Singyes Solar (00750.HK/750 HK)

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1 Singyes Solar (00750.HK/750 HK) Margin decline not a concern for earnings growth HK$12.64 Outperform Maintained 1 Huei-chen Flannery hueichen.flannery@kgi.com Company update Estimate downgrade 1 Jerry Weng (Coordinator) PV orders pipeline ensures high BIPV revenue growth in 2014F; positive to blended gross margin despite margin slide from Golden Sun project level Sale agreement with United PV (686 HK) cancelled; no further BOT projects considered in our forecast, but investment income remains a key earnings spotlight 2014F EPS is HK$1.25; we raise 2014F PE from 8x to 10x on profitability improvement outlook in coming years; we add 20% premium on target valuation of HK$12.5 given forecast model is exclusive of BOT income; we raise our 12M target price from HK$11.2 to HK$15, for upside of 18.7%; maintain Outperform Projects pipeline to maintain high BIPV revenue growth in 2014F; good for margin despite decline from Golden Sun level In January, Singyes announced 320MW of PV EPC projects on hand, of which 60% are distributed PV power projects and 40% are terrestrial station projects. This lays the foundation for continued high growth in Singyes has also acquired a 1.1GW power station project in Minqin, Gansu Province, and a distributed PV project in Zhuhai City (yet to be validated as orders on hand). At the analyst meeting, management said the Minqin project will pipeline at least 300MW in 2014 in either EPC or BOT mode depending on cashflow. We thus maintain our BIPV project shipments forecast of at least 600MW in 2014, and target of 800MW in Considering distributed PV EPC projects carry lower gross margin, below the Golden Sun level, and that terrestrial station projects have gross margin in the teens, we forecast Singyes 2014 BIPV gross margin will fall 3.8ppts to 25.7%, based on expectations of distributed PV projects of 29% and terrestrial station projects of 18%. Sale agreement with United PV (686 HK) cancelled; no further BOT projects considered in our forecast, but investment income remains a key earnings spotlight The agreement to discuss the sale was made in August It was cancelled due to numerous conditions precedent of the Proposed Transaction. As a result, our model is impacted by Rmb200mn in other income. The firm states in the annual report that it looks to explore other collaboration opportunities to ensure BOT project sales progress. Singyes sold 15MW of projects in Guangdong in 2013, for a hefty gain of Rmb53.6mn (Rmb34mn sponsored by Golden Sun Program), a token of real earnings contribution by BOT projects. From 2014, Singyes will develop BOT-mode projects of MW or more. The company has self-developed solar projects on-hand of 180MW (100MW with Gold Sun Program). Given the fragmented nature of distributed PV projects, we believe Singyes will plan to shift its focus to BOT within the next couple years. For example, the Minqin terrestrial station is convenient for sell-through, as is the 500MW Zhuhai project (150MW in phase 1 and 350MW in phase 2), given its concentration in one city, making management less complex. Even though we have not incorporated BOT projects income in our latest forecast, we still reckon investment income is a key watch for earnings upside. 2014F EPS lowered to Rmb1.0 On lower BIPV ASP and gross margin expectations and correction of other income, we have revised down 2014F sales by 5.7% to Rmb6.6bn. For proper cost control results in 2013, we have cut 2014F financing and depreciation costs by a respective 11.7% and 5.4%. Our 2014F net income attributable to holding company is lowered 10.1% to Rmb696mn, for EPS of Rmb1.0. Figure 2: Breakdown of 2013 results & 2014 forecast revisions 2014F 2013 Rmb mn Previous Revision Chg. (%) Sales 1,776 1,983 2, Operating profits Net income EPS (Rmb) Gross margin (%) Net margin (%) (0.6) estimates Figure 1: Strong demand boosts BIPV sales outlook BIPV sales, Rmb mn 6,000 5,000 4,000 3,000 2,000 1, F 2015F Valuation and Recommendation EPC suppliers continue to run on China s policy-driven PV installation demand. We think Singyes traction in both EPC and BOT markets will help to extend the high earnings growth outlook. We forecast 2014 EPS of HK$1.25. Current valuation is 10.1x 2014 PE. We raise 2014 PE from 8x to 10x on profitability improvement outlook over coming years. We also add a 20% premium to our target PE-derived valuation of HK$12.5 as our forecast model is exclusive of BOT income. We raise our 12M target price from HK$11.2 to HK$15, for upside of 18.7%. Maintain Outperform. Institutional portal: April 3,

