HOLD BUY. China Singyes Solar Technologies [0750.HK] Outlook improving but positives largely priced in after recent share price rally

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1 September February 27, 1, China Singyes Solar Technologies [0750.HK] Outlook improving but positives largely priced in after recent share price rally Singyes s 1H16 earnings growth of 42% YoY was driven mainly by one-off items, and the core profit was -1% YoY based on our calculations. That said, we see some positive factors after attending the analyst meeting: (1) Singyes is confident of achieving 420MW of solar EPC volume in 2016E and will start construction of 500MW in 2017E, up significantly from 183MW in 2015; (2) Singyes is making good progress on selling its existing solar farm projects located in Gansu and Xinjiang (110MW), as well as some projects in Guangdong, which will help improve its cash flow; and (3) a solid backlog will help support the curtain wall business. We raised our 2016E/2017E core earnings forecast to RMB360m/373m from RMB190m/201m after fully modelling the company s targets. We raised our TP from HK$2.75 to HK$4.80, based on 8.8x 2016E PER (historical average). However, we maintain our HOLD rating, as we believe the recent strong share price rally already factored in most of the positives. 1H16 earnings driven mainly by one-off gains. The reported net profit of RMB316m included two major items: (1) RMB145m of non-cash pre-tax gains on the disposal of the 50MW Golden Sun project in June; and (2) RMB43m of fairvalue gains on CBs. Adjusting for the above items and other one-off items, we calculated the core net profit to be RMB176m (-1% YoY). Recovery of solar EPC volume. Singyes completed 170MW of solar EPC volume in 1H16 (+42% YoY), with an ASP of RMB7.4/watt (-14% YoY, largely due to the replacement of business tax with VAT). Currently, projects under construction are 200MW, which must be completed by year end according to the contract terms. This, coupled with another new project of 50MW, will take the EPC volume to 250MW in 2H16E, implying 420MW for the full year. Singyes s construction target for 2017E is 500MW, with a focus on top-runner projects and distributive generation projects. Aims to gradually cash out from solar farm projects to reduce gearing. As at end-june, Singyes owned 195.5MW of on-grid solar farm projects (Gansu and Xinjiang: 110MW; Guangdong: 42MW; Golden Sun projects: 43.5MW). Between July and August, a 30MW project in Guangdong and a 10MW project in Hebei were connected to the grid. Including other projects under development, the total solar farm scale could reach 397.9MW. Singyes is making good progress in selling 110MW in Gansu and Xinjiang this year. We have modelled a selling price of RMB8/watt, largely the same as the projects construction cost. We estimate this will help reduce the net debt-to-equity ratio to 40% by year-end from 67% in June. On the other hand, Singyes intends to sell more solar farms in Guangdong, through introducing an investment trust. This will help further improve cash flow and reduce gearing. Solid backlog for curtain wall business. Revenue from its curtain wall business increased 27% YoY to RMB765m in 1H16. We expect the revenue in 2H16E to be largely similar to that in 1H16. Currently, the total backlog is ~RMB1.79bn, including RMB1bn in Mainland China, RMB500m in Hong Kong, RMB200m in Australia, RMB40m in Macau and RMB50m in Malaysia. Upside risk: Better-than-expected solar EPC business. Downside risks: (1) Government policy changes; (2) extended receivables; (3) refinancing risk; (4) reduced margins for solar EPC. Solar Power Sector HOLD BUY (Unchanged) Close: Close: HK$4.29 HK$xxx (August (Feb 26, 31, 2015) 2016) Target Target Price: Price: HK$4.80 HK$xx (+xx%) (+12%) Share Price Performance Market Cap US$461m US$xxxm Shares Outstanding 696m 834m Auditor Ernst & Young Free Float 63% xx% 52W range HK$ HK$xxxxxx 3M average daily T/O US$xxxm US$5.3m Major Shareholding Liu Liu Hongwei (36.7%) (35%) Wayne Fung, CFA Analyst (852) waynefung@chinastock.com.hk Wong Chi Man, CFA Head of Research (852) cmwong@chinastock.com.hk 1

2 Figure 1: Singyes 1H16 revenue and gross profit breakdown (RMB m) 1H15 1H16 Chg YoY Revenue breakdown Curtain wall and green building Public work % Commercial and industrial % High-end residential % Sub-total % Gross profit % Gross margin 15.9% 15.9% Solar EPC Public work % Commercial and industrial 1,033 1, % High-end residential buildings 0 0 n/a Sub-total 1,034 1, % Gross profit % Gross margin 28.7% 26.2% Sale of goods Curtain wall materials % Renewable energy goods % New material business % Sub-total % Gross profit Curtain wall materials % Renewable energy goods % New material business % Sub-total % Gross margin Curtain wall materials 17.0% 16.2% Renewable energy goods 22.1% 17.4% New material business 29.3% 40.8% Average gross margin 21.9% 18.1% Sale of electricity Revenue % Gross profit % Gross margin 49.7% 55.7% Rendering of design and other services Revenue % Gross profit % Gross margin 100.0% 100.0% Sources: Company, CGIS Research 2

