Our target price for Sungrow shares of Rmb160.00 is based on a DCF valuation, which we believe is appropriate because it captures the long-term potential returns of the company. We factor in earnings forecasts up to 2030E and terminal growth of 4%. Our WACC for Sungrow is 8.2%, which assumes: 1) a risk-free rate of 5.2%; 2) a market risk premium of 6.8%; 3) an equity beta of 0.7x, according to Bloomberg; 4) a cost-of-debt of 3.9%; 5) a target debt-to-capital ratio of 30%; and 6) a 25.0% corporate tax rate. At our DCF-based target price, Sungrow would trade at 18.8x 2026E PE and 5.3x PB.

Key downside risks that could prevent Sungrow shares from reaching our target price include: (i) slower-than-expected solar installation that could accelerate Sungrow’s PV inverter and EPC business growth; (ii) less-than-expected energy storage system demand from China and the overseas market; and (iii) intensification of overseas trade tensions that could lessen the exports of Sungrow’s products.