Sunpower Group - UOB Kay Hian 2021-01-07: Pure Green Investments Play After Sale Of M&S Business


Sunpower Group - Pure Green Investments Play After Sale Of M&S Business

  • Sunpower Group is selling its manufacturing & services (M&S) business at an attractive valuation, which will result in a special dividend distribution of S$0.2359/share.
  • Post-sale, management will focus on driving greater scalability as a pure steam-power producer in China.
  • The green investments (GI) segment has superior cash flow generation capability relative to the M&S segment, with 30-year operating concessions providing long-term revenue visibility. Maintain BUY with an 18% higher target price.

Disposal of Sunpower Group's M&S business.

  • Sunpower Group (SGX:5GD) is selling its manufacturing & services (M&S) business for RMB2.29bil. See Sunpower Group's announcements.
  • The manufacturing-based business will be sold to a special purpose vehicle that will be owned by a consortium of China funds (64%), the group’s two largest shareholders, Guo Hong Xin and Ma Ming, and certain employees of the M&S segment (36%). The sale price translates to 12.2x 2019 P/E and represents close to 50% of Sunpower Group’s current market cap.
  • We deem the deal as attractive, at a valuation more than twice the 5-7x ascribed by the street.
  • Furthermore, the disposal of the order-driven M&S business will leave investors with the remaining power-producing-related green investments (GI) business, which offers greater revenue visibility and certainty.

Special dividend proposed post-sale.

  • Sunpower Group intends to pay out a special dividend amounting to RMB1.34bil, or S$0.2359/share, split into two tranches. After which, the remaining amount will also be used to repay payables due from the GI business to the M&S business of RMB130mil, as well as RMB551mil earmarked for existing GI projects and working capital.

Redirects strategic focus on successful Green Investments (GI) business.

  • The GI business has significantly more potential to deliver long-term sustainable benefits to the group due to its proven capacity to deliver sizeable recurring income and cash flow.
  • Unlike M&S which is an inherently cyclical, order book-driven business that requires high working capital, GI has the ability to generate recurring cash flow that is sustainable over the long term. This is due to:
    1. 30-year operating concession rights;
    2. Sunpower Group’s exclusive supplier status with a captive customer base; and
    3. mission-critical, non-discretionary products such as steam and heating.

Sunpower to become a fast-growing power-producer.

  • Currently, Sunpower Group has nine plants in operation and two under construction. With four of the plants acquired through M&A - almost half of its existing portfolio, M&A opportunities have been abundant and the proposed disposal would put the group in good position to source for more M&A targets.
  • Sunpower Group's 9M20 financials reflected strong contributions from operational GI plants and the continued ramp-up of existing projects. We expect earnings for the rest of 2020 and beyond to be driven by:
    1. full-year contributions from newly-acquired GI plants;
    2. additional contributions from Phase 2 of the Shantou Project and the new Xintai Zhengda plant;
    3. continuous acquisition of new customers following mandatory closures of “small dirty boilers” and/or mandatory relocations into industrial parks; and
    4. organic growth of existing customers and industrial parks served by the group’s GI plants.

Valuation & Recommendation

China’s economic recovery provides favourable tailwinds.

  • According to the National Bureau of Statistics, China’s 3Q20 GDP grew 4.9% y-o-y and the economy is on track for a full recovery. Furthermore, the International Monetary Fund and Oxford Economics have increased their GDP growth forecasts for China to 1.9-2% y-o-y (1-2% y-o-y previously), with China being one of the few countries to be given positive growth forecasts.
  • With the COVID-19 pandemic relatively under control in China, we believe Sunpower Group is in a favourable position to benefit from the full resumption of economic activity in China and will post strong results for 4Q20.

John Cheong UOB Kay Hian Research | Clement Ho UOB Kay Hian | https://research.uobkayhian.com/ 2021-01-07
SGX Stock Analyst Report BUY MAINTAIN BUY 1.10 UP 0.920