Sunpower Group - UOB Kay Hian 2021-05-20: 1Q21 Superior Profitability & Cashflow From Green Investments; Awaiting Special Dividend


Sunpower Group - 1Q21 Superior Profitability & Cashflow From Green Investments; Awaiting Special Dividend

  • Sunpower Group’s 1Q21 results are in line, with earnings of RMB59.2m (+15.6% y-o-y) led by more green investments (GI) projects coming on-stream. Sunpower Group is in the midst of transitioning towards being a pure power producer.
  • In 2021, Sunpower Group will focus on:
    1. improving capacity utilisation,
    2. expansion of coverage areas, and
    3. planned construction of expansion phases for existing projects.
  • Maintain BUY on Sunpower Group with a higher target price, after accounting for the reduced amount of fully diluted shares.

Sunpower Group's 1Q21 results in line.

  • Sunpower Group (SGX:5GD)’s 1Q21 net profit rose 17.0% y-o-y to RMB59.7m, in line with estimates. 1Q21 revenue grew a faster pace to RMB882.8m (+31.2% y-o-y), on a 12.5% y-o-y growth in manufacturing and services (M&S) and 61.2% y-o-y growth in Green Investments, with the latter attributed to the commercial operation of Shantou Project Phase 1 since 4Q20.

Temporary cost hike at Xintai Zhengda Project masked underlying margin improvement.

  • Headline gross margin contracted to 21.2% (-1.7ppt y-o-y, -1.4ppt q-o-q), mainly due to the transition from the old to new plant at the Xintai Zhengda Project. This resulted in a one-off cost increase estimated at RMB15m, which includes the purchase of electricity from the state grid. Excluding that, we believe that gross margin would have improved on a y-o-y basis, but still be lower sequentially due to seasonality effects.
  • Sunpower Group's management has updated that all customers at the Xintai Zhengda Project have now switched over to the new plant. We expect gross profitability to improve in 2Q21.

Awaiting sale proceeds from M&S disposal.

  • Sunpower Group stated that conditions relating to the M&S sale have been fulfilled, and 96.51% of the proceeds have been escrowed into an onshore escrow account in China, awaiting release to the company. Upon receipt, Sunpower Group will make a further announcement on the record as well as the payment date for the tranche 1 special dividend.

Sunpower's share price to be supported by special distribution.

  • Pending announcement of the ex-distribution date for the M&S proceeds of RMB1.34b (approximately S$0.2398/share), we believe share price for Sunpower Group would be supported by the payout, which equates to 29% yield based on the current share price.
  • Post-distribution, Sunpower Group will transform into a stable asset-based business where it owns and operates industrial infrastructure projects which generate recurring income and cash flow through typically exclusive long-term concessions of 30 years.
  • Sunpower Group's management sees many business opportunities in the anti-smog sector in China, due to regulatory mandated closure of high-emission polluting boilers and the structural shift to low emission centralised steam and electricity facilities.

Sunpower to become a fast-growing clean energy producer.

  • Sunpower Group has 9 plants in operation and two under construction. With four of the plants acquired through M&A (almost half of its existing portfolio), acquisition opportunities have been abundant and the proposed M&S disposal would put the group in a good position to source for more targets.

Reiterate BUY on Sunpower with higher target price

Catalysts to Sunpower share price

  • Faster-than-expected construction ramp-up of GI projects.
  • Better-than-expected utilisation at existing plants.
  • EPS-accretive acquisitions.

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-05-20
SGX Stock Analyst Report BUY MAINTAIN BUY 1.22 UP 1.110