Trade and Supply Pressures Weigh on UBS’s Downgrade of Power Equipment

UBS released a report on China’s power equipment sector and downgraded the industry rating due to trade concerns and easing supply tightness. The report cut 2026-28E earnings by 3-66% and lowered target prices by 38-67%.

The sector has fallen 30-50% from its year-to-date highs, driven first by positioning, as it has been used as a short in AI trades, and second by fundamentals, as shortages of global transformers and gas turbines have eased faster than expected.

Exporters face further downside, with 2028-29E market share and margins pressured by rising Western capacity and European trade risks. On the domestic side, the sudden slowdown in grid capital expenditure is a concern, but coal-fired power equipment demand may be better than the market fears. Rating changes: CEEG, Huaming, Yingliu, Sany, and Wasion were downgraded from Buy to Neutral; Harbin Electric, Dongfang Electric, and NARI remained Buy. The report prefers downstream IPPs such as CGN Power and China Resources Power because their earnings are more defensive.

For exporters, the tightness in global transformer and gas turbine supply has eased faster than expected. Capacity expansion in Europe and the U.S. is accelerating, and U.S. transformer capacity is expected to reach three times its 2023 level by 2030. As a marginal supplier, China may be the first to lose market share and face gross margin pressure in 2028-2029. On geopolitical risk, China’s share of transformer supply in the EU is expected to approach the 40-50% policy threshold in 2028-2029, and new EU procurement rules may require local production, creating an earnings hit. The market broadly expects strong overseas growth for companies such as Sieyuan Electric, but the report says that expectation is unlikely to be realized.

The domestic market is divided into two major segments: grid equipment and thermal power equipment. On the grid side, State Grid investment growth slowed sharply in January-July 2026, and bidding projects were delayed. Although total investment under the five-year plan remains unchanged, the timing of bidding resumption is unclear and is viewed only as an upside option. Demand for thermal power equipment has proved more resilient than the market expected. The report estimates average annual thermal power equipment demand of about 50 GW in 2026-2030, consisting of 20 GW of new builds, 17 GW of equipment replacement, and 4-7 GW of overseas exports. Replacement demand comes from larger unit sizes and policy requirements for higher efficiency.

In terms of valuation and stock selection, institutions prefer downstream IPP power producers over domestic equipment makers, and domestic equipment makers over export-oriented equipment makers. Exporters’ valuations have fallen back to historical averages, but EU trade risks are not yet fully priced in. Grid equipment valuations are below one standard deviation of historical levels, awaiting a catalyst from a pickup in bidding. Thermal power equipment companies remain attractively valued.