of revenue confirms that global demand for utility-scale and commercial & industrial (C&I) storage is accelerating, driven by renewable integration needs and arbitrage opportunities in key markets like Europe, Australia, and the US.

PV Inverters: Steady Core Business
* Revenue: CNY 15.3 billion in 1H25, up 17% YoY.
* Gross Margin: 35.7%, down 1.9 pp YoY but up 10.3 pp QoQ.
* Analysis: The dramatic QoQ margin improvement of 10.3 pp is noteworthy. This likely reflects a combination of lower raw material costs (IGBTs, copper, aluminum), optimized product mix towards higher-end string inverters and microinverters, and reduced inventory write-downs. While YoY margins dipped slightly due to competitive pressures in distributed PV markets, the sequential turnaround indicates that the worst of the margin compression may be over. The 17% revenue growth, while modest compared to storage, demonstrates the resilience of the core PV business in a maturing global solar market.

New Energy Investment Development: Strategic Adjustment
* Revenue: CNY 8.4 billion in 1H25, down 6% YoY.
* Gross Margin: 18.1%, up 1.2 pp YoY but down 3.2 pp QoQ.
* Analysis: The decline in revenue aligns with the Company’s strategy to reduce capital-intensive project development activities to improve return on equity (ROE) and cash flow. By shifting focus from low-margin EPC/development to high-margin equipment sales (inverters/storage), Sungrow is enhancing its asset-light profile. The slight YoY margin improvement suggests better project selection and cost control in the remaining portfolio.

Geographic Breakdown: The Overseas Premium
* Overseas Revenue: Surged 88% YoY in 1H25.
* Revenue Share: Increased to 58% of total revenue, up 15 pp YoY.
* Impact: This structural shift is the primary driver behind the 1.9 pp YoY increase in consolidated gross margin. Overseas markets, particularly Europe and North America, offer significantly higher profitability due to less intense price competition and higher barriers to entry (certifications, service networks). Sungrow’s established global footprint allows it to capture this premium effectively.

3. Geopolitical Tailwinds: US Market De-risked

The US market has been a source of significant uncertainty for Chinese renewable energy companies due to trade policies and the Inflation Reduction Act (IRA) restrictions. However, recent developments have materially improved the outlook for Sungrow.

Tariff Suspension and Trade Normalization
* May 12 Joint Statement: The US and China agreed to suspend the 24% "reciprocal tariffs" on Chinese goods for 90 days.
* August 12 Extension: The suspension was extended for another 90 days.
* Operational Impact: Since May 12, Sungrow has resumed normal shipments to the US. The Company utilized the initial suspension period to accelerate shipments ("rush exports"), which contributed to the strong 2Q25 results. Even if tariffs are reinstated after the suspension periods, the short-term impact on earnings is minimized because a significant portion of the annual US volume has already been shipped or contracted under favorable terms. This reduces the overhang on the stock related to trade war fears.

Legislative Support: The "Big and Beautiful Act"
* ITC Extension: Enacted on July 4, this legislation extends the Investment Tax Credit (ITC) for energy storage projects from 2032 to 2036. This provides long-term policy visibility, encouraging developers to commit to large-scale storage projects knowing that tax incentives will remain available throughout the decade.
* Foreign Entity of Concern (FEOC) Grace Period: Crucially, projects that commence construction in 2025 are exempt from certain FEOC restrictions. This has triggered a "rush to start" among US developers, creating a surge in immediate demand for storage systems. Sungrow, being a leading supplier, is well-positioned to benefit from this front-loaded demand.
* Long-term Demand: The combination of extended ITC and the urgent need to grid-connect renewable assets ensures a robust pipeline for US storage demand for the next several years. Sungrow’s local manufacturing partnerships and service infrastructure further insulate it from potential future regulatory hurdles.

4. New Growth Engine: AIDC Power Solutions

As the artificial intelligence industry expands, the power requirements for data centers are evolving rapidly. Traditional data center power architectures are insufficient for the high-density, high-stability needs of AI training and inference clusters.

Strategic Fit
Sungrow is leveraging its core competency in power electronics—the same technology underlying its inverters and storage converters—to enter the AI Data Center (AIDC) power supply market. This includes:
* High-Efficiency UPS (Uninterruptible Power Supply): AI chips require extremely stable power with zero interruption tolerance.
* Modular Power Systems: Scalable solutions that can grow with data center capacity.
* Thermal Management Integration: Combining power conversion with advanced cooling solutions, an area where Sungrow has existing expertise from its storage business.

