Sunpower Group - DBS Research 2020-11-16: Gearing For More


Sunpower Group - Gearing For More

  • Raise Sunpower Group's FY20F adjusted PATMI forecast by 10% to reflect higher Manufacturing & Service (M&S) margins.
  • M&S order book maintained at RMB2.8bn and has remained so in the past three quarters.
  • New Phase 1 of Shanxi Xinjiang Plant expected to bring Green Investments (GI) steam capacity to c.2,450t/h.

Sunpower's 3Q20 revenue in line but earnings beat on higher M&S margins

  • Sunpower Group (SGX:5GD)'s 3Q20 revenue rose 15.9% y-o-y to RMB901.1m as the Green Investments (GI) segment saw higher revenues. 3Q20 adjusted PATMI also increased 33.4% y-o-y to RMB105.2m, helped by higher Manufacturing & Services (M&S) margins.
  • The Manufacturing & Services (M&S) segment is beginning to see some stabilisation in growth after performing exceptionally in the previous quarter. Segment revenue increased to RMB581.6m (+9.0% y-o-y) while the order book remained at RMB2.8bn.
  • Green Investments (GI) segment surged 30.8% y-o-y to RMB319.5m as the steam plants continue to ramp up with new customers relocating their operations.

M&S performance sustaining despite low oil prices

  • 3Q20 M&S performance continued its upward trend with 70% of orders from repeat customers.
  • We estimate that c.15% of M&S revenue is attributed to service concession arrangements dependent on GI plant construction activity. M&S revenue is thus expected to pick up in 2021 as the newly announced Shanxi Xinjiang Phase 1 construction progresses.
  • The M&S segment is likely to improve its performance in 4Q20 relative to the previous three quarters given that M&S sales typically peak in the fourth quarter.

4Q20 to deliver strong GI performance

  • The GI segment has typically performed better in the fourth quarter largely spurred by higher heating demand as the climate in China turns colder.
  • China’s 3Q20 industrial utilisation capacity has also largely returned to pre-COVID levels (3Q20: 76.7%, 3Q19: 76.4%), pointing to a resumption in factory activity and greater demand for steam.
  • These two factors are likely to drive a strong 4Q20 GI showing in line with Sunpower’s previous performance in the fourth quarter.
  • The construction of a new Shanxi Xinjiang Phase 1 plant with 130t/h capacity was announced. Overall steam capacity is now expected to rise to an estimated c.2,450t/h (+74% from FY19) by the end of the 2022.

China retail sales back in positive territory

  • We believe that a significant portion of GI revenue (40- 50%) is linked to demand for steam used by China’s printing & dyeing industry.
  • Retail sales growth of garments was up 8.3% and 4.2% y-o-y in September and August 2020, signalling a recovery in the domestic textile sector.
  • Overall retail sales also improved, rising 3.3% y-o-y in September 2020.

Liquidity position stable with net debt-to-equity estimated to be at 1.51x as at 3Q20 (2Q20: 1.53x, 3Q19: 1.50x)

  • We have adjusted our net debt-to-equity numbers to include the convertible bond.
  • Sunpower Group's interest coverage ratio continued its improvement to 8.2x (3Q19 6.0x) as EBITDA rose while finance costs inched down as lower-cost credit facilities were obtained.
  • Sunpower Group had c.RMB900m repayable within a year or on demand as of 3Q20 with a cash position of c.RMB590m vs c.RMB1bn and cash position of RMB690m as at end-FY19.

Key goals in China's 14th Five-Year Plan (2021 – 2025) could benefit Sunpower Group

  • While the details in the plan have not been fleshed out, “green growth” has been identified to be a key area of focus in the new plan.
  • The previous 13th Five-Year Plan laid the groundwork for regulations to drive the closure of small dirty boilers.
  • We expect the 14th Five-Year Plan to continue this momentum, with the potential to surprise on the upside if stricter regulations are announced.

Maintain BUY on Sunpower Group with a higher target price

Woon Bing Yong DBS Group Research | Lee Keng LING DBS Research | https://www.dbsvickers.com/ 2020-11-16
SGX Stock Analyst Report BUY MAINTAIN BUY 0.76 UP 0.690