2 Year to Sales Gross profits EBIT EBITDA Net profits EPS 31-Dec (Rmb mn) (Rmb mn) (Rmb mn) (Rmb mn) (Rmb mn) (Rmb) 2012A 4, F 6,600 1, , F 8,100 1,899 1,211 1, F 9,000 2,138 1,373 1, Year to EV/Sales EV/EBIT EV/EBITDA P/E EV/Inv. C. ROAE 31-Dec (x) (x) (x) (x) (x) (%) 2012A F F F Sector Energy 52-week trading range (HK$) M target price (HK$/shr) Mkt cap-hk$ bn/us$ mn 8.8/1,124 Upside/downside (%) 18.7 Outstanding shares (mn) 694 The percentile of excess return (%) 69 Free floating shares (%) 59 Dividend yield-12/14e (%) 1.1 The Largest Shareholder (%): Strong Eagle 35 Book value/shr-12/14e (Rmb) 4.7 3M avg. daily trading (mn) 5 P/B-12/14E (x) 1.8 Abs. Performance (3,6,12M)(%) 54.5; 51.9; Net debt/equity-12/14 (%) 35.9 Rel. Performance (3,6,12M)(%) 59.8; 58.2; Institutional portal: April 3,

3 Figure 3: Company overview Singyes Solar is a high-tech firm engaged in solar technology, the building of energy-saving technology and related functional materials R&D and production. It has subsidiaries and branches in China, and elsewhere. Outlets include Zhuhai Singyes Green Building, Zhuhai Singyes Renewable Energy, Zhuhai Singyes Opto-Electrical, Hunan Singyes Solar, and Singyes Engineering (HK), with branches in Los Angeles, Abu Dhabi, Qatar and Nigeria. Figure 7: Singyes Solar s share price chart Share price, HK$ (LHS); relative to HSCEI, percent (RHS) Apr-13 Jun-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Share price Price performance relative to HSCEI Figure 4: Earnings growth outlook secure in 2014F Figure 8: Singyes Solar s 12M forward PE band Sales, Rmb mn (LHS); gross margin, percent (RHS) Share price, HK$ (LHS); PE ratio, x (RHS) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, F 2015F Sales Gross margin x 9.7x 8.2x 6.7x 5.2x 3.7x 2.2x estimates Figure 5: Sales structure Figure 9: Singyes Solar s 12M forward PB band Sales breakdown, percent Alternative energy materials 34.9 Curtain wall materials 10.5 Others [1.1] 40.4 Curtain wall Share price, HK$ (LHS); PB ratio, x (RHS) x 2.2x 1.8x 1.4x 1.3x 0.8x 0.4x BIPV estimates Figure 6: PV module price low PV module price, US$/watt Jan-11 May-11 Sep-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Institutional portal: April 3,

4 Balance Sheet Total Assets 4,064 6,301 8,402 10,333 11,831 Current Assets 2,366 3,467 4,028 5,238 6,384 Cash & ST Investments 913 1, ,569 2,244 Inventories Accounts Receivable 1,330 1,919 2,622 3,107 3,452 Others Non-current Assets 1,697 2,834 4,374 5,095 5,447 LT Investments Net fixed Assets 1,545 2,680 4,215 4,931 5,278 Others Total Liabilities 2,219 3,702 5,156 6,309 6,921 Current Liabilities 1,634 2,378 3,186 3,800 4,178 Accounts Payable 515 1,293 2,072 2,548 2,820 ST Borrowings ,068 Others Long-term Liabilities 584 1,323 1,971 2,508 2,743 Long-term Debts ,291 1,788 1,983 Others Shareholders' Equity 1,845 2,599 3,246 4,025 4,909 Common Stock Capital Surplus Retained Earnings 1,245 1,995 2,641 3,421 4,305 Preferred Stock Key Ratios Growth (% YoY) Sales OP EBITDA NP EPS Profitability (%) Gross Margin Operating Margin EBITDA Margin Net Profit Margin ROAA ROAE Stability Gross Debt/Equity (%) Net Debt/Equity (%) Interest Coverage (x) Interest & ST Debt Coverage (x) Cash Flow Interest Coverage (x) Cash Flow/Interest & ST Debt (x) Current Ratio (x) Quick Ratio (x) Net Debt (Rmb mn) , Per Share Data (Rmb) EPS CFPS BVPS SPS EBITDA/Share DPS Activity Asset Turnover (x) Days Receivables Days Inventory Days Payable Cash Cycle Profit & Loss Sales 3,098 4,151 6,600 8,100 9,000 Cost of Goods Sold 2,348 3,162 5,041 6,201 6,863 Gross Profit ,559 1,899 2,138 Operating Expenses Operating Profit ,211 1,373 Net Interest Income (85) (111) (139) (172) (203) Interest Income Interest Expense Net Investment Income/(Loss) Net other Non-op. Income/(Loss) Pretax Income ,079 1,214 Income Taxes Net Extraordinaries 2 (0) (0) (1) (1) Net Profit After Extraordinaries EBITDA ,086 1,331 1,529 EPS (Rmb) Cash Flow Operating Cash Flow Net Profit Depreciation & Amortization Change in Working Capital (187) 20 (2) (114) (197) Others Investment Cash Flow (311) (1,204) (1,628) (841) (508) Net CAPEX (336) (1,199) (1,620) (833) (500) Change in LT Investment (0) Change in Other Assets 24 (5) (8) (8) (8) Free Cash Flow (115) (626) (846) Financing Cash Flow Change in Share Capital (8) 263 (49) (62) (62) Net Change in Debt Change in Other LT Liab Net Cash Flow (257) Rates of Return on Invested Capital Year to COGS Dep./Amortization SGA Exp. Operating = 31-Dec Revenue Revenue Revenue Margin 2012A 74.1% 1.8% 8.4% 15.7% 2013A 74.6% 1.6% 7.9% 15.9% 2014F 75.0% 1.3% 8.5% 15.1% 2015F 75.1% 1.5% 8.5% 14.9% 2016F 74.5% 1.7% 8.5% 15.3% Operating Year to Working Net PPE Other Assets Capital 1/ + + = capital 31-Dec Revenue Revenue Revenue Turnover 2012A A F F F Year to Operating Capital Cash 1 - Tax After-tax Return x x = 31-Dec Margin Turnover Rate on Inv. Capital 2012A 15.2% % 13.7% 2013A 15.7% % 14.9% 2014F 15.9% 1.1 7% 13.8% 2015F 15.1% 1.2 7% 14.4% 2016F 14.9% 1.3 7% 15.0% Institutional portal: April 3,

