Investors interested in China’s green transition should focus on the power infrastructure rather than renewables

In 2024, China’s renewable sector experienced wide-spread losses due to overcapacity. However, it doesn’t mean China’s green transition will grind to a halt. In this note, we analyze the emerging opportunities in China’s power infrastructure, i.e., power grid equipment and battery energy storage manufacturers (see Appendix).China has reached the 1,200GW renewable capacity target 6 years in advance, but the share of renewable in energy consumption remains low as grid construction usually lags power sources. As a result, a large part of the massive installation of solar and wind projects during past few years are not generating power to feed the grid. To catch up with renewables, grid investment, while having gone up since 2024, is subject to greater demand in the long run.This has entitled the power infra sector more resilience. Despite weak private demand so far, grid equipment manufacturers had recorded above average earnings thanks to the rebooted construction of ultra-high voltage transmission network. The investment pickup, albeit belated and moderate, did benefit a wide range of companies as the share of zombie firms (EBITDA lower than interest expense) unexpectedly fell in 2024 while other sectors saw a further increase.In terms of profitability, renewable firms are facing massive drop in net profit margin from 7% to -4%, but the power infra sector has kept a stable profit level and again outperformed the average. It’s also worth noting that grid equipment manufacturers had been cutting capex in a proactive way in contrast with other sectors passively, meaning they are likely to exit the contraction cycle and stage an upswing sooner, especially with demand boosted by China’s continued electrification and renewable installation.In addition to domestic demand, the overseas market is also growing. Given renewable power’s rising share, global power grid systems need to be upgraded as renewable power’s disturbance from weather requires better assurance of the grid’s functional continuity. The surge of AI implementation and local data centers also necessitate better power systems, which will drive the demand for grid equipment globally, especially in the EU and US.With power demand to grow 50% by 2050 and pressing needs for West-to-East power transmission, China may need to double its investment in grid to fill the gap, which means huge upside for grid equipment manufacturers. Beyond the fact that investing in the grid is bound to be more profitable than in renewables in the future, we also need to realize that its geopolitical advantage in shifting the US and EU’s attention away from overcapacity in renewables and China’s dumping green tech into them.All in all, investors may want to look away from the increasingly unprofitable and contended renewable sector and start considering other sectors necessary for China’s green transition, such as power infrastructure.