Sun King Power Electronics
7 April 2017
Sun King Power Electronics
INDUSTRIAL
Carrying on the triumph
BUY
We expect Sun King’s strong pipeline for the EHVDC and flexible DC projects will continue to fuel its skyrocketing growth, while other innovative products will further enrich its war chest for a CAGR of 33.0% in net profit in FY17-19. We reiterate a BUY on the counter, and revised up our target price by 31% to HKD3.35, based on a 13x FY18 forward PER, indicating an 87% of upside potential. 31.3% CAGR in topline in FY17-19 – We slightly raised the topline in FY17 by 5%, due to the postponement of product delivery for some projects in FY16, and revised up that in FY18&19 as more projects in the pipeline have been confirmed, delivering a topline CAGR of 31.3% FY17-19. We expect the overall GPM to increase to above 40% in FY17-19 from 39% in FY16.
Swarms of EHVDC and flexible DC projects in the pipeline – We expect the EHVDC projects to contribute a minimum of RMB500mn/year to its topline in the next three years while the flexible DC project will amass around RMB1.6bn in FY17-FY19. The landmark 2022 Winter Olympics project, Zhangbei flexible direct current project (張北柔直工程), alone is expected to bring in an estimated order value of RMB10bn in FY17-18 together with other projects in the bidding process.
Safeguarding heavy-duty locomotives – China’s complex electrified railway
Recommendation Ticker Quam’s Rating Last Close Target Price Previous Target Up/Downside Previous Rating Share Information 52-week range ADT (3M) (HK$’mn) Market Cap. (HK$’mn) Shares outstanding (‘mn) Free float (%) SH-HK Connect SZ-HK Connect
580 HK BUY HKD1.79 HKD3.35 HKD2.55 87% BUY
1.03-1.99 2.77 2,499 1,396 52.3 No No
Major Shareholders Xiang Jie Jin Hyenmi
34.59% 7.36%
Share Price Performance
systems have created some world-class technical problems, especially those in mountainous areas and freight lines. Sun King’s AC circuit breaker based Neutral Section Power Supply Device ( 鐵 路 分 相 區 貫 通 供 電 裝 置 ) becomes the ultimate answer. China’s some 50k km of electrified railways offer a huge potential market for Sun King.
Ever-expanding war chest with wide applications – Sun King has kept on
Source: Bloomberg
expanding its knowledge in the area of power electronics. Besides the foregoing products, the company has worked with electric vehicle manufacturers like BYD for laminated busbars and IGBT drivers. Its pulsed power generators have also already made various civil and scientific applications overseas, including but are not limited to nuclear fusion, gamma knife, flue gas treatment, etc. The company’s strong R&D capability, thanks to its acquisition of Swiss Astrol, will drive the growth of the company by expanding its shelf with unique products. Key Financials – Fiscal Year Ended December 31th (RMB mn) Revenue Growth Operating profit Growth Net profit Growth
FY15 782 51.2% 104 T/A 62 T/A
FY16 857 9.6% 170 64.3% 144 131.0%
EPS (RMB Cents) PER (x) PBR (x) Dividend Yield Dividend Payout
4.50 35.28 2.47 0.6% 18.6%
10.35 15.34 2.14 1.4% 21.4%
Source: Company data, Bloomberg
Sun King Power Electronics (580 HK)
FY17E FY18E 1,272 1,813 48.4% 42.5% 307 446 80.5% 45.1% 223 318 54.7% 42.9% CAGR FY17E-19E 16.02 22.90 9.92 6.94 1.77 1.46 2.5% 3.6% 25% 25%
FY19E 2,194 21.0% 557 25.0% 394 23.7% 33.0% 28.33 5.61 1.21 4.5% 25%
Kevin Sun : +852 2971 5439 : [email protected]
1
Table of Contents Forecast Revision ........................................................................................................................................................... 3 Promising Outlook ......................................................................................................................................................... 5 Ultra high voltage direct current power transmission .............................................................................................. 5 Flexible DC Transmission ............................................................................................................................................ 6 Rail Transportation ....................................................................................................................................................... 8 Industrial and Other Uses ............................................................................................................................................ 9 Other New Products ..................................................................................................................................................... 10 DC Circuit Breaker ...................................................................................................................................................... 10 Pulsed Power Generator ........................................................................................................................................... 11 Financial Analysis ........................................................................................................................................................ 12 Operating Efficiency ................................................................................................................................................... 12 Financial Position ........................................................................................................................................................ 13 Financial Statements ................................................................................................................................................... 14
