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

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.

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

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