Sunpower Group - UOB Kay Hian 2019-03-01: 2018 Results Above Expectation; Better Earnings Quality

SUNPOWER GROUP LTD. (SGX:5GD)

Sunpower Group - 2018: Results Above Expectation; Better Earnings Quality

Sunpower Group's 2018 core net profit represents 108% of our estimate. The 117.5% y-o-y leap in core net profit was driven by a strong GI segment which led to record revenue growth of 66% y-o-y.
Earnings quality also improved. Full-year contribution from Green Investment (GI) plants, continued ramp-up in GI projects and strong Manufacturing and Services (M&S) orderbook should translate into a stronger 2019.
We raise our 2019F EPS by 7% and SOTP target price by 16% to S$0.88. Maintain BUY.

SUNPOWER GROUP LTD. (SGX:5GD) reported 2018 core net profit of Rmb268m, up 87% y-o-y, driven by a 66% y-o-y leap in revenue.
Earnings quality has also improved on better gross margin and operating cash flow (+141% y-o-y). The strong growth was underpinned by the Green Investment (GI) segment which saw a 384.4% y-o-y surge in revenue while Manufacturing and Services (M&S) revenue rose 39.3% y-o-y.
Moreover, gross profit grew in tandem with revenue to Rmb286m (+70.1% y-o-y) on the back of the ramp-up in the GI segment.

The traditional M&S segment which supports the GI segment expansion delivered a strong performance, clocking in a 39.3% y-o-y growth in revenue to Rmb712.7m in 2018.
Sunpower Group’s reputable track record is proven by the strong orderbook of Rmb2.5b as at Feb 19 vs Rmb1.9b a year ago. Management said there is still room for margin improvement for this segment through better cost savings.

Since the issuance of the second convertible bond and the acquisition of the Yongxing plant, Sunpower Group has seven GI projects in operation and two projects under construction.
We understand that the Xintai Zhengda project is expected to be completed by end-19 and the first phase of the Shantou project should contribute to earnings in 2H19.

Management has earmarked the GI segment as the key driver for the group.
In China, Sunpower Group could benefit from the mandatory closure of small boilers and relocation of factories into industrial parks which allows it to secure more customers. It will also see full-year contribution of electricity sales from the Changrun project (2018: only three months). The Lianshui project expected to achieve full operations and the Shantou project will start contributing to earnings in 2H19.

We raise 2019 EPS forecast by 7% but maintain our 2020 EPS forecast.
Risks include:
1. higher leverage from expansion,
2. project execution risk, and
3. forex movements.

Maintain BUY and raise our SOTP-based target price by 16% from S$0.76 to S$0.88, after incorporating higher utilisation rate for the GI projects. See attached PDF report for breakdown of SOTP.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-03-01

SGX Stock Analyst Report BUY MAINTAIN BUY 0.88 UP 0.760