Sun King Power Electronics (580 HK)
2
Forecast Revision Yet better performance anticipated in FY17&18 Figure 1: New Estimate VS. Original Estimate FY2017E (RMB 'mn)
FY2018E
Original
New
Change
Original
New
Change
Revenue
1,207
1,272
5.4%
1,513
1,813
19.8%
GPM
39.0%
40.3%
2.7 ppt
39.0%
40.9%
1.9 ppt
Operating Profit
260
307
18.1%
350
446
27.4%
Net Profit
173
223
28.7%
240
318
32.6%
14.4%
17.5%
3.1 ppt
15.9%
17.5%
1.6 ppt
NPM
Source: Quam Securities We slightly raised the topline of our forecast in FY17 by 5.4% as some of the projects, namely Jinbei - Nanjing (晉北-南京), Jiuquan - Hunan (酒泉-湖南), Ximeng - Taizhou (錫盟-泰州) and Shanghai Temple - Shandong (上海廟-山東), in the EHVDC segment that started shipment in FY16 will continue delivery in FY17. The sales in FY18 has been marked up more aggressively as a major flexible DC project, Zhangbei flexible DC project (張北柔直工程), is expected to commence delivery together with the gradual application of the Track Neutral Section Power Supply Device (鐵路分相區貫通供電裝置). The total gross profit margin has also been revised up accordingly, thanks to increased sales from the power transmission segment with a higher GPM of 45%-46% and more polished GPM in other two segments for the sales of self-patented products. Figure 2. Revenue Breakdown by Segments (RMB ‘mn)
Source: Company data and Quam Securities
Sun King Power Electronics (580 HK)
3
We also expect an ease-up in S&D expenses as a result of increased brand awareness and the irreplaceability of its products. Admin expenses are also expected to be better controlled, breaking down to consistent depreciation and amortization, as no other large capex plans will add to new PPE, with other expenses being scalable. The tax benefit of the 15% tax rate for technology innovative companies will further strengthen the net profit margin of the company. Figure 3. Major expenses as percentage of Revenue
Source: Company data and Quam Securities
Sun King Power Electronics (580 HK)
4
Promising Outlook Ultra high voltage direct current power transmission Riding on the high tide of the “West-to-East” power transmission strategy (西電東輸 戰略) and the Energy Sector Development in the 13th Five-year Plan (電力發展「十 三五」規劃), Sun King is directly benefiting from the country’s ever increasing investments in the area. In FY16, the company had attained a groundbreaking 106% YoY growth in UVDC revenue to RMB294mn, contributing to around 34% of its total revenue. Looking ahead, the four projects that are still in the process of delivery and five more projects, namely Zhundong – Wannan ( 准 東 - 皖 南 ), Dianxibei – Guangdong (滇西北-廣東), Jarud – Qingzhou (紮魯特-青州), Luoping Station 2nd Phase (羅平二期) and Yili – Pakistan (伊犁-巴基斯坦) are expected to commence shipment rendering an estimated income of RMB580mn in FY17-18. In the coming three years, the UVDC segment is expected to ship out not less than RMB500mn worth of products per year including Anode Saturation Resistors (陽極 飽和電抗器) and Power Capacitors (電力電容器), according to the current orders in hand and management estimate. We expect this segment would contribute some 30% of the company’s revenue in FY17-19. The 13th Five-year plan stated that 43 UHVDC projects will be built by 2030, and management believes that it will be able to secure more than three domestic projects annually let alone the oversea projects brought by the country’s “one belt one road” strategy (一帶一路戰略).
Figure 4. Timeline of Major Chinese UHVDC Projects
Shipment Period
Project Name
Estimated Orders
2016 - 2017
Jiuquan – Hunan (酒泉-湖南) Jinbei – Nanjing (晉北-南京) Ximeng – Taizhou (錫盟-泰州) Shanghai Temple – Shandong (上海廟-山東)
RMB550mn
2017 - 2018
Jarud – Qingzhou (紮魯特-青州) Zhundong – Wannan (准東-皖南) Dianxibei – Guangdong (滇西北-廣東) Luoping Station 2nd Phase (羅平二期) Yili – Pakistan (伊犁-巴基斯坦)
RMB580mn
2018 - 2019
Mengxi – Wuhan (蒙西-湖北武漢) Zhundong – Chengdu (准東-成都) Jarud – Zhumadian (紮魯特-駐馬店) Belo Monte 2nd Phase (巴西美麗山二期)
RMB600mn
Source: Company data and Quam Securities
Sun King Power Electronics (580 HK)
5
Product wise, the company is highly competitive and to a certain extent enjoys a monopoly status, thanks to its extraordinary R&D capability. Below is a snapshot of the major products used in the UHVDC projects.
Figure 5. Products sold in UHVDC projects
Source: Company data Flexible DC Transmission
In the flexible DC segment, Sun King has also achieved an amazing growth of 122% to RMB169mn in FY16. After the previous successes in the Zhoushan (舟山 柔 直 工 程 ) and Xiamen ( 廈 門 柔 直 工 程 ) flexible DC projects, Sun King had commenced product delivery to Yu-E (渝鄂柔直工程) and Southern Suzhou 500kv demonstration projects (蘇州南部 500 千伏示範工程) in FY16, and shipments will continue into FY17. The management has much confidence in winning the Jinsha River downstream mix direct current project ( 金 沙 江 下 游 混 合 直 流 工 程 ) and Zhangbei flexible direct current project (張北柔直工程), and expects the shipment to start in FY17-F18. The Zhangbei project will construct a cornerstone power transmission system for 2022 Winter Olympics, since Chinese government openly promised that all power used in the sports events is generated by clean energy. As the technology becomes better received through a series of applications, an increasing number of projects is anticipated. Thus, we expect this segment to contribute around 35% of company’s total revenue in FY17-19.
