Excerpts from DBS Research report

Analysts: Lee Keng LING & Singapore Research Team

All that glitters is green
Upgrade to BUY with DCF-based TP of S$0.69. The worst appears to be over for Sunpower as China’s economic activities resume.

Sunpower

Share price: 
57 c

Target: 
69 c

Sunpower’s green investments (GI) growth could be back on track given that the textile sector has seen domestic sales return to pre-COVID-19 levels.

Specifically, China retail sales growth of clothing items were at -0.1% y-o-y in June.

The textile sector, which uses steam from Sunpower’s GI plants for printing & dyeing purposes, contributes 40-50% of Sunpower’s GI revenue.

Altogether, as the economic recovery continues, GI performance should see at least a slight improvement from last year.



Manufacturing and services (M&S) order book sets another record. Following 1Q20’s strong order book of RMB2.8bn, the M&S segment outperformed in 1H20, growing revenue to RMB1.3bn (+32.7% y-o-y).

As a result, we revise FY20F adjusted PATMI by 6% as Sunpower has proven that its larger order book of RMB2.8bn is sustainable.

steam electricity8.20Sunpower’s GI business supplies industrial steam to a wide range of industries.The increase in order book should have a positive impact on 1H21 results.

Where we differ: We have assumed a lower impact of the global economic slowdown on Yongxing and Xinyuan plants as a significant portion of their capacity is used for heating purposes and less linked to industrial activity.

Potential catalyst: New GI plant development or acquisition, rise in M&S order book driving M&S sales.

"Sunpower aims to invest RMB2.5bn in GI equity by 2021. Given the looming target and that only RMB1.7bn in GI equity has been invested or committed, we see a possibility that Sunpower could announce an acquisition in the coming months."

-- DBS report

Valuation:
Upgrade to BUY with DCF-based TP of S$0.69. Valuation was increased on earnings revisions for FY20F, FY21F and FY22F led by the sustained higher M&S order book of RMB2.8bn and the removal of additional dilutive shares that were previously assumed based on a miss in convertible bond targets.

Key Risks to Our View: Unfavourable changes in the regulatory environment; steep rise in coal prices; resurgence of COVID-19; weak Chinese economy.


Full report here


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