Clou Electronics （Clou） packs light to focus on smart grid and energy storage after selling non-core business units and assets. 1） Smart meter business remains stable through close cooperation with two grid operators, to benefit from the robust renewal demand and increasing ASP; 2） Excellent energy storage technologies, along with "3GWh+5GWh" capacity structure and secured cell supply contracts, are expected to satisfy soaring demand downstream. In addition, appliance leader Midea planned to hold shares in the Company, which may empower Clou in finance, channel, and supply chain. We expect Clou's 2022E/23E/24E ANP to be Rmb-80mn/250mn/520mn, respectively. Since private placement to Midea is not yet confirmed, no rating is provided.

    　　 Bounce back to concentrate on energy storage.

    　　Disorderly and inefficient diversified expansion, coupled with market policy changes, sparked a liquidity crisis in Clou, with the debt-to-assets ratio soaring to c. 90% and the financial expense ratio staying above 10% for a long time.

    　　Against such a backdrop, Clou began to divest non-core business units and assets, while bringing Shenzhen Municipal State-owned Assets Supervision and Administration Commission （Shenzhen SASAC） as an investor in 2019.

    　　Divestment puts pressure on Clou's operating revenue, with a revenue CAGR of -7.5% from 2017 to 2021. In addition, the loss during asset disposal and provision for impairment also resulted in fluctuating profits, with ANP lowered to Rmb-1.22bn/-2.38bn in 2018 and 2019, respectively. The strategy has started to produce results, and the focus is put on the smart grid and energy storage. According to Clou's announcement, Midea planned to be a controlling shareholder through private placement and equity transfer. If that became a reality, we expect Clou to be empowered by Midea in capital, supply chain, and channel. Together with a solid energy storage technology reserve and rapid development in the energy storage sector, a new growth pole may appear.

    　　 Electrochemical energy storage boasts immense potential as the energy revolution unfolds.

    　　In the wake of the dual carbon goal, new energy storage and power services contribute to the majority of newly installed storage capacity. The energy storage segment is booming. We estimate the global energy storage sector to value c. Rmb300bn in 2025E, with a roughly 60% growth in the demand capacity （GWh） from 2021 to 2025E. Thanks to rapid response and decreasing costs, we expect electrochemical energy storage （EES） to hold great promise and become a preferred solution. China with a complete EES chain is likely to gain a global competitive advantage and fully benefit from the growing sector.

    　　Energy storage growth boom fueled by capacity scaling and abundant orders.

    　　After a prospective move into energy storage in 2009, Clou engages in major generation/grid-side energy storage projects and has a full presence across　　the chain except for battery cells. Clou's products come in various parameters to satisfy scenarios of all kinds, and the Company is experienced in overall O&M. The production capacity is steadily expanding, with the "3GWh + 5GWh" structure being built smoothly. Surging downstream demand can be met, and we forecast the annual output to hit c. Rmb10bn when all projects come on stream. Long-term contracts have been signed for secure battery cell supply （4/4/8GWh for 2023 to 2025, respectively） that support smooth production capacity rise. With abundant orders and overseas expansion up to speed, the energy storage business is likely to boom.

    　　 Steady progress by satisfying robust smart meter renewal demand.

    　　The smart meter sector is cyclical, and the 14th Five-Year Plan （14th FYP） period is a new upward cycle. We expect over 500mn units to be replaced during the 14th FYP period. As China moves faster to introduce new standards, the share of precision meters expands, and we expect the ASP of meters to increase sharply. Clou has a rich portfolio of smart grid products and works closely with State Grid and China Southern Power Grid （CSG）。Its gross profit margin （GPM） ranks top among its peers, and the smart grid business is remarkable in withstanding cyclical fluctuations （revenue still grew by 49.3%/17.4% in 2016/2017 with stagnant demand in the sector）。Fueled by strong replacement demand in China and stepped-up smart grid construction across the globe, Clou's smart meter business will register steady progress and act as a cornerstone.

    　　Financial strain to end through Midea's empowerment.

    　　According to Clou's announcement, Midea intended to become a shareholder of the Company. If that becomes a reality, Midea stands a good chance to empower Clou in debt relief and financial structure optimization. Clou sees high financial expenses （over Rmb300mn per year） and huge short-term repayment pressure, while Midea is cash-rich and experienced in debt relief （refer to Hiconics）。We expect the financial difficulties to end after the private placement to Midea is completed. Clou will enjoy an efficient supply chain through procurement synergy. Midea shares part of the supply chain with Clou （PCS raw materials including IGBT and structural parts, bulk commodities）， and it is well-positioned in the supply chain with superb bargaining power （refer to Hiconics）。If Midea completes the private placement, Clou could enjoy the cost advantage and supply chain efficiency brought by Midea's scale procurement.

    　　Potential risks:

    　　The Company's private placement not up to expectations; stronger-than-expected competition in the energy storage sector; disappointing development in the energy storage sector; disappointing capacity ramp-up; cell shortage beyond expectation.

    　　Investment recommendation:

    　　Clou packs light to focus on smart grid and energy storage after selling non-core business units and assets. Excellent energy storage technologies, along with "3GWh+5GWh" capacity structure and secured cell supply contracts, are expected to satisfy soaring demand downstream. In addition, appliance leader Midea planned to become the controlling shareholder of the Company, which may empower Clou in finance, channel, and supply chain.

    　　We expect Clou's 2022E/23E/24E ANP to be Rmb-80mn/250mn/520mn, respectively. Considering that private placement to Midea will be a watershed and the non-public offering has not been confirmed, we do not assign a　short-term target market cap.

机构：中信证券股份有限公司 研究员：JI Min