Sun King Power Electronics (580 HK)
6
Figure 6. Timeline of Major Flexible DC Projects
Shipment Period
Project Name
Sun King's Order
2016 - 2017
Yu-E Flexible DC (渝鄂柔直工程) Zhoushan Flexible DC (舟山柔直工程) Southern Suzhou Project (蘇南示範工程)
RMB255mn
2017 - 2018 2018 - 2019
Jinsha River Project (金下混合直流工程) Zhangbei Flexible DC (張北柔直工程) Zhangbei Flexible DC 2nd Phase (張北二期)
RMB1,300mn TBC
Source: Company data and Quam Securities The company has mainly three key products to be applied in the flexible DC projects, namely the Flexible DC Converter (柔性直流換流閥), the HVDC Circuit Breaker (高壓直流斷路器) and the Unified Power Flow Controller (UPFC 統一潮流 控制器) for improving the safety and efficiency of the entire grid system, when more renewable energy needs to be bridged to the distribution networks.
Figure 7. Products sold in flexible DC projects
Source: Company data
Sun King Power Electronics (580 HK)
7
Rail Transportation Sun King has shifted its development focus in this segment to railway power supply system since FY16. The triumphs in the reformation projects of Nanning, Chengdu and Shenyang Railway Bureau have led the company into the power management solutions business.
We expect incremental contributions from this segment in FY17-19, thanks to the successful road tests of the Track Neutral Section Power Supply Device (鐵路分相 區貫通供電裝置) in the Netherlands and India. This device helps safeguard the journey of the heavily loaded cars by supplying power to “powerless” neutral sections, which locate on average once every 30-50 km using their own momentum. The key part of the device, the AC breaker, is exclusively developed and manufactured by Sun King. The company intends to market the product back eyeing China’s some 50k km of electrified railways. This new device is expected to contribute 7% of the company’s total revenue in FY17-19. The boom will likely to be evident after the initial experimental success in Chinese rails.
Figure 8. Product Description
Source: Company data
Sun King Power Electronics (580 HK)
8
Industrial and Other Uses
Sun King has commenced working with electric vehicle manufacturers, such as BYD. Its Laminated Busbars and IGBT Gate Drivers are not only installed in EVs, but are also used in AC/DC conversion applications, especially in wind power converters and photovoltaic inverters. Sun King’s IGBT Gate Drivers sustain up to 1.7KV+, an area where very few players can compete.
The company remains a leading provider of Industrial Rectifiers for domestic metal smelters. The demands are usually used in the factory sites with power generation facilities, as the power generated needs to be rectified before it can be connected to machineries for production. Currently, the company is becoming increasingly cautious when it comes to picking customers from the industrial sector. It is putting more focus on reputation, payment terms and credibility of counter-parties rather than the size of orders. This product, together with Laminated Busbars and IGBT Gate Drivers, is expected to contribute to no less than 20% of company’s topline in FY17-19.
Figure 9. Product Description
Source: Company data
Sun King Power Electronics (580 HK)
9
Other New Products DC Circuit Breaker DC circuit breaker is Sun King’s new killer product to be applied in the micro-grid system, where AC grids with different frequencies could be connected through DC bridging; such as green energy to city grid or intercity connections. Currently, the device has found its use in the marine industry. Shipbuilders are now able to purchase this piece of equipment rather than going after the expensive “package” solutions marketed by foreign giants.
Figure 10. Product Description
Source: Company data DC circuit breakers can also be used in the Micro Grid and Smart Grid system, where Sun King expects to see great growth potential. As Micro Grid and Smart Grid will mainly connect low voltage AC networks with different frequencies, DC breakers will be essential in power transformation stations. In terms of market potential, the central government has already approved 65 smart grid demonstration projects, and Sun King will actively look to take part in this growing trend.
Sun King Power Electronics (580 HK)
10
Pulsed Power Generator Thanks to Swiss Astrol’s extraordinary R&D capability, another cutting edge product has been added to Sun King’s war chest. The Pulse Power Generator has already proved its usefulness in everyday life applications and scientific research. The device enables stored energy to be unleashed over a very short interval, resulting in the deliverance of a huge amount of peak power. Sun King’s generator could render a maximum voltage of 100kV with pulse current of over 1 million Amps, which is used in the research of nuclear fusion in an American institute.
