1. Key takeaways:

The key driver of the company's earnings volatility lies in the volume and margin dynamics of its ESS business. Our analysis yields the following conclusions: (1) We estimatethe volume and margin of the ESS business under bearish, base, and bullish scenarios respectively. Even under a bearish scenario where the company loses most of its NorthAmerican market and a portion of its European market, we project a bottom-line net profit of ~RMB13bn and a market cap floor of around RMB200bn for next year. Thecurrent market cap already reflects the most pessimistic expectations, while the actual outcome is likely to be better. (2) Since 4Q25, ESS profitability has deviated from itshistorical mean, primarily due to the mismatch between contracted prices and costs caused by the extended order cycle. However, as newly signed orders are graduallydelivered, this represents a deferral of profits rather than a structural decline. (3) The global utility-scale ESS market is experiencing explosive growth. Beyond China, highbarrierand high-margin markets such as North America, Europe, and Australia are growing at a pace no slower than that of Asia-Pacific, Africa, and Latin America, whichunderpins the company's sustained high profitability. (4) The company has launched its SST product, and we expect the combination of AIDC power supply and ESS toemerge as the company's third growth driver.

2. Thesis

Overseas inverter restrictions: The US FCC ban is impactful but leaves room for exemptions, while Europe's demand-driven market and lack of consensus among countriessuggest limited impact.

The US FCC inverter ban has officially taken effect. In our view, the ban currently only applies to new product models, while the company's existing PowerTitan series maintains a 4–5year technological edge over overseas brands. Even for new products, the definition of "communication functionality" under the current policy remains ambiguous and may notnecessarily trigger restrictions; in any case, the issue could potentially be resolved through local manufacturing in the US. In Europe, inverter restrictions have limited near-term impacton certain projects. The IAA Act remains far from implementation, and recent discussions in Europe have somewhat downplayed the issue. Multiple countries including Germany, Italy,and Spain have introduced policies to accelerate utility-scale installations, and achieving this without Chinese inverter, ESS, and battery capacity is practically infeasible. The company'sPoland plant has already planned capacity for inverters and ESS, providing a first-mover advantage, and we expect policy-related disruptions to be limited.

ESS business: Temporary profitability decline does not erode competitiveness; high-barrier markets including the US, Europe, and Australia underpin sustained highprofitability.

Profitability: After adjusting for lithium carbonate price fluctuations, we estimate the company's ESS business GPM at a normalized level of ~30%. In 1Q26, after stripping out theimpact of lithium carbonate volatility, we believe the actual GPM exceeded 30%, roughly in line with 1Q25 levels. As lithium carbonate prices stabilize going forward, we expect the gapbetween reported and normalized margins to gradually narrow. Moreover, the company's PowerTitan series features a fully integrated PCS architecture, 684Ah large-cell and SiCcomponent adoption, second-generation stem-cell grid-forming technology, and strong bankability, all of which reinforce the company's brand premium.

Industry trends: The company's core strength lies in its high market share across high-barrier, high-margin markets including the US, Europe, and Australia. The company ranksamong the top two in global market share as well as in Europe, North America, Latin America, and the Middle East. In Europe, the US, and Australia, demand is set to sustain rapidgrowth, driven by widening peak-to-valley price spreads, capacity market progression, and other supportive factors. At the same time, stringent requirements for grid-formingtechnology, response speed, and other technical specifications create high entry barriers and preserve ample profit headroom.

AIDC business: Power supply and ESS emerge as the company's third growth driver.

On the ESS front, NVIDIA has released its self-certification guidelines for ESS, where only products with sufficient capacity and superior performance are expected to qualify. At theindustry frontier, Fluence and Tesla have already secured AIDC ESS projects. Leveraging its North American channel and certification advantages, the company has already benefitedfrom AIDC solar PV-ESS integrated projects in North America, and we expect it to further secure co-located AIDC ESS orders going forward.

On the power supply front, the company has launched its EnerNeo series SST products, expanding into the AIDC power supply portfolio. Leveraging its accumulated powerelectronics R&D expertise from the solar PV and ESS businesses, coupled with its deep-rooted North American customer base advantages, the company is well-positioned to capture asignificant share in the AIDC power supply market.

3. Earnings forecast

Downside supported: Even under a bearish scenario—assuming the company loses its US market and a portion of its European market—we expect it to sustain unit profitability aboveRMB 0.10/Wh, driven by volume growth in other regions. We project earnings of RMB13bn and RMB15bn for 2027 and 2028, respectively, providing strong support for the company'smarket cap.

Upside optionality: In practice, the company could benefit from product exemptions on existing models and potentially mitigate restrictions through US-based manufacturing in thefuture. When factoring in AIDC ESS, 2028 earnings could increase by over RMB4bn to ~RMB23.8bn. Meanwhile, the SST product line offers a market opportunity on the order ofRMB100bn by 2030. Maintain "Buy" rating on the company.

Risks:

1. Intensified industry competition poses a risk of significant declines in energy storage order prices and gross margins. Currently, competition in theglobal energy storage industry is gradually intensifying, especially in markets such as the Middle East and domestic markets, where lithium battery giants are alsoparticipating in the market competition. The gross profit margin contribution of the company's energy storage business has rapidly increased in recent years. Ifthe level of competition exceeds expectations in the future, it could lead to a significant decline in the unit price and gross profit margin of the company's energystorage business.

2. Geopolitical volatility leads to overseas shipments falling short of expectations. The company has significant exposure to overseas solar and ESS markets,which contribute substantially to its earnings. This year, the European IAA Act and the US FCC inverter import ban have materially impacted market expectationsfor the company's overseas shipments. If these policy risks are not resolved in a timely manner, the company's fundamental outlook could be adversely affected.

3. AIDC business progress and industry demand fall short of expectations. The company's AIDC power supply and ESS businesses represent its third growthdriver for sustained future expansion. If the company faces challenges in market development, fails to meet customer requirements in terms of producttechnology and performance, or is affected by weaker-than-expected end-market demand and decelerating capex, the growth trajectory of its AIDC-relatedbusinesses may underperform expectations.