Sunpower Group - DBS Research 2020-08-14: All That Glitters Is Green

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SUNPOWER GROUP LTD. (SGX:5GD)

Sunpower Group - All That Glitters Is Green

• Revise FY20F adjusted PATMI by 6% on Sunpower Group's record M&S 1H20 performance and RMB2.8bn order book.
• GI steam revenue stable with 2H20 likely to improve over 1H20.
• Miss in CB target and share dilution worries allayed.

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• The worst appears to be over for Sunpower Group (SGX:5GD) as China’s economic activities resume.
• Sunpower Group’s green investments (GI) growth could be back on track given that the textile sector has seen domestic sales return to pre-COVID-19 levels. Specifically, China retail sales growth of clothing items were at -0.1% y-o-y in June. The textile sector, which uses steam from Sunpower Group’s GI plants for printing & dyeing purposes, contributes 40-50% of Sunpower Group’s GI revenue. Altogether, as the economic recovery continues, GI performance should see at least a slight improvement from last year.

Record revenues and earnings amid the pandemic

• Sunpower Group's revenue for 2Q20 rose to RMB1,084.2m (+64.5% y-o-y) led by the M&S segment. Underlying net profit also soared to RMB122.5m (+131.2%) for the quarter helped by lower finance costs.
• Manufacturing & Services (M&S) segment revenue jumped 100.9% y-o-y to RMB831.9m on a strong order book of RMB2.8bn (+12.0% y-o-y). 2Q20 M&S EBITDA rose to RMB112.8m.
• Green Investments (GI) segment revenue increased 3.0% y-o-y to RMB252.3m as steam plants continued to ramp up post-COVID-19. 2Q20 GI EBITDA rose to RMB108.4m.

M&S outperformance driven by execution ability

• Sunpower Group attributed the strong 2Q20 M&S performance to its proven quality and execution ability. The Group points to evidence including its blue-chip customer base (such as Shell, BASF) and how 70% of its customers are repeat customers.
• We estimate that c.20% of M&S revenue is attributed to service concession arrangements which is based on construction for its GI plants.
• Going forward, the M&S segment is likely to perform better in 2H20 relative to 1H20 as we see some seasonality in sales. M&S sales typically peak in the fourth quarter of every year driven by seasonal factors.

GI to pick up in 2H20

• Similar to M&S, we see some seasonality in GI performance with the fourth quarter of every year typically recording higher sales. This is likely due to higher heating demand, driven by the colder climate in China towards the end of the year.
• We therefore expect 2H20 GI performance to improve over 1H20, especially with economic indicators pointing to a resumption of activity.
• Overall steam capacity could rise to an estimated c.2,320t/h (+c.65% from FY19) on completion of Tongshan Phase 1.

China’s retail sales recovered in June

• We estimate that a sizeable portion (40-50%) of GI revenue is derived from demand for steam for printing & dyeing from the domestic textile industry.
• Retail sales growth of clothing items has recovered to - 0.1% y-o-y in June 2020, a significant improvement from the -34.8% y-o-y recorded in March 2020.
• Overall retail sales in China has also recovered, with June 2020 registering only a 1.0% y-o-y decline.
• The recovery in Chinese retail sales of garments, footwear, hats & knitwear points to possible increased demand for steam due to higher printing & dyeing needs.

Upgrade Sunpower Group to BUY with revised Target Price of S$0.69.

• We revised up our Sunpower Group's FY20F adjusted PATMI (i.e. net profit pre-exceptionals) by c.6% on the back of the record performance from the M&S segment. Our forecasts for GI are maintained, with 1H20 performance seemingly in line with expectations. We also increased our FY21F adjusted PATMI forecasts by c.9%, led by a higher order book assumption as Sunpower has proven its ability to sustain a RMB2.8bn order book.
• We are now expecting Sunpower Group to meet its convertible bond targets of RMB370m and RMB460m for FY20 and FY21 respectively. As such, we have removed the dilution effect caused by potential additional shares to be issued from missing the convertible bond targets. Our WACC was also lowered to 8.4% on lower market volatility.
• Overall, we derived a Target Price of S$0.69 for Sunpower Group.
• 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/ 2020-08-14

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