Figure 11. Applications of Pulsed Power Generator developed by Sun King
Source: Company data
Sun King Power Electronics (580 HK)
11
Financial Analysis Operating Efficiency Due to the sudden surge in sales orders and industry practice, Sun King’s days receivable had inevitably extended to 299 days in FY16. We expect Sun King to have a smoother payment collection process and better credit terms with its customers, mainly state grid and southern grid, in FY17-19, thanks to its unique products being offered in the market. Figure 12. Operating Efficiency
Source: Company data and Quam Securities
Sun King Power Electronics (580 HK)
12
Financial Position Sun King has slightly improved its net debt to equity level in FY16. However, we expect that the ratio will go up together with the expansion of the business. According to our financial model, bank loans is still suffice to finance the company’s day to day operations. Given the prolonged operating cycle, we expect its interest bearing debts will grow to RMB1.5bn in FY19 rendering a net debt to equity ratio of 68.2%. Figure 13. Liquidity Ratios
Source: Company data and Quam Securities
Sun King Power Electronics (580 HK)
13
Financial Statements Income Statement (RMB ‘mn) Revenue Cost of goods sold Gross profit
2015 782 (515) 267
2016 857 (523) 334
2017E 1,272 (760) 512
2018E 1,813 (1,071) 742
2019E 2,194 (1,296) 898
Other income and gains, net Operating expenses EBIT
30 (193) 104
33 (197) 170
21 (226) 307
29 (326) 446
35 (376) 557
(18) (7) 79 (18) 61 1
(17) 18 171 (24) 147 (3)
(37) 0 270 (43) 227 (5)
(59) 0 386 (62) 325 (6)
(79) 0 478 (76) 402 (8)
62
144
223
318
396
Per Share Items (RMB) EPS (RMB Cent) Diluted EPS (RMB Cent) DPS (HKD Cent) BVPS
2015 4.50 4.50 1.00 0.64
2016 10.35 10.13 2.50 0.74
2017E 16.02 16.02 4.51 0.90
2018E 22.90 22.90 6.45 1.09
2019E 28.33 28.33 7.98 1.31
Balance Sheet (RMB ‘mn) Non-current assets PPE Available for Sales Investment Intangible assets Investment in JV/Associates Others Total non-current assets
2015
2016
2017E
2018E
2019E
360 17 57 29 160 624
324 0 77 39 135 575
374 0 76 39 214 703
380 0 74 39 272 765
387 0 73 39 309 808
175 590 48 128 24 965 1,588
252 765 71 103 34 1,225 1,800
312 1,368 71 86 33 1,870 2,573
440 1,950 71 205 33 2,699 3,464
533 2,359 71 266 33 3,262 4,070
Current liabilities Trade payables Other payables and accruals Bank borrowings Tax payables Others Total current liabilities
187 61 395 24 2 668
237 146 327 26 0 736
320 146 800 24 0 1,290
448 146 1,300 24 0 1,918
540 146 1,500 24 0 2,211
Non-current liabilities Deferred tax liabilities Deferred income Other payable Total non-current liabilities Total liabilities
12 17 0 29 697
13 14 8 35 771
13 14 8 35 1,325
13 14 8 35 1,953
13 14 8 35 2,246
Shareholders’ equity Share capital Reserves Total shareholders’ equity Minority interest Total equity
119 756 875 16 891
119 885 1,005 25 1,029
123 1,108 1,231 16 1,247
123 1,371 1,494 16 1,510
123 1,684 1,808 16 1,824
Finance costs Gains/Losses of JV/Associates Profit before tax Income tax expense Profit after tax Minority interest Attributable profit to shareholders
Current assets Inventories Trade receivables Prepayments Bank balances and cash Others Total current assets Total assets
Sun King Power Electronics (580 HK)
Cashflow Statement (RMB ‘mn) Operating cashflow EBITDA Non-cash items & adjustments Tax paid Operating cashflow before W/C Change in working capital Cash flow from operations Investing activities Capex Others Cash flow from investing activities Financing activities Bank loan movement Dividend paid Interest paid Others Cash flow from financing activities Net increase/decrease in cash and cash equivalents Cash and cash equivalents at beginning of the Year Cash and cash equivalents at end of the Year Ratio Analysis Growth (YoY%) Revenue EBIT Net profit Diluted EPS Margins Gross profit margin EBIT margin Net profit margin Other ratios Sales/ avg. assets Return on average assets Return on average equity ROIC Dividend payout ratio Valuation measures PSR (x) PER (x) PBR (x) Dividend yield Key Ratios Debt to equity Net debt to equity Capex/ Sales Current ratio (x) Quick ratio (x) Interest coverage (x) Days inventory (days) Days receivable (days) Days payable (days) Cash conversion cycle (days)
2015
2016
2017E
2018E
2019E
129 (43) (6) 80 (205) (125)
196 (24) (24) 148 (111) 37
334 0 (43) 291 (659) (368)
473 0 (62) 411 (640) (229)
586 0 (76) 510 (452) 58
(12) 3
(16) 43
(40) (5)
(40) 10
(40) 10
(10)
27
(45)
(30)
(30)
166 0 (18) 1
(67) (31) (17) 26
473 (56) (37) 15
500 (80) (59) 17
200 (98) (79) 11
149
(89)
405
389
43
14
(25)
(17)
119
61
114
128
103
86
205
128
103
86
205
266
2015
2016
2017E
2018E
2019E
51% T/A T/A T/A
10% 64% 131% 125%
48% 80% 55% 55%
43% 45% 43% 43%
21% 25% 24% 24%
34% 13% 8%
39% 20% 17%
40% 24% 17%
41% 25% 18%
41% 25% 18%
53% 4% 7% 7% 19%
51% 8% 15% 14% 21%
57% 10% 20% 17% 25%
