• Sembcorp (SGX:U96) acquired 1.7GW (2 sites) and 583MW of renewable assets in China and India, respectively. With the three acquisitions, Sembcorp’s total gross renewable capacity increases to 9.4GW, including work-in-progress assets, very close to its 10GW target by 2025.
• These acquisitions will be accretive to earnings upon completion by 1H23 and will be funded by external debt and internal cash. We estimate they will add 5-6% to Sembcorp's FY24E EPS. We retain our earnings forecasts for now as we await FY22 results.

Acquiring Vector Green in India

• Sembcorp will acquire a 100% equity interest in Vector Green Energy for S$474m. This will help rebalance Sembcorp’s Indian wind/solar portfolio to ~35%/65% to cushion low-wind seasons.
• The Indian assets, which comprise mainly solar assets, are covered by long-term PPAs averaging 19 years. With recent changes to India’s receivables payment regulations, credit quality has improved and the receivables issue has been mostly resolved.

Gaining Meaningful Traction in China Renewables

• Beijing Energy Sembcorp (Hainan) International Renewables Company Limited (a joint venture 49%-owned by Sembcorp Industries) is acquiring 100% equity interests in three solar projects, with a total gross capacity of 795MW, from BEI Energy Development for S$3m and future capital injection of up to S$222m. The assets are contracted to the State Grid Corporation of China, a Chinese state-owned electric utility and grid operator, for 3 to 5-year power purchase agreements (PPA).
• China’s regulated power markets provides greater stability to tariff rates. Sembcorp is confident of renewing the PPAs when they come due as the solar assets are in the south of Hebei Province, one of China’s main energy demand centres.
• Sembcorp Energy (Shanghai) will also be acquiring a 45.3% equity stake in Xingling New Energy (an affiliated company of State Power Investment Corporation Limited (SPIC)) for S$204m, which owns a portfolio of wind and solar assets comprising 830MW of installed renewable capacity and 62MW under development in the provinces of Hunan and Guizhou.

Higher Renewables Target Expected

• While we predict Sembcorp's net debt/equity ratio will reach 1.0-2.0x post acquisition, we believe existing cash flows from newly acquired assets will be used to pay down the debt for Sembcorp to achieve optimal gearing of 1.3x.
• Sembcorp's management has reaffirmed that there will be no equity raising to achieve its 10GW renewables plan.

• Sembcorp’s renewables expansion plan will remain tenacious and it is likely to set a higher target in FY23E. For FY22E, we expect high electricity tariffs in Singapore and India to continue to buoy earnings.
• We anticipate a S$0.16 per share dividend from Sembcorp for FY22E (split between final and special) due to acquisitions and divestments this year, translating to a 5.2% dividend yield. Special dividend is not yet reflected in our forecasts.

Source: Maybank Research - 25 Nov 2022