Sembcorp Industries - OCBC Investment 2021-11-15: Doubling Renewables Portfolio In China

SEMBCORP INDUSTRIES LTD (SGX:U96)

Sembcorp Industries - Doubling Renewables Portfolio In China

On 12 November 2021, Sembcorp announced that will acquire a 98% interest in a portfolio of operational wind and solar PV assets from CGN Capital Partners Infrastructure Fund III and its affiliates for a consideration (net of external debt financing) of about RMB3.3b (S$700m). CGN Capital Partners Infrastructure Fund III is an unlisted private equity infrastructure fund focused on renewable energy infrastructure assets in China.
We estimate that the acquisition price at ~US$2.5m/MW is at a premium considering ~6-7% project IRRs and risks related to receivables on subsidies.
The government subsidy payment backlog is about three to four years for the industry, but for the last few quarters subsidies have been paid more frequently, according to management.

The total gross installed capacity of 658MW of the portfolio will provide Sembcorp (SGX:U96) with a scalable renewable platform to drive further growth in China.
Located in energy demand centres Hebei, Henan and Shandong provinces, the assets are contracted and are eligible for fixed feed-in tariffs under China’s renewable energy policy. With this acquisition, Sembcorp’s renewables portfolio in China will double in gross capacity to 1,400MW of wind and solar assets. More details on the assets to be acquired are in Exhibit1 of report attached below. Completion of the acquisition is expected in 1H22, and is subject to conditions precedent including regulatory approvals.

Looking ahead, uncertainties continue to persist with regard to the COVID-19 pandemic with the potential resurgence of infections globally. The underlying performance of Sembcorp will also be negatively impacted by changes in customer profile in the UK and Singapore, as well as loss of income from divested assets in Panama and Chile.
There are potential downside risks in the Conventional Energy segment across markets due to higher market volatility as well as higher fuel costs. In addition, there will be planned maintenance shutdowns in Singapore, Myanmar and India in 2H21.
Sembcorp, however, is transforming its portfolio to focus on sustainable solutions. In 1H21, 78MW of renewable energy capacity was installed. About 87MW of capacity is expected to come onstream by end of this year.

Currently, about 25% of Sembcorp’s total energy is in renewables (comprising installed and under development capacity), with the remaining 75% in thermal.
In 2020, about 20% of Sembcorp’s bottom-line was attributed to renewables. Should the group be able to execute its renewables strategy, the stock may re-rate in the future. We maintain our fair value estimate of S$2.50 on Sembcorp.

Sembcorp’s ESG rating has remained constant since Aug 2018, with the company scoring above the industry average in the aspect, and lower than the industry average for Labour Management and Opportunities in Clean Tech. Sembcorp still mainly relies on thermal sources such as coal and gas, which may expose it to compliance risks associated with the increasingly stringent carbon tax schemes in Singapore. There is potential for improvement given Sembcorp’s strategy to increase its exposure to renewables.
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OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-11-15

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