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.
Environmental equipment specialist with proprietary technology
- 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.
Solidifying recurring income base via BOT/BOO model
- 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.
Strong order momentum with expanding customer base
- 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.
Doubled 9M16 core net profit to sustain earnings re-rating?
- 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.
A cheaper environmental concession play
- 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.
Target Price: N/A