Sunpower Group - DBS Research 2020-04-20: A Passing Cloud


Sunpower Group - A Passing Cloud

  • Lower Sunpower Group's FY20F earnings by 7% on global recession concerns.
  • Green Investments steam plant growth may slow in short term which could lead to convertible bond target miss and share dilution.
  • Manufacturing & Services could face headwinds in FY21F.
  • Cut to HOLD with Target Price of S$0.49.

China’s textile exports fell in first two months of FY20

  • We believe the textile sector contributes the majority of Sunpower Group (SGX:5GD)’s Green Investments revenue (over 50%).
  • Exports of textile yarn, fabric and articles thereof fell 19.5% y-o-y for January and February 2020 to RMB96.2bn. Most major markets were affected with significant declines in exports to the US (-31.1% y-o-y), Japan (-24.2% y-o-y) and Vietnam (-21.3% y-o-y).
  • We think the fall in exports was due to the extended closure of factories which resulted in a backlog of orders.
  • As at end-March, c.86% of textile manufacturers in 28 textile industrial estates had resumed work. Factory activity in April and May may thus be sustained by the backlog of orders. However, the global spread of COVID-19 has disrupted economies across the world which may weaken global demand for textiles and impact Sunpower Group’s Green Investments segment.
  • That said, we understand that Sunpower Group’s Green Investments textile exposure is oriented towards the domestic market which may shield the group from a large impact. Taking the above into consideration, FY20F earnings are cut by 7% mainly on weaker textile demand.

Credit in focus

  • 74% of borrowings secured as at end-FY19 with c.RMB1.0bn, representing c.44% of Sunpower Group’s borrowings due within FY20 or on demand.
  • While we do not think any liquidity issues will surface in FY20F, gearing is expected to rise further beyond FY20F as strong operating cashflows are offset by high capex to drive Green Investments expansion and meet convertible bond targets.

Manufacturing & Services could face headwinds

  • Demand for Manufacturing & Services products such as heat exchangers and flare gas recovery systems are largely linked to the petrochemical sector.
  • Capital expenditures by petrochemical companies could slow given the uncertain global demand and low oil price. Sunpower Group’s FY20F order book could be impacted by c.25% which would translate into slower FY21F earnings growth for Sunpower of 18% (previously 28%).
  • As of end FY19F, Sunpower Group’s Manufacturing & Services segment boasts an order book of RMB2.5bn which we believe will sustain FY20F Manufacturing & Services revenues for a year.

We downgrade to HOLD with a revised Target Price of S$0.49.

  • Our DCF-valuation was adjusted based on three factors, lower expected earnings, share dilution and higher required rate of return.
  • We revise FY20F earnings down by 7% as growth in the Green Investments segment decelerates. While demand for steam may be sustained in early FY20 due to heating needs, it may slow in the coming months of summer as heating needs diminish and global demand for textiles slow. That said, the GI segment is still expected to grow in FY20F led by the opening of the new GI plants. 
  • Beyond FY20F, environmental-related regulations are expected to continue to drive GI growth as small boilers are phased out in favour of Sunpower Group’s centralised steam plants. This growth is expected to mitigate a fall in Manufacturing & Services FY21F earnings driven by weak demand from the petrochemical sector. Still, Manufacturing & Services FY20F revenues are expected to remain largely stable with Sunpower supported by an order book of RMB2.5bn.
  • See Sunpower Group Share Price; Sunpower Group Target Price; Sunpower Group Analyst Reports; Sunpower Group Dividend History; Sunpower Group Announcements; Sunpower Group Latest News.
  • The greater uncertainty in the global outlook has increased the probability of Sunpower missing its convertible bond targets (Adjusted PATMI FY20: RMB370m, FY21: RMB460m).
  • A miss in convertible bond targets will lead to share dilution with the magnitude dependent on the size of the miss. While a possibility of a renegotiation on convertible bond targets exists, assuming there are no changes, total ordinary shares could be diluted by an additional c.45m shares.
  • Given the high market volatility, we raise our WACC to 8.9% derive a Target Price of S$0.49.

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-04-20
SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.49 DOWN 0.840