60% 11% 23% 21% 25%
58% 11% 24% 21% 25%
2.81 35.28 2.47 0.56%
2.58 15.34 2.14 1.39%
1.73 9.92 1.77 2.52%
1.22 6.94 1.46 3.60%
1.01 5.61 1.21 4.46%
2015 44% 31% 2% 1.44 1.18 5.88 124 260 123 261
2016 32% 22% 2% 1.66 1.32 9.66 176 299 139 336
2017E 64% 61% 3% 1.45 1.21 8.36 150 250 126 274
2018E 86% 77% 2% 1.41 1.18 7.51 150 250 131 269
2019E 82% 68% 2% 1.48 1.23 7.04 150 250 139 261
14
Rating Definitions
Disclaimer and Risk Statement
BUY
We expect the stock to have a total return of > 15% over the next 12 months HOLD We expect the stock to have a total return of < 15% and >-15% over the next 12 months SELL We expect the stock to have a total return of < -15% over the next 12 months
This document is published by Quam Securities Company Limited (“Quam Securities”), a licensed corporation (central entity number AAC577) regulated by the Securities and Futures Commission in Hong Kong. This document is for distribution in Hong Kong only to persons who are “Professional Investors” as defined in Part 1 of Schedule 1 of Securities and Futures Ordinance (Cap 571) of Hong Kong and any rules made thereunder. This document is not intended for distribution to or use by, any person or entity who is a citizen or resident of any jurisdiction where such distribution or use would be contrary to applicable law or regulation within such jurisdiction. This document does not constitute an offer or a solicitation of an offer to buy or sell any securities. This document is circulated to addresses solely and may not be reproduced or redistributed to any other person or published, in whole or in part, for any purpose. The research is based on information obtained from sources believed to be reliable, but Quam Securities does not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without prior notice. Any recommendation does not have regard to specific investment objectives, financial situation and particular needs of any specific addressee. Quam Securities accepts no liability whatsoever for any direct or consequential loss arising from any use of this document. Quam Securities and its affiliates as well as persons associated with any of them from time to time may or may not have interests in the securities mentioned in this document. The prices of securities may move up or down, and past performance is not an indication of future performance. Investors shall consider seeking separate legal or financial advice before making investment decisions.
Disclosures
Analyst Certification: The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Kaiwen “Kevin” Sun (CE No. BIH180), the author of this document and his associates declare that as of the date of the publication of this report, they do not hold any financial interest in the company.
Sun King Power Electronics (580 HK)
15
Sun King Power Electronics
INDUSTRIAL
Carrying on the triumph
BUY
We expect Sun King’s strong pipeline for the EHVDC and flexible DC projects will continue to fuel its skyrocketing growth, while other innovative products will further enrich its war chest for a CAGR of 33.0% in net profit in FY17-19. We reiterate a BUY on the counter, and revised up our target price by 31% to HKD3.35, based on a 13x FY18 forward PER, indicating an 87% of upside potential. 31.3% CAGR in topline in FY17-19 – We slightly raised the topline in FY17 by 5%, due to the postponement of product delivery for some projects in FY16, and revised up that in FY18&19 as more projects in the pipeline have been confirmed, delivering a topline CAGR of 31.3% FY17-19. We expect the overall GPM to increase to above 40% in FY17-19 from 39% in FY16.
Swarms of EHVDC and flexible DC projects in the pipeline – We expect the EHVDC projects to contribute a minimum of RMB500mn/year to its topline in the next three years while the flexible DC project will amass around RMB1.6bn in FY17-FY19. The landmark 2022 Winter Olympics project, Zhangbei flexible direct current project (張北柔直工程), alone is expected to bring in an estimated order value of RMB10bn in FY17-18 together with other projects in the bidding process.
Safeguarding heavy-duty locomotives – China’s complex electrified railway
Recommendation Ticker Quam’s Rating Last Close Target Price Previous Target Up/Downside Previous Rating Share Information 52-week range ADT (3M) (HK$’mn) Market Cap. (HK$’mn) Shares outstanding (‘mn) Free float (%) SH-HK Connect SZ-HK Connect
580 HK BUY HKD1.79 HKD3.35 HKD2.55 87% BUY
1.03-1.99 2.77 2,499 1,396 52.3 No No
Major Shareholders Xiang Jie Jin Hyenmi
34.59% 7.36%
Share Price Performance
systems have created some world-class technical problems, especially those in mountainous areas and freight lines. Sun King’s AC circuit breaker based Neutral Section Power Supply Device ( 鐵 路 分 相 區 貫 通 供 電 裝 置 ) becomes the ultimate answer. China’s some 50k km of electrified railways offer a huge potential market for Sun King.