5 Singyes Solar Three-year recommendation & target price history Share price, HK$ Jan-11 Apr-11 Jul-11 Oct-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Mar-14 Share price Target price lowered Target price raised Singyes Solar Investment ratings & target prices for the past three years Date Share price Rating Target price (HK$) (HK$) Previous Revised Previous Revised 3-Apr Outperform Outperform Jan Outperform Outperform Sep-13 0 Outperform Outperform May Outperform Outperform Mar Outperform Outperform Mar Outperform Outperform Jan Outperform Outperform Dec Outperform Outperform Oct Outperform Outperform Sep Outperform Outperform Aug Outperform Outperform May Neutral Outperform Apr Outperform Neutral Feb Outperform Outperform Nov Outperform Outperform Jun Initial coverage Outperform N.A Institutional portal: April 3,

6 KGI Locations China Taiwan Shanghai Room 2703B-2704, Tower A, Shanghai Dawning Centre,500 Hongbaoshi Road Shanghai, PRC Shenzhen Room 24D1, 24/F, A Unit, Zhen Ye Building, 2014 Bao annan Road, Shenzhen PRC Taipei 700 Mingshui Road, Taipei, Taiwan Telephone Facsimile Hong Kong 41/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong Telephone Facsimile Thailand Bangkok 8th - 11th floors, Asia Centre Building 173 South Sathorn Road, Bangkok 10120, Thailand Telephone Facsimile KGI's Ratings Rating Definition Outperform (OP) The stock's excess return over the next twelve months is ranked in the top 40% of KGI's coverage universe in the related market (e.g. Taiwan). Neutral (N) The stock's excess return over the next twelve months is ranked in the range between the top 40% and the bottom 40% of KGI's coverage universe in the related market (e.g. Taiwan). Underperform (U) The stock's excess return over the next twelve months is ranked in the bottom 40% of KGI's coverage universe in the related market (e.g. Taiwan). Not Rated (NR) The stock is not rated by KGI. Restricted (R) KGI policy and/or applicable law regulations preclude certain types of communications, including an investment recommendation, during the course of KGI's engagement in an investment banking transaction and in certain other circumstances. Excess return = 12M target price/current price-1 Note When an analyst publishes a new report on a covered stock, we rank the stock's excess return with those of other stocks in KGI's coverage universe in the related market. We will assign a rating based on its ranking. If an analyst does not publish a new report on a covered stock, its rating will not be changed automatically. Disclaimer This information has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. It is not an offer to sell or solicitation of an offer to buy any securities. KGI Asia Limited and its affiliates and their officers and employees may or may not have a position in or with respect to the securities mentioned herein. KGI Asia Limited (or one of its affiliates) may from time to time perform investment banking or other services or solicit investment banking or other business for any company mentioned in this report. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. Institutional portal: April 3,