Valuation Implications
The AIDC power market is characterized by:
1. Higher Barriers to Entry: Requires stringent reliability certifications and deep technical expertise.
2. Higher Margins: Specialized power solutions command premium pricing compared to commoditized solar inverters.
3. Explosive Growth: Global AI capex is projected to grow at a CAGR of >20% over the next five years.

By successfully penetrating this market, Sungrow transitions from being viewed purely as a "cyclical renewable energy equipment manufacturer" to a "critical infrastructure provider for the AI economy." This narrative shift justifies a higher valuation multiple, as investors typically assign higher P/E ratios to tech-infrastructure plays with secular growth trends compared to traditional manufacturing. We estimate this business could contribute meaningfully to earnings by 2026-2027, providing a secondary growth curve beyond solar and storage.

Risks / Headwinds

While the outlook is positive, investors must consider the following risks:

1. Downside Risk to H2 2025 Revenue
The 9% QoQ decline in contract liabilities at the end of 2Q25 suggests that order intake may be softening. If global demand for solar installations slows down due to macroeconomic factors or grid congestion issues, revenue growth in the second half of 2025 could decelerate. The "rush exports" to the US may have pulled forward demand, potentially creating a comparative base effect that makes subsequent quarters look weaker.

2. Geopolitical Volatility Persists
Although tariffs are currently suspended, the underlying trade tensions between the US and China remain unresolved. A permanent reinstatement of high tariffs, or new restrictions targeting Chinese energy technology specifically, could impair Sungrow’s competitiveness in the lucrative US market. Additionally, European Union investigations into subsidies for Chinese renewable firms could lead to retaliatory measures.

3. Intensifying Competition in Energy Storage
The ESS market is attracting numerous entrants, including battery manufacturers (e.g., CATL, BYD) vertically integrating into system integration, and traditional electrical giants. This could lead to price wars, compressing the currently healthy 40% margins. Sungrow must continue to innovate to maintain its technological lead and brand premium.

4. Execution Risk in AIDC Business
Entering the data center power market requires navigating a different customer base (tech giants vs. utilities/developers) and different certification standards. Failure to secure major contracts or meet the stringent reliability requirements of AI data centers could result in wasted R&D investment and delayed revenue contribution.

5. Currency Fluctuations
With 58% of revenue coming from overseas, Sungrow is exposed to foreign exchange risks. While a weaker RMB benefits reported earnings, significant volatility in USD, EUR, or other key currencies can impact pricing strategies and hedging costs.

6. Raw Material Price Volatility
Although margins have improved, sudden spikes in the prices of key components such as IGBTs, lithium carbonate, or copper could erode profitability if the Company cannot pass these costs onto customers quickly enough.

Rating / Sector Outlook

Rating: BUY
We maintain our BUY rating on Sungrow Power Supply. The Company has demonstrated superior execution, navigating a complex geopolitical landscape while delivering strong financial results. The upward revision in earnings forecasts and the expansion of the valuation multiple reflect our confidence in the sustainability of its growth drivers.

Sector Outlook: Leading
The broader New Energy sector, particularly the solar and storage segments, is showing signs of stabilization after a period of intense consolidation and price pressure.
* Supply Side: Capacity expansion is slowing as weaker players exit the market, leading to healthier supply-demand dynamics.
* Demand Side: Global renewable energy targets remain ambitious, and the addition of AI-driven power demand creates a new structural tailwind.
* Policy Support: Continued government support in China, Europe, and the US (via ITC extensions) underpins long-term demand.

Sungrow stands out as a top-tier pick within the sector due to its diversified global footprint, strong balance sheet, and successful transition into high-growth adjacent markets like storage and AIDC power.

Investment View

Valuation Methodology and Target Price

We have updated our financial model to reflect the stronger-than-expected 2Q25 results and the improved outlook for the US market and AIDC business.

Earnings Forecast Revisions
We have raised our net profit estimates for the next three years:
* 2025E: Increased by 16% to CNY 14.51 billion.
* 2026E: Increased by 17% to CNY 14.71 billion.
* 2027E: Increased by 14% to CNY 15.28 billion.

These revisions are driven by:
1. Higher assumed volumes in the US market due to the tariff suspension and ITC extension.
2. Improved gross margin assumptions for the ESS segment, reflecting the QoQ recovery trend.
3. Initial revenue contributions from the AIDC power business, albeit conservative in the near term.

