The recent 40+% sell-down of Sunpower caught my attention as it has always been on my watchlist due to its strategic positioning in the “Green” China economy. Upon further research, it seems that the event-driven selldown had nothing to do with the fundamentals of the company, which in fact were improving (increasing order book size, earnings, and operating cash flows). In order to keep this post brief, I have attached useful sources below that goes into detail the long-term investment merits of Sunpower as well as the recent events that transpired.
The Event – America 2030 Capital
In summary, Guo Hongxin (Founder & Executive Chairman) and Ma Ming (Executive Director), made personal loans by collateralizing their Sunpower shares (approx 1.89% of Sunpower’s total issued shares). The lender is America 2030 Capital. However, the collateral was allegedly forfeited as they had breached terms in the loan contract (this is currently being disputed between borrower and lender). Hence, America 2030 Capital took control of the collateralized Sunpower shares and supposedly sold in the open market, which caused the sell down.
Guo and Ma then obtained an interim injunction to prevent America 2030 “from selling or otherwise dealing in company shares which were used as collateral for personal loans”. They also “lodged a report with the Commercial Affairs Department of the Singapore Police Force over the loan agreement with America 2030”.
Guo and Ma also “begun legal proceedings in the Supreme Court of Singapore to seek the return of the collateral shares“.
From what I can see and what Sunpower has announced, this entire fiasco has nothing to do with Sunpower as a going concern. 2 months ago, Sunpower’s market cap was $383.6m ($0.52 per shares), today it is $221.3m ($0.30 per share), a decline of 42.3%.
I believe Sunpower Sunpower has been unfairly punished and is currently trading at compelling valuations. There are 3 share price catalysts that should send Sunpower higher.
Share Price Catalyst #1 – Share Buy-Back Mandate (28 December 2018)
The adoption and renewal of the share buyback mandate are usually held during a company’s AGM day. To call an EGM so urgently just to adopt a share buy-back mandate signals to me that the management is also of the view that the company’s stock is undervalued. The share buyback mandate, which will most likely be approved, will enable Sunpower to commence open market purchases on or after 28 December 2018. This should provide some form of price support.
Share Price Catalyst #2 – Stellar 4Q18 Results (End Feb 2019)
Sunpower’s earnings are seasonal with the majority of earnings coming in 4Q. Management is of the view that Sunpower’s 4Q18 will be stellar considering:
- Quanjiao and Lianshui projects will continue to secure new customers driven by the closure of small “dirty” boilers
- Full-quarter electricity revenue contribution by the Changrun Project
- Additional revenue from providing heating during winter by Xinguan Plant
- Full quarterly contributions from Yongxing Plant (acquired in Sep 2018), which will benefit from higher seasonal activities in 4Q
- M&S segment expected to benefit from a record order book of RMB2.2b and usually higher deliveries of work-in-progress products in Q4.
I am forecasting 4Q18 PATMI (excl. CB effects) of RMB100m which translates to FY18 PATMI (excl. CB effects) of RMB220m, which is below the forecasts of UOB Kay Hian and Lim and Tan (RMB250m). This means that Sunpower is currently trading at only 5x FY18F P/E (4.4x if we use RMB250m) despite its multi-year growth profile.
My personal arbitrary short-term (<1 year) target price for Sunpower is $0.45, representing 50% upside, implying a 7.5x FY18F P/E.
Share Price Catalyst #3 – Outcome of legal proceedings between Guo & Ma v America 2030 (Date uncertain)
There are 2 possible scenarios, either Guo & Ma wins the lawsuit or America 2030 does. In the latter event, nothing exciting happens. However, in the event Guo & Ma wins, there could potentially be a short squeeze scenario as America 2030 would have to either buy up shares in the open market or purchase them from a substantial shareholder at a premium, both of which would be a positive catalyst for the stock.
Sunpower has 2 business units, namely Manufacturing & Services (M&S) and Green Investment (GI). Both business units are seeing robust growth in terms of order book size and project pipeline.
For the M&S side, Sunpower’s order book size has hit a record Rmb2.2billion as at Sep’18. This provides the group with strong earnings visibility in the near to mid-term.
For the GI side, Sunpower has massive CAPEX plans to build/acquire centralized steam & electricity facilities. For instance, it plans to grow annual steam and electricity capacity by 3.5x and 5.3x respectively by 2021. Upon completion and ramp-up, these facilities provide Sunpower with recurring cash flows. One interesting caveat is that such facilities allow Sunpower to seek advance payments from its customers due to its exclusivity.
Sunpower is founder-led with management collectively owning 42%. Hence, there is a strong alignment of interests with shareholders.
Based on Sunpower’s AR17, Guo Hong Xin (Founder) and Ma Ming (Executive Director) own 20.02% and 17.42% respectively.
Key Risk Factors
- High debt levels – Due to the massive CAPEX required for the GI segment, Sunpower finances its projects with 60% debt and 40% equity.
- Forex risk of convertible bonds – the debt is denominated in USD while Sunpower’s income is denominated in RMB. Further weakening of the RMB vs. USD will adversely affect the debt servicing capabilities of Sunpower.
- Execution risk – Sunpower may not have adequate experience in the GI segment and hence there might be execution hiccups which will adversely affect its ability to service its debt obligations
3Q18 Investor Presentation (10 Nov 2018): http://infopub.sgx.com/FileOpen/15763766_Announcement_Investor.Presentation.ashx?App=Announcement&FileID=533291
Lim & Tan Initiation (06 June 2018): https://gallery.mailchimp.com/3ee0deff94878c8fa53817feb/files/7f83b121-2444-48a8-84c3-b532ea9950f0/20180606_Lim_Tan_Sunpower_Initiation.pdf
UOBKH Initiation (06 June 2018): https://research.uobkayhian.com/content_download.jsp?id=45710&h=7be9fdb21d740d2bc72ceaa415e791ed
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