Sunpower Group - CIMB Research 2016-12-09: Level up heat

SUNPOWER GROUP LTD. 5GD.SI

Sunpower Group - Level up heat

Environmental equipment specialist with a 20-year track record, proprietary heat insulation technology and a diverse customer base.
Recent expansion into BOT projects (Rmb966m) boosted 9M16 EPC revenue and offers recurring income from FY17.
Strong order momentum sustained by new EPC and equipment sales projects.
Positive operating cashflow; net gearing of 20.8% as at end-Sep 16 to support higher leverage and ROEs.

Currently trades at 12x historical P/E, cheaper than overall peers’ average of 31x.

An environmental equipment specialist based in China, Sunpower recently diversified into green investments of power plants by leveraging on its proprietary heat insulation and clean coal technology.
Backed by established relationships with domestic SOEs (CNPC, Sinopec) and MNCs (BASF, Shell), the company is a potential beneficiary of Chinese policies on stricter air quality and replacement of inefficient coal-fired boilers.

Sunpower announced its first win of long-term contracts in late 2015, funded by its 342.9m new share placement. These projects typically take the form of BOT/BOO, have concession periods of 30 years, 12-15% leveraged IRR (based on debt-to-equity ratio of 60/40) and payback periods of 6-9 years. With investments of Rmb966m, such projects contributed to higher EPC revenue in 9M16 and could offer recurring income from FY17.
Management hints at more projects that are currently under evaluation.

Apart from its penetration into green investments, Sunpower continues to gain traction in its existing businesses, such as the new EPC project win of Rmb23m from a subsidiary of China Shenhua Energy, and Rmb99m worth of equipment sales to several enterprises in China.
Management estimates these will contribute positively to the company’s FY17 earnings, while its order book was at Rmb1.08bn as at end-Aug 16.

Sunpower’s 9M16 core net profit more than doubled from 9M15’s Rmb41m, as a result of both topline growth (+15% yoy) and gross margin expansion (9M16: 25%, vs. 9M15: 23%).
9M16 core EPS, however only grew 9% yoy due to dilution from new share placement.
It had a net gearing of 20.8% as at end-Sep 16, signaling potential for higher leverage and better ROEs (current: 11%).
9M16 operating cashflow was also healthy at Rmb256m, higher than 9M15’s Rmb49m.

The company currently trades at 12.2x historical P/E, which is significantly cheaper than overall industry peers’ average of 31.2x. It also has a record of paying dividends (implied 0.2% dividend yield), despite not having a dividend policy.
Failure to collect electricity tariffs from end users under the BOT arrangement will pose risks to the company.

NOT RATED
Target Price: N/A

NGOH Yi Sin CIMB Research | NAWilliam TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-12-09

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