Sunpower Group 2Q19 - UOB Kay Hian 2019-08-16: Results In Line, Robust Growth From The GI Segment

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SUNPOWER GROUP LTD. (SGX:5GD)

Sunpower Group 2Q19 - Results In Line, Robust Growth From The GI Segment

• Sunpower Group’s 2Q19 core net profit posted robust growth (+84.8% y-o-y) at Rmb50.5m. The 84.8% y-o-y growth in core net profit was driven by the strong performance from the GI segment. Underlying core net profit rose 53% y-o-y in 1H19 to Rmb111m, forming 37% of our full-year forecast.
• The ramp-up of existing GI projects and a strong M&S orderbook should continue to drive revenue growth in 2H19.
• Maintain BUY and SOTP target price of S$0.83.

2Q19 RESULTS

2Q19 results were in line with expectations; driven by Green Investments (GI) segment.

• SUNPOWER GROUP LTD. (SGX:5GD) posted strong revenue at Rmb659.0m (+10.2% y-o-y) while core net profit was at Rmb50.5m (+84.8% y-o-y), forming 37.1% of our full-year estimate.
• Gross profit increased 52.7% y-o-y to Rmb171.8m, with gross profit margin increasing from 18.8% to 26.1% on a y-o-y basis.
• All increases were in tandem with the strong growth in the GI segment.

M&S remained stable with better margins.

• The manufacturing and services (M&S) segment posted 1H19 revenue of Rmb939m. Sunpower Group has started to focus on higher value-added contracts and holistic internal improvements. The corresponding cost efficiency then led to a 1.2ppt y-o-y increase in gross margins. The M&S orderbook as of 1H19 stands at Rmb2.5b providing earnings visibility for 2H19.

New acquisition for the GI segment.

• Sunpower Group recently acquired 90% of a centralised steam plant in Changshu, Suzhou. Management expects the plant to start contributing in 2H19. The plant is situated favourably in an industrialised cluster, close to a resilient and attractive customer base. The newly-upgraded Yongxing Plant, along with Phase 1 of Shantou Project, is also expected to contribute to earnings in 2H19.

STOCK IMPACT

Expect a strong 2H19 from the contributions of GI plants and continued ramp-up of existing projects.

• Management has earmarked the GI segment as a key driver for the group.
  1. Sunpower Group could stand to benefit from mandatory closure of small boilers and relocation of factories into industrial parks;
  2. full-year contribution from YongXing plant post-upgrades; and
  3. start of trial production by Shantou Project Phase 1 in 2H19 and Suyan plant to start contributing to earnings in 2H19.

EARNINGS REVISION/RISK

• We maintain our EPS forecasts.
• Risks include:
  • higher leverage from expansion;
  • project execution risk; and
  • forex.

VALUATION/RECOMMENDATION

• Maintain BUY and with a new SOTP-based target price of S$0.83, slightly lower than our previous target price of S$0.88 due to a weaker renminbi.

SHARE PRICE CATALYST

• Faster-than-expected ramp-up of GI projects.
• Higher-than-expected project wins for M&S segment.
• More EPS-accretive acquisitions.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-08-16

SGX Stock Analyst Report BUY MAINTAIN BUY 0.83 DOWN 0.880