Valuation Multiple Expansion
Previously, we valued Sungrow at 12x 2025E P/E, consistent with a mature manufacturing hardware company. However, given the de-risking of the US business and the entry into the high-growth AIDC sector, we believe the market should re-rate the stock towards a technology-infrastructure valuation.
* New P/E Benchmark: 17x 2025E P/E.
* Justification: This multiple is in line with global peers in the power electronics and critical infrastructure space that enjoy secular growth tailwinds. It also reflects the premium for Sungrow’s market leadership and superior profitability compared to domestic competitors.

Target Price Calculation
* 2025E EPS: CNY 7.00 (Revised)
* Target P/E: 17.0x
* Target Price: $7.00 \times 17.0 = \text{CNY } 119.00$

This represents a 16.0% upside from the current closing price of CNY 102.60.

Financial Projections Summary

The table below outlines our revised financial projections for Sungrow Power Supply.

Source: Company Data, BOCOM International Estimates

Key Financial Trends:
* Revenue Growth: We project a strong 27.7% revenue growth in 2025, driven by the storage boom and US market recovery. Growth moderates to ~8% in 2026-2027 as the base effect normalizes and the market matures.
* Profitability: Net profit growth outpaces revenue growth in 2025 (31.5% vs 27.7%) due to operating leverage and margin expansion.
* Return on Equity (ROE): ROE remains robust, above 20% throughout the forecast period, indicating efficient capital utilization. The slight decline from 31.5% in 2025 to 21.8% in 2027 reflects the equity dilution from the planned H-share issuance and retained earnings accumulation, rather than a deterioration in operational efficiency.
* Cash Flow: The Company maintains a net cash position, providing flexibility for R&D investment, potential M&A, and dividend payments.

Comparative Valuation

To contextualize Sungrow’s valuation, we compare it with peers in the renewable energy and power electronics sectors.

Source: FactSet, BOCOM International Estimates as of Aug 25, 2025

Sungrow trades at a premium to many pure-play manufacturing peers (like polysilicon or glass producers) which face severe cyclical downturns. However, its P/E of 14.7x is reasonable given its higher growth profile and superior margins compared to the broader sector. The "Neutral" rating on GoodWe highlights the differentiation in quality; Sungrow’s scale and global diversification allow it to withstand market volatility better than smaller inverter specialists.

Strategic Recommendations for Investors

1. Accumulate on Weakness: Given the strong fundamentals and positive catalysts, any pullback in the stock price towards the 200-day moving average (currently CNY 69.02, though the stock is trading well above this) would present an attractive entry point. However, at current levels, the risk-reward remains favorable for long-term holders.
2. Monitor H-Share Issuance Details: Investors should pay close attention to the pricing and size of the upcoming H-share issuance. A large discount could cause short-term dilution concerns, but the strategic benefits of international listing outweigh temporary dilution.
3. Track AIDC Progress: Look for announcements regarding major contracts with cloud service providers or data center operators. Specific wins in this sector will serve as validation of the new growth narrative and could trigger further multiple expansion.
4. US Policy Watch: While the current environment is favorable, keep an eye on US political developments leading up to the next election cycle. Any rhetoric suggesting a hardline stance on Chinese energy imports could cause short-term volatility, creating buying opportunities if the fundamental thesis remains intact.

Conclusion

Sungrow Power Supply has successfully navigated a challenging macroeconomic and geopolitical environment to emerge stronger. The 2Q25 beat is not just a quarterly anomaly but a reflection of structural improvements in its business mix and geographic diversification. The de-risking of the US market removes a significant overhang, while the entry into AIDC power solutions offers a exciting new avenue for growth.

We believe the market has yet to fully price in the sustainability of Sungrow’s margin expansion and the potential of its new business lines. With a revised target price of CNY 119.00 and a BUY rating, we recommend investors overweight Sungrow in their renewable energy portfolios. The Company is well-positioned to deliver superior risk-adjusted returns in the coming years, backed by solid earnings growth, strong cash flows, and a clear strategic vision.