Ever-expanding war chest with wide applications – Sun King has kept on
Source: Bloomberg
expanding its knowledge in the area of power electronics. Besides the foregoing products, the company has worked with electric vehicle manufacturers like BYD for laminated busbars and IGBT drivers. Its pulsed power generators have also already made various civil and scientific applications overseas, including but are not limited to nuclear fusion, gamma knife, flue gas treatment, etc. The company’s strong R&D capability, thanks to its acquisition of Swiss Astrol, will drive the growth of the company by expanding its shelf with unique products. Key Financials – Fiscal Year Ended December 31th (RMB mn) Revenue Growth Operating profit Growth Net profit Growth
FY15 782 51.2% 104 T/A 62 T/A
FY16 857 9.6% 170 64.3% 144 131.0%
EPS (RMB Cents) PER (x) PBR (x) Dividend Yield Dividend Payout
4.50 35.28 2.47 0.6% 18.6%
10.35 15.34 2.14 1.4% 21.4%
Source: Company data, Bloomberg
Sun King Power Electronics (580 HK)
FY17E FY18E 1,272 1,813 48.4% 42.5% 307 446 80.5% 45.1% 223 318 54.7% 42.9% CAGR FY17E-19E 16.02 22.90 9.92 6.94 1.77 1.46 2.5% 3.6% 25% 25%
FY19E 2,194 21.0% 557 25.0% 394 23.7% 33.0% 28.33 5.61 1.21 4.5% 25%
Kevin Sun : +852 2971 5439 : [email protected]
1
Table of Contents Forecast Revision ........................................................................................................................................................... 3 Promising Outlook ......................................................................................................................................................... 5 Ultra high voltage direct current power transmission .............................................................................................. 5 Flexible DC Transmission ............................................................................................................................................ 6 Rail Transportation ....................................................................................................................................................... 8 Industrial and Other Uses ............................................................................................................................................ 9 Other New Products ..................................................................................................................................................... 10 DC Circuit Breaker ...................................................................................................................................................... 10 Pulsed Power Generator ........................................................................................................................................... 11 Financial Analysis ........................................................................................................................................................ 12 Operating Efficiency ................................................................................................................................................... 12 Financial Position ........................................................................................................................................................ 13 Financial Statements ................................................................................................................................................... 14
Sun King Power Electronics (580 HK)
2
Forecast Revision Yet better performance anticipated in FY17&18 Figure 1: New Estimate VS. Original Estimate FY2017E (RMB 'mn)
FY2018E
Original
New
Change
Original
New
Change
Revenue
1,207
1,272
5.4%
1,513
1,813
19.8%
GPM
39.0%
40.3%
2.7 ppt
39.0%
40.9%
1.9 ppt
Operating Profit
260
307
18.1%
350
446
27.4%
Net Profit
173
223
28.7%
240
318
32.6%
14.4%
17.5%
3.1 ppt
15.9%
17.5%
1.6 ppt
NPM
Source: Quam Securities We slightly raised the topline of our forecast in FY17 by 5.4% as some of the projects, namely Jinbei - Nanjing (晉北-南京), Jiuquan - Hunan (酒泉-湖南), Ximeng - Taizhou (錫盟-泰州) and Shanghai Temple - Shandong (上海廟-山東), in the EHVDC segment that started shipment in FY16 will continue delivery in FY17. The sales in FY18 has been marked up more aggressively as a major flexible DC project, Zhangbei flexible DC project (張北柔直工程), is expected to commence delivery together with the gradual application of the Track Neutral Section Power Supply Device (鐵路分相區貫通供電裝置). The total gross profit margin has also been revised up accordingly, thanks to increased sales from the power transmission segment with a higher GPM of 45%-46% and more polished GPM in other two segments for the sales of self-patented products. Figure 2. Revenue Breakdown by Segments (RMB ‘mn)
Source: Company data and Quam Securities
Sun King Power Electronics (580 HK)
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We also expect an ease-up in S&D expenses as a result of increased brand awareness and the irreplaceability of its products. Admin expenses are also expected to be better controlled, breaking down to consistent depreciation and amortization, as no other large capex plans will add to new PPE, with other expenses being scalable. The tax benefit of the 15% tax rate for technology innovative companies will further strengthen the net profit margin of the company. Figure 3. Major expenses as percentage of Revenue
Source: Company data and Quam Securities
Sun King Power Electronics (580 HK)
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Promising Outlook Ultra high voltage direct current power transmission Riding on the high tide of the “West-to-East” power transmission strategy (西電東輸 戰略) and the Energy Sector Development in the 13th Five-year Plan (電力發展「十 三五」規劃), Sun King is directly benefiting from the country’s ever increasing investments in the area. In FY16, the company had attained a groundbreaking 106% YoY growth in UVDC revenue to RMB294mn, contributing to around 34% of its total revenue. Looking ahead, the four projects that are still in the process of delivery and five more projects, namely Zhundong – Wannan ( 准 東 - 皖 南 ), Dianxibei – Guangdong (滇西北-廣東), Jarud – Qingzhou (紮魯特-青州), Luoping Station 2nd Phase (羅平二期) and Yili – Pakistan (伊犁-巴基斯坦) are expected to commence shipment rendering an estimated income of RMB580mn in FY17-18. In the coming three years, the UVDC segment is expected to ship out not less than RMB500mn worth of products per year including Anode Saturation Resistors (陽極 飽和電抗器) and Power Capacitors (電力電容器), according to the current orders in hand and management estimate. We expect this segment would contribute some 30% of the company’s revenue in FY17-19. The 13th Five-year plan stated that 43 UHVDC projects will be built by 2030, and management believes that it will be able to secure more than three domestic projects annually let alone the oversea projects brought by the country’s “one belt one road” strategy (一帶一路戰略).
