• Sunpower Group's 2018 core net profit represents 108% of our estimate. The 117.5% y-o-y leap in core net profit was driven by a strong GI segment which led to record revenue growth of 66% y-o-y.
• Earnings quality also improved. Full-year contribution from Green Investment (GI) plants, continued ramp-up in GI projects and strong Manufacturing and Services (M&S) orderbook should translate into a stronger 2019.
• We raise our 2019F EPS by 7% and SOTP target price by 16% to S$0.88. Maintain BUY.

2018 Results

2018 results slightly above expectations; better earnings quality.

• SUNPOWER GROUP LTD. (SGX:5GD) reported 2018 core net profit of Rmb268m, up 87% y-o-y, driven by a 66% y-o-y leap in revenue.
• Earnings quality has also improved on better gross margin and operating cash flow (+141% y-o-y). The strong growth was underpinned by the Green Investment (GI) segment which saw a 384.4% y-o-y surge in revenue while Manufacturing and Services (M&S) revenue rose 39.3% y-o-y.
• Moreover, gross profit grew in tandem with revenue to Rmb286m (+70.1% y-o-y) on the back of the ramp-up in the GI segment.

M&S: Continued to grow.

• The traditional M&S segment which supports the GI segment expansion delivered a strong performance, clocking in a 39.3% y-o-y growth in revenue to Rmb712.7m in 2018.
• Sunpower Group’s reputable track record is proven by the strong orderbook of Rmb2.5b as at Feb 19 vs Rmb1.9b a year ago. Management said there is still room for margin improvement for this segment through better cost savings.

GI: Projects under construction are on track and expected to contribute to earnings in 2019.

• Since the issuance of the second convertible bond and the acquisition of the Yongxing plant, Sunpower Group has seven GI projects in operation and two projects under construction.
• We understand that the Xintai Zhengda project is expected to be completed by end-19 and the first phase of the Shantou project should contribute to earnings in 2H19.

Stock Impact

Expect a stronger 2019 from full-year contribution from GI plants and continued ramp-up of existing projects.

• Management has earmarked the GI segment as the key driver for the group.
• In China, Sunpower Group could benefit from the mandatory closure of small boilers and relocation of factories into industrial parks which allows it to secure more customers. It will also see full-year contribution of electricity sales from the Changrun project (2018: only three months). The Lianshui project expected to achieve full operations and the Shantou project will start contributing to earnings in 2H19.

Earnings Revision / Risk

• We raise 2019 EPS forecast by 7% but maintain our 2020 EPS forecast.
• Risks include:
  1. higher leverage from expansion,
  2. project execution risk, and
  3. forex movements.

Valuation / Recommendation

• Maintain BUY and raise our SOTP-based target price by 16% from S$0.76 to b after incorporating higher utilisation rate for the GI projects. See attached PDF report for breakdown of SOTP. 

Share Price Catalyst

• Faster-than-expected ramp-up of GI projects.
• Higher-than-expected project wins for the M&S segment.
• More EPS-accretive acquisitions.

Source: UOB Kay Hian Research - 01 Mar 2019