Sunpower Group - DBS Research 2020-03-02: Racing For Green


Sunpower Group - Racing For Green

  • Sunpower Group's FY19 underlying profit rose 31.5% y-o-y led by ramp up in GI projects.
  • M&S orderbook maintained at RMB2.5bn.
  • Gearing increased to 1.25x.
  • Maintain BUY, lift Target Price to S$0.84 as we revise FY20F net profit up by 10%.

Green investment (GI) plant ramp up to drive growth.

  • Sunpower Group (SGX:5GD)’s GI plants have ramped up successfully, with GI operating cash flow rising by c.19% y-o-y to RMB252m. GI operating margin also improved by 1.6ppt. With the Shantou
  • and Xintai Zhengda projects starting to ramp up in FY20F and FY21F, a further 1,080t/h of active steam capacity, representing c.50% of FY21F total active steam capacity, is expected to come
  • online soon. This combined with the steady closure of small boilers and shifting of businesses to industrial parks will drive a 27.2% growth in GI operating profit for FY20F.
  • In line with its target of having RMB2.5bn in GI equity investments by FY21, Sunpower Group recently announced its plans to invest in the Tongshan Project in Xuzhou City. We estimate that Phase 1 of the project will start operating within two years with the cost of Phase 2 set to be cheaper than Phase 1.

Sunpower’s FY19 net profit above expectations.

  • Revenue rose 10.5% y-o-y to RMB3,604.6m driven by a ramp-up in GI projects and new GI plant acquisitions.
  • Underlying net profit leapt 31.5% y-o-y to RMB352.2m. The improved performance was similarly due to increasing capacity utilisation of GI plants, portfolio expansion and enhancement initiatives. We note that with the latest results, Sunpower Group appears to be on track to hit its convertible bond underlying profit targets of RMB370m and RMB460m in FY20 and FY21 respectively.
  • A dividend of S$0.0025 per share was declared, which while low in absolute terms still represents an increase of 31.6% y-o-y.

M&S margin improved; Orderbook stable

  • M&S revenue declined to RMB2.4bn due to timing differences in contracts. Notably, M&S operating margin improved to 10.8% from 9.3% a year ago while orderbook remained at a healthy RMB2.5bn. The improvement in M&S margin came on the back of efforts to drive operational improvements.

Upcoming GI plants on track for completion.

  • Shantou Phase 1 currently in trial production while works for Shantou Phase 2 are undergoing. Xintai Zhengda project is nearing completion and expected to begin trial production in 1H20.

Tongshan Project to deliver long-term recurring cashflows.

  • Sunpower Group recently announced a planned investment of RMB420m into Phase 1 of the Tongshan Project in an estimated 75:25 debt-equity proportion. The plant, to be built in the Tongshan District of Xuzhou City, will comprise of 2x 130t/h steam boilers and 2x 35MW electricity generators and will supply civil heating to homes as well as electricity to the State Grid. Judging from past projects, we believe that Phase 1 may become operational within 2 years. While no plans for Phase 2 has been announced, we note that Phase 2 of Sunpower Group’s greenfield developments have typically been cheaper and took a shorter time to complete.

COVID-19 virus outbreak.

  • The COVID-19 outbreak in China led to Lunar New Year holiday extensions that lasted till as late as 24 Feb. This had no doubt impacted many Chinese businesses with Sunpower Group not being an exception. While meeting the convertible bond targets remains important, the health and safety of Sunpower Group’s workers is paramount.
  • Management has confirmed that none of Sunpower Groups staff have been infected with COVID-19 and has put in place measures to defend against the virus.
  • With no end to the virus outbreak in sight, any impact on Sunpower Group’s FY20 results remains uncertain. That said, due to the holiday extensions, Sunpower Group’s GI plants saw lower capacity utilisation. As business in China returns to normalcy, we expect topline growth to slow by c.3% attributed to COVID-19.

FY20F and FY21F net profit revised up by 10% and 29% respectively to account for faster ramp up in GI projects.

  • We had previously assumed later completions and ramp up of GI plants in Shantou and Xintai Zhengda. Together, these projects have an active steam capacity of 1,080t/h representing c.50% of FY21F active steam capacity.
  • As a result of this assumption, our previous GI operating margins were more conservative at 25.5% for FY21F. With the Shantou and Xintai Zhengda projects looking to ramp up soon and the achievement of a 28.2% GI operating margin for FY19, we believe these projects will see higher capacity utilisation than previously forecasted with GI operating margins to maintain at 28.2% for FY20F and FY21F.
  • Additionally, we have factored in the new development of the Tongshan Project with the assumption of it beginning operations towards the end of FY21F.
  • Overall, these changes led to our revision in net profit by 10% and 29% for FY20F and FY21F. Following Sunpower Group’s beat in FY19 underlying profit guidance of c.RMB300m by c.17%, we believe that Sunpower Group is on track to meet its convertible bond targets and raise our Target Price to S$0.84 (previously S$0.81).
  • As a side note, our FY22F underlying net profit (i.e. net profit pre ex) was down 3.5% from the previous year. This is attributed to forecasted lower revenue from service concession arrangements for M&S due to lower plant construction activity. FY22F net profit was however up from the previous year as we expect the convertible bonds to mature, resulting in lower finance expenses.
  • See Sunpower Group Share Price; Sunpower Group Target Price; Sunpower Group Analyst Reports; Sunpower Group Dividend History; Sunpower Group Announcements; Sunpower Group Latest News.

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-03-12
SGX Stock Analyst Report BUY MAINTAIN BUY 0.84 UP 0.810