Here's the impact of China's new power grid investments on domestic power firms

It's showtime for downstream players.

According to CCB International, government investment in China’s power grid is shifting focus in two directions that will have major implications for domestic power companies.

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With China’s upstream electrical grid almost complete (coal plants, hydro-electric plants, and so on), more investment will be directed downstream to the power distribution network that connects city power plants and industrial and residential customers to the grid. More investment will also be put towards connecting distributed energy projects, particularly wind power and photovoltaic power generation (solar panels).

Wasion Group (3393 HK, Not Rated) and Boer Power (1685 HK, Not Rated), two domestic power companies, have taken different approaches to the changing investment landscape. Wasion has taken steps to transform itself from being China’s largest manufacturer of electrical meters, an upstream business, into a provider of comprehensive energy-saving solutions and a major player in the development of a smart grid in China (use of real-time information to achieve efficiencies). 

Boer is a smaller company than Wasion in terms of total revenue turnover. In 2013, Boer had total turnover of RMB1,354 compared with RMB2,412 at Wasion. Unlike Wasion, Boer does not have the wherewithal to manufacture a wide range of in-house products or the expertise to develop large-scale downstream energy solutions. 

Instead, Boer has closely allied itself with Schneider Electric, a multinational electricity distribution company. The biggest part of Boer’s business is distributing and implementing Schneider products and solutions, mainly at non-power grid companies like data centers and telecommunication companies. 

Due to its smaller scale and heavy reliance on a single dominant partner, we believe Boer can not take full advantage of the changing trends within the sector to the extent Wasion is now doing. 

Wasion’s energy-saving solutions recorded 52% YoY growth in 2013. Wasion is also diversifying its client base to include more non-power grid companies like gas distributors and oil companies. Revenue from these sources increased 21% YoY in 2013. 

Wasion’s business with the large power grid companies was generally restricted to selling them power meters. By contrast, non-power grid companies tend to require total energy-saving solutions delivering higher margins.