Figure 4. Timeline of Major Chinese UHVDC Projects
Shipment Period
Project Name
Estimated Orders
2016 - 2017
Jiuquan – Hunan (酒泉-湖南) Jinbei – Nanjing (晉北-南京) Ximeng – Taizhou (錫盟-泰州) Shanghai Temple – Shandong (上海廟-山東)
RMB550mn
2017 - 2018
Jarud – Qingzhou (紮魯特-青州) Zhundong – Wannan (准東-皖南) Dianxibei – Guangdong (滇西北-廣東) Luoping Station 2nd Phase (羅平二期) Yili – Pakistan (伊犁-巴基斯坦)
RMB580mn
2018 - 2019
Mengxi – Wuhan (蒙西-湖北武漢) Zhundong – Chengdu (准東-成都) Jarud – Zhumadian (紮魯特-駐馬店) Belo Monte 2nd Phase (巴西美麗山二期)
RMB600mn
Source: Company data and Quam Securities
Sun King Power Electronics (580 HK)
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Product wise, the company is highly competitive and to a certain extent enjoys a monopoly status, thanks to its extraordinary R&D capability. Below is a snapshot of the major products used in the UHVDC projects.
Figure 5. Products sold in UHVDC projects
Source: Company data Flexible DC Transmission
In the flexible DC segment, Sun King has also achieved an amazing growth of 122% to RMB169mn in FY16. After the previous successes in the Zhoushan (舟山 柔 直 工 程 ) and Xiamen ( 廈 門 柔 直 工 程 ) flexible DC projects, Sun King had commenced product delivery to Yu-E (渝鄂柔直工程) and Southern Suzhou 500kv demonstration projects (蘇州南部 500 千伏示範工程) in FY16, and shipments will continue into FY17. The management has much confidence in winning the Jinsha River downstream mix direct current project ( 金 沙 江 下 游 混 合 直 流 工 程 ) and Zhangbei flexible direct current project (張北柔直工程), and expects the shipment to start in FY17-F18. The Zhangbei project will construct a cornerstone power transmission system for 2022 Winter Olympics, since Chinese government openly promised that all power used in the sports events is generated by clean energy. As the technology becomes better received through a series of applications, an increasing number of projects is anticipated. Thus, we expect this segment to contribute around 35% of company’s total revenue in FY17-19.
Sun King Power Electronics (580 HK)
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Figure 6. Timeline of Major Flexible DC Projects
Shipment Period
Project Name
Sun King's Order
2016 - 2017
Yu-E Flexible DC (渝鄂柔直工程) Zhoushan Flexible DC (舟山柔直工程) Southern Suzhou Project (蘇南示範工程)
RMB255mn
2017 - 2018 2018 - 2019
Jinsha River Project (金下混合直流工程) Zhangbei Flexible DC (張北柔直工程) Zhangbei Flexible DC 2nd Phase (張北二期)
RMB1,300mn TBC
Source: Company data and Quam Securities The company has mainly three key products to be applied in the flexible DC projects, namely the Flexible DC Converter (柔性直流換流閥), the HVDC Circuit Breaker (高壓直流斷路器) and the Unified Power Flow Controller (UPFC 統一潮流 控制器) for improving the safety and efficiency of the entire grid system, when more renewable energy needs to be bridged to the distribution networks.
Figure 7. Products sold in flexible DC projects
Source: Company data
Sun King Power Electronics (580 HK)
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Rail Transportation Sun King has shifted its development focus in this segment to railway power supply system since FY16. The triumphs in the reformation projects of Nanning, Chengdu and Shenyang Railway Bureau have led the company into the power management solutions business.
We expect incremental contributions from this segment in FY17-19, thanks to the successful road tests of the Track Neutral Section Power Supply Device (鐵路分相 區貫通供電裝置) in the Netherlands and India. This device helps safeguard the journey of the heavily loaded cars by supplying power to “powerless” neutral sections, which locate on average once every 30-50 km using their own momentum. The key part of the device, the AC breaker, is exclusively developed and manufactured by Sun King. The company intends to market the product back eyeing China’s some 50k km of electrified railways. This new device is expected to contribute 7% of the company’s total revenue in FY17-19. The boom will likely to be evident after the initial experimental success in Chinese rails.
Figure 8. Product Description
Source: Company data
Sun King Power Electronics (580 HK)
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Industrial and Other Uses
Sun King has commenced working with electric vehicle manufacturers, such as BYD. Its Laminated Busbars and IGBT Gate Drivers are not only installed in EVs, but are also used in AC/DC conversion applications, especially in wind power converters and photovoltaic inverters. Sun King’s IGBT Gate Drivers sustain up to 1.7KV+, an area where very few players can compete.
The company remains a leading provider of Industrial Rectifiers for domestic metal smelters. The demands are usually used in the factory sites with power generation facilities, as the power generated needs to be rectified before it can be connected to machineries for production. Currently, the company is becoming increasingly cautious when it comes to picking customers from the industrial sector. It is putting more focus on reputation, payment terms and credibility of counter-parties rather than the size of orders. This product, together with Laminated Busbars and IGBT Gate Drivers, is expected to contribute to no less than 20% of company’s topline in FY17-19.