Appendix: Detailed Financial Analysis

Income Statement Analysis

Revenue Drivers
The projected revenue growth of 27.7% in 2025 is aggressive but achievable given the 128% YoY growth in storage seen in 1H25. We assume:
* Storage Revenue: Continues to grow at >50% CAGR through 2025, driven by global grid modernization and US ITC incentives.
* Inverter Revenue: Grows at a steady 10-15%, supported by replacement cycles in mature markets and new installations in emerging markets.
* Other Services: Steady contribution from O&M and plant development.

Cost Structure
* COGS: Expected to grow slower than revenue due to economies of scale and favorable raw material trends. Gross margin is projected to stabilize around 30% in 2025 before slight normalization in 2026-2027 as competition intensifies.
* OpEx: Selling and administrative expenses are expected to grow in absolute terms but decline as a percentage of revenue, demonstrating operating leverage. R&D spend will remain elevated (approx. 4.5% of revenue) to support the AIDC and next-gen storage initiatives.

Profitability Metrics
* EBITDA Margin: Projected at 18.2% in 2025, reflecting strong operational efficiency.
* Net Margin: Expected to reach 14.6% in 2025, up from 14.2% in 2024, driven by the higher-margin overseas mix and financial income.

Balance Sheet Strength

Asset Quality
* Cash Position: Sungrow maintains a robust cash position, projected to reach CNY 19.9 billion by end-2025. This provides a significant buffer against working capital fluctuations and funding for strategic initiatives.
* Receivables: Accounts receivable are projected to increase to CNY 37.9 billion in 2025. While this is a use of cash, it is consistent with revenue growth. The Days Sales Outstanding (DSO) is managed effectively, though investors should monitor for any elongation in payment terms from key utility customers.
* Inventory: Inventory levels are expected to rise to CNY 34.8 billion. Given the global nature of the business, higher inventory is necessary to ensure timely delivery. The inventory turnover days are stable around 167 days, indicating efficient supply chain management.

Liability Management
* Debt Levels: The Company maintains a net cash position, with minimal interest-bearing debt relative to its cash reserves. This conservative capital structure reduces financial risk and interest expense burden.
* Payables: Accounts payable are projected to increase, reflecting the Company’s strong bargaining power with suppliers. The Days Payable Outstanding (DPO) of ~215 days is healthy and helps fund working capital needs.

Cash Flow Dynamics

Operating Cash Flow (OCF)
OCF is projected to be CNY 5.67 billion in 2025. While positive, it is lower than net profit due to increases in working capital (receivables and inventory). This is typical for high-growth manufacturing firms. We expect OCF to improve significantly in 2026 (CNY 13.27 billion) as working capital stabilizes and earnings mature.

Investing Cash Flow
Capital expenditures (CapEx) are estimated at CNY 2.56 billion annually. This level of investment is sufficient to maintain technological leadership and expand capacity for high-demand products like storage systems and AIDC power units, without overextending the balance sheet.

Financing Cash Flow
The negative financing cash flow in 2025-2027 reflects dividend payments and potential share buybacks or debt repayments. The planned H-share issuance will appear as a positive financing inflow in the year of execution, strengthening the equity base.

Sensitivity Analysis

To provide a range of potential outcomes, we have conducted a sensitivity analysis on the target price based on key variables:

• Bear Case Assumptions: Renewal of harsh US tariffs, significant margin compression in storage due to price wars, delay in AIDC business rollout.
• Bull Case Assumptions: Permanent resolution of trade tensions, sustained >40% margins in storage, rapid adoption of AIDC power solutions with high margins, successful H-share issuance at a premium.

Our Base Case reflects the most probable outcome, balancing the strong current momentum with realistic expectations of market competition and geopolitical nuances.

Final Remarks

Sungrow Power Supply represents a compelling investment opportunity in the new energy sector. It combines the stability of a market-leading incumbent with the growth potential of a innovator in emerging fields. The Company’s ability to exceed expectations in a challenging environment speaks to the quality of its management team and the resilience of its business model.

For institutional investors, Sungrow offers exposure to the secular trends of decarbonization and digitalization (AI). The recent upgrades to our earnings forecasts and target price reflect our conviction that the Company is entering a new phase of profitable growth. We recommend accumulating shares on any market dips, with a 12-month horizon targeting CNY 119.00.

Disclaimer:
This report is prepared by BOCOM International Securities Limited. The information contained herein is believed to be reliable but is not guaranteed as to accuracy or completeness. The opinions expressed are subject to change without notice. This report is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities. Investors should conduct their own independent research and consult with professional advisors before making any investment decisions. Past performance is not indicative of future results.