Asia Power Equipment Addressing investors’ key questions - What to do post the 20-30% decline during 2Q?

Research evidence excerpt

Asia Power Equipment Addressing investors’ key questions - What to do post the 20-30% decline during 2Q?

as Chinese players’ market share in the EU remains

small at less than 10%, making it unlikely to threaten the market share of domestic

players such as Siemens Energy. The pullback presents an attractive entry point for

quality players such as Wasion Holdings (3393 HK), which trades at ~10x 1-year

forward P/E with more than 20% earnings growth p.a.

• Concerns about data center capacity growth have dragged down share

performance in 2Q: A number of power equipment companies have pulled

back recently (Figure 3SharePriceWeaknesesAcrosGlobalPowerEquipmentCompaniesSinceMay) following the release of 1Q results. While we are not

aware of any fundamental changes, we believe investors are increasingly

concerned about slower-than-expected data center capacity growth next year,

driven by potential delays in permitting, power constraints and other issues.

This may lead to slower-than-expected new order growth, especially for

behind-the-meter generation equipment.

• Why did the Korean names pull back by ~25% in a month despite a strong

beat in 1Q new orders? This compares with a flat KOSPI over the same

period. We believe the pullback reflects several factors: (1) Valuation: Hyundai

Electric and Hyosung Heavy traded at ~35x 1-year forward P/E at their

valuation peaks, representing a premium to some global peers. (2) Short

interest and funding dynamics: We have seen rising short interest in the sector

locally, especially in Hyundai Electric and LS Electric. We sense that some

hedge fund investors may have positioned power equipment companies as a

short to fund long positions in memory names, as the two sectors have

somewhat traded in tandem with U.S. tech stocks.