Sunpower Group - DBS Research 2020-05-18: On The Right Path

SUNPOWER GROUP LTD. (SGX:5GD)

Sunpower Group - On The Right Path

Raise Sunpower Group's FY20F/FY21F earnings by 4%/5% on better M&S margins and order book.
M&S order book rose to a record RMB2.8bn.
Green Investments (GI) segment holding up as textile exports rebound.

Sunpower Group (SGX:5GD)’s long-term green investments (GI) growth remains on track even as the world battles COVID-19. The textile sector, which we estimate to contribute over 50% of Sunpower Group’s GI revenue, may face greater uncertainty in the coming months if consumers tighten their belts.
To elaborate, lower China retail sales in April (-7.5% y-o-y) may reflect a more cautious sentiment among Chinese consumers which could affect domestic textile demand. That said, any impact may be mitigated by an increase in steam demand from the food and pharmaceutical industries, which was higher by 18.2% and 8.6% y-o-y respectively in April.
Altogether, we expect environmental regulations to remain a key driver behind rising demand for Sunpower Group’s GI steam plant.

Sunpower Group's 1Q20 revenue and adjusted PATMI (PATMI excluding convertible bond effects) was down 17.1% and 15.6% y-o-y to RMB672.7m and RMB51.1m respectively as a result of the lockdown in China.
M&S revenue was down 21.2% to RMB413.6m although operating income was flattish at RMB53.1m (+1.9% y-o-y). M&S order book rose to RMB2.8bn in April (Jan: RMB2.5bn).
GI revenue and EBITDA declined to RMB259.1m (-9.6% y-o-y) and RMB78.9m (-9.4% y-o-y) respectively. The decline was partially mitigated by certain plants that continued to supply heating to households despite the lockdown.

We estimate that the textile sector (printing and dyeing) contributes most of Sunpower Group’s GI revenue (over 50%).
Following a 19.5% y-o-y fall in exports of textile yarn, fabric and articles thereof for January and February 2020, exports for the months of March and April 2020 have rebounded to RMB165bn (+26.9% y-o-y).
We believe this may be attributed to a buildup of orders during the shutdown and could last a few months. However, textile exports may face pressure in the coming months dragged by an economic recession.

China’s April retail sales dipped 7.5% y-o-y but improved from the 15.8% y-o-y tumble in March. Notably, retail sales of clothing items such as shoes and hats fell 18.5% y-o-y in April although this was mitigated by growth in retail sales of medicines and food items such as grains and oil.
Given Sunpower Group’s exposure to the domestic textile sector, softer retail sales of clothing items may indicate a cautious sentiment among Chinese consumers due to the economic uncertainty. This could signal lower domestic demand for textiles and in turn lower steam demand even as the country resumes business
That said, an increase in steam demand from the food and pharmaceutical sectors could help support steam demand.

Phase 1 of Shantou plant is in trial production while Phase 2 is expected to complete construction in early-2021. The Xintai Zhengda project is also scheduled to begin trial production in 1H20 with the Tongshan Phase 1 project targeted for completion in 2021.
Overall, steam capacity could rise to an estimated c.2,320t/h (+c.65% from FY19) on completion of the Tongshan Phase 1 project
In addition, we believe that steam capacity could rise further given Sunpower Group’s RMB2.5bn equity investment target with only RMB1.7bn invested or committed as of 1Q20. To meet this target, we think a plant acquisition may be on the cards.

We revised FY20F adjusted PATMI (i.e. net profit pre-exceptionals) up on better margins from the M&S segment. Our FY21F earnings forecast was also increased by c.4% to account for the higher order book of RMB2.8bn which we expect will have a positive impact in 1H21.
See Sunpower Group Share Price; Sunpower Group Target Price; Sunpower Group Analyst Reports; Sunpower Group Dividend History; Sunpower Group Announcements; Sunpower Group Latest News.
Overall, we now think there is an increased possibility of Sunpower Group meeting its convertible bond targets although uncertainty from COVID-19 remains as lower retail sales may weigh on domestic textile demand.

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-05-18

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