Excerpts from UOB Kay Hian report
Analyst: Edison Chen
|Explosive Growth On China’s Environmental Sunrise
As China’s Xi has vowed a war on pollution, Sunpower is on the cusp of explosive growth.
With Rmb3.4b of projects and Rmb2.0b in its orderbook, top investment funds have validated this company with its technology advantage and proven track record.
Initiate coverage with BUY and SOTP-based target price of S$0.77.
♦ Initiate coverage with BUY and SOTP-based target price of S$0.77, with 59.7% upside. Conservatively assuming only Rmb400m of future investments for Sunpower’s Green Investment (GI) arm and valuing its manufacturing & services (MS) business with a 10.5x peer multiplier, we have a SOTP value of Rmb3.65/share (on full dilution).
♦ Huge demand of Rmb500b to replace smog-producing boilers as China’s Xi vows war on pollution; air pollution top priority. Since its 2013 “airpocalypse”, China has listed environmental protection as a main concern.
Under President Xi (who has placed air pollution as a top priority), the government has set up a powerful new cabinet-level environment ministry, identified small inefficient coal boilers as the culprit of highly polluting smog, and set strict regulations to replace these boilers and promote clean energy heating. This has heralded an era of “central boilers” with a huge Rmb500b market.
♦ Technological advantage leads to profitable high IRR GI projects. Sunpower is set to ride on this boiler replacement wave as it captures GI projects with its core advantages of proprietary technology arsenal (its patented heat exchangers are one of the best in the world) and engineering experience.
Sunpower is able to deliver steam at a lower price, giving it a competitive pricing edge, translating into both higher project capture rate (due to the bidding system) and attractive double-digit IRRs.
♦ On the verge of explosive growth; >Rmb3.4b of committed projects (28 more in deal pipeline), Rmb2.0b in record orderbook, 1Q18 core profit has already grown 52.4% yoy. Sunpower is on the verge of explosive growth with four projects already operational (a smaller fifth project is only 49%-owned) and contributing to 52.4% yoy increase in 1Q18 core profits.
Five more projects are underway, three more to be constructed (totalling >Rmb3.4b) as well as 28 projects in the deal pipeline. With the oil price recovery, its other business segment also has a record-high Rmb2.0b orderbook.
♦ Top investment funds back its proven track record and 143 patents. Sunpower is a proven company with more than 20 years of track record with its 143 patented technologies tested by >1500 clients such as global giants Sinopec, Shell and BP. Top investors such as China’s top private equity fund are on board (latest bonds convertible at S$0.60), adding credibility and confidence to Sunpower’s potential.
♦ Initial high gearing leads to risks but quality cash flow means healthy interest coverage. To gain the first-mover advantage and capture market share, Sunpower has taken an aggressive growth approach through gearing (net gearing forecasted to peak at 141% in FY19).
While this increases related risks, successful execution will generate quality cash flow as evidenced from early projects (interest coverage ratio ~5x), thanks in part to a strict prepaid system for GI projects (customers pay before consumption).
|Initiate coverage with BUY and SOTP-based target price of S$0.77.
Riding on the back of favourable regulatory environment, we like Sunpower for its:
a) solid market positioning (through its industry-leading heat transfer technology) in the explosively growing China environmental industry,
b) profitable high IRR GI projects that have begun contributing to Sunpower’s bottom-line,
c) track record of more than 20 years partnering with oil majors such as BP and Shell, and
d) validation and opportunities provided by top investment funds, CDH Investments (CDH)/DCP Capital Partners (DCP).
We value Sunpower at S$0.77, based on a SOTP valuation where its MS business is valued on a PE basis while GI is valued based on discounted cashflow methodology.
Full report here.