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.
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. |
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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. 
Sunpower’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