3 Oct-09 Feb-10 May-10 Aug-10 Nov-10 Mar-11 Jun-11 Sep-11 Dec-11 Apr-12 Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-13 Mar-14 Jun-14 Sep-14 Dec-14 Apr-15 Jul-15 Oct-15 Jan-16 May-16 Aug-16 Figure 2: Singyes 1H16 results highlights Income Statement (RMBm) 1H15 1H16 Chg YoY Revenue 2,201 2, % Cost of sales (1,669) (2,143) 28.4% Gross profit % Gross margin 24.2% 22.2% Other income and gains % Selling & distribution expenses (46) (60) 31.6% Administrative expenses (158) (173) 9.3% Others (8) (6) -17.1% EBIT % EBIT margin 19.8% 22.1% D&A % EBITDA % EBITDA margin 22.7% 24.9% Share of profit/(loss) of associates 0 (17) n/a Finance expenses (152) (190) 24.7% Pretax Profit % Income tax expenses (61) (76) 24.8% After tax profit % MI 0 (10) n/a Net profit % Recurring net profit % Net margin 10.1% 11.5% Recurring net margin 8.0% 6.4% Note: The recurring net profit figures are adjusted for the one-off gains on disposals, noncash deferred income, non-cash CB interest expenses and fair value change. Sources: Company, CGIS Research Figure 3: Singyes solar EPC volume Figure 4: Singyes PER band E 2017E EPC completed for the year (MW) HKD x 12 21x x 6 9x 4 2 3x 0 Sources: Company, CGIS Research estimates Note: The EPS is on recurring basis 3

4 Earnings projection (RMB m) E 2017E (RMB m) E 2017E Income statement Cash flow statement Revenue 4,151 5,043 4,239 6,260 6,818 Operating activities Curtain wall and green building 1,371 1,671 1,281 1,537 1,567 Pretax profit Solar EPC 1,889 2,064 1,468 3,024 3,400 Depreciation Sales of goods 879 1,247 1,365 1,520 1,629 Amortization of prepaid land lease payments Sales of electricity Amortization of intangible assets Rendering of design & other services Interest income (7) (24) (45) (14) (15) COGS (3,162) (3,962) (3,298) (4,886) (5,361) Finance costs Gross profit 988 1, ,374 1,457 Share of profit/(loss) of associates (0) Curtain wall and green building Change in working capital 76 (766) (1,267) (762) 159 Solar EPC Income tax paid (104) (141) (97) (114) (90) Sales of goods Others (19) (176) (193) 0 0 Sales of electricity Operating cash flow 751 (56) (694) Rendering of design & other services Other income Investing activities Selling & distribution expenses (76) (89) (108) (175) (191) Net capex on PP&E (1,312) (1,084) (374) 580 (100) Administrative expenses (219) (271) (386) (488) (511) Purchase of intangible assets (0) (1) (3) 0 0 Other expenses (34) 14 (13) (31) (34) Investment in associates 0 0 (1) (3) (10) EBIT Interest received D&A Dividend received from associates EBITDA 805 1, , Others 246 (95) 216 (10) (10) Share of profit/(loss) of associates 0 0 (6) (1) 0 Investing cash flow (1,059) (1,169) (144) 581 (105) Finance expenses (111) (238) (317) (345) (314) Pretax Profit Financing activities Tax expenses (136) (114) (90) (114) (90) Proceed from/(repayment of) borrowings 344 1,417 1, (1,490) After tax profit Proceed from equity MI (0) (1) (1) (15) (12) Dividends paid (37) (49) (49) (17) 0 Net Income Interest paid (99) (159) (245) (345) (314) Recurring net profit Others Reported EPS Financing cash flow 507 1,229 1, (1,804) Recurring EPS Net Changes in Cash ,545 (949) (RMB m) E 2017E Balance sheet Non-current assets E 2017E PP&E 2,680 3,455 3,835 3,144 3,129 Valuation Prepaid land lease payment PER (recurring earnings) (x) Intangible assets Dividend yield 2.2% 2.1% 0.7% 0.0% 0.6% Investment in associates 0 0 (5) (2) 8 PBR (x) Others EV/EBITDA (x) Total non-current assets 2,834 3,792 4,045 3,363 3,365 Growth rate Revenue 34% 22% -16% 48% 9% Current assets EBIT 45% 27% -18% 23% -17% Inventories EBITDA 43% 31% -14% 17% -15% Construction contracts , Recurring net profit 49% 3% -59% 73% 3% Trade and bill receivables 1,801 2,161 2,292 3,539 2,999 Recurring EPS 44% -3% -59% 58% -5% Others ,100 1,081 Operating ratios Pledged deposits Gross margin 24% 21% 22% 22% 21% Cash ,265 2,810 1,861 Curtain wall and green building 16% 15% 14% 15% 14% Total current assets 3,467 4,417 5,607 9,380 7,161 Solar EPC 29% 27% 27% 25% 24% Sales of goods 24% 19% 23% 18% 18% Total assets 6,301 8,209 9,652 12,743 10,526 Sales of electricity 4% 58% 42% 56% 56% Rendering of design & other services 43% 77% 81% 100% 100% Current liabilities EBIT margin 18% 19% 18% 15% 12% Trade and bill payables 1,293 1, ,309 1,215 EBITDA margin 19% 21% 21% 17% 13% Other payables and accruals Recurring net margin 12% 10% 5% 6% 5% Interest-bearing bank and other borrowings ,041 1,091 1,091 Asset turnover Income tax payable Adjusted ROE 22% 18% 6% 9% 9% Others Adjusted ROA 9% 7% 2% 3% 3% Total current liabilities 2,378 2,791 2,540 4,056 2,945 Interest coverage Net debt/equity 12% 43% 68% 40% 25% Non-current liabilities Current ratio Interest-bearing bank and other borrowings 681 1,751 2,986 3,786 2,296 Quick ratio Deferred tax liabilities Days inventories Deferred income Days receivables Total non-current liabilities 1,323 2,277 3,611 4,411 2,921 Days payables Equity Issued capital Reserves 2,553 3,094 3,378 4,139 4,511 2,599 3,140 3,425 4,185 4,558 MI Total equity 2,599 3,141 3,501 4,276 4,660 Total equity and liabilities 6,301 8,209 9,652 12,743 10,526 BVPS (RMB) Sources: Company, CGIS Research estimates 4

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