Figure 9. Product Description
Source: Company data
Sun King Power Electronics (580 HK)
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Other New Products DC Circuit Breaker DC circuit breaker is Sun King’s new killer product to be applied in the micro-grid system, where AC grids with different frequencies could be connected through DC bridging; such as green energy to city grid or intercity connections. Currently, the device has found its use in the marine industry. Shipbuilders are now able to purchase this piece of equipment rather than going after the expensive “package” solutions marketed by foreign giants.
Figure 10. Product Description
Source: Company data DC circuit breakers can also be used in the Micro Grid and Smart Grid system, where Sun King expects to see great growth potential. As Micro Grid and Smart Grid will mainly connect low voltage AC networks with different frequencies, DC breakers will be essential in power transformation stations. In terms of market potential, the central government has already approved 65 smart grid demonstration projects, and Sun King will actively look to take part in this growing trend.
Sun King Power Electronics (580 HK)
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Pulsed Power Generator Thanks to Swiss Astrol’s extraordinary R&D capability, another cutting edge product has been added to Sun King’s war chest. The Pulse Power Generator has already proved its usefulness in everyday life applications and scientific research. The device enables stored energy to be unleashed over a very short interval, resulting in the deliverance of a huge amount of peak power. Sun King’s generator could render a maximum voltage of 100kV with pulse current of over 1 million Amps, which is used in the research of nuclear fusion in an American institute.
Figure 11. Applications of Pulsed Power Generator developed by Sun King
Source: Company data
Sun King Power Electronics (580 HK)
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Financial Analysis Operating Efficiency Due to the sudden surge in sales orders and industry practice, Sun King’s days receivable had inevitably extended to 299 days in FY16. We expect Sun King to have a smoother payment collection process and better credit terms with its customers, mainly state grid and southern grid, in FY17-19, thanks to its unique products being offered in the market. Figure 12. Operating Efficiency
Source: Company data and Quam Securities
Sun King Power Electronics (580 HK)
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Financial Position Sun King has slightly improved its net debt to equity level in FY16. However, we expect that the ratio will go up together with the expansion of the business. According to our financial model, bank loans is still suffice to finance the company’s day to day operations. Given the prolonged operating cycle, we expect its interest bearing debts will grow to RMB1.5bn in FY19 rendering a net debt to equity ratio of 68.2%. Figure 13. Liquidity Ratios
Source: Company data and Quam Securities
Sun King Power Electronics (580 HK)
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Financial Statements Income Statement (RMB ‘mn) Revenue Cost of goods sold Gross profit
2015 782 (515) 267
2016 857 (523) 334
2017E 1,272 (760) 512
2018E 1,813 (1,071) 742
2019E 2,194 (1,296) 898
Other income and gains, net Operating expenses EBIT
30 (193) 104
33 (197) 170
21 (226) 307
29 (326) 446
35 (376) 557
(18) (7) 79 (18) 61 1
(17) 18 171 (24) 147 (3)
(37) 0 270 (43) 227 (5)
(59) 0 386 (62) 325 (6)
(79) 0 478 (76) 402 (8)
62
144
223
318
396
Per Share Items (RMB) EPS (RMB Cent) Diluted EPS (RMB Cent) DPS (HKD Cent) BVPS
2015 4.50 4.50 1.00 0.64
2016 10.35 10.13 2.50 0.74
2017E 16.02 16.02 4.51 0.90
2018E 22.90 22.90 6.45 1.09
2019E 28.33 28.33 7.98 1.31
Balance Sheet (RMB ‘mn) Non-current assets PPE Available for Sales Investment Intangible assets Investment in JV/Associates Others Total non-current assets
2015
2016
2017E
2018E
2019E
360 17 57 29 160 624
324 0 77 39 135 575
374 0 76 39 214 703
380 0 74 39 272 765
387 0 73 39 309 808
175 590 48 128 24 965 1,588
252 765 71 103 34 1,225 1,800
312 1,368 71 86 33 1,870 2,573
440 1,950 71 205 33 2,699 3,464
533 2,359 71 266 33 3,262 4,070
Current liabilities Trade payables Other payables and accruals Bank borrowings Tax payables Others Total current liabilities
187 61 395 24 2 668
237 146 327 26 0 736
320 146 800 24 0 1,290
448 146 1,300 24 0 1,918
540 146 1,500 24 0 2,211
Non-current liabilities Deferred tax liabilities Deferred income Other payable Total non-current liabilities Total liabilities
12 17 0 29 697
13 14 8 35 771
13 14 8 35 1,325
13 14 8 35 1,953
13 14 8 35 2,246
Shareholders’ equity Share capital Reserves Total shareholders’ equity Minority interest Total equity
119 756 875 16 891
119 885 1,005 25 1,029
123 1,108 1,231 16 1,247
123 1,371 1,494 16 1,510
123 1,684 1,808 16 1,824
Finance costs Gains/Losses of JV/Associates Profit before tax Income tax expense Profit after tax Minority interest Attributable profit to shareholders
Current assets Inventories Trade receivables Prepayments Bank balances and cash Others Total current assets Total assets
Sun King Power Electronics (580 HK)
Cashflow Statement (RMB ‘mn) Operating cashflow EBITDA Non-cash items & adjustments Tax paid Operating cashflow before W/C Change in working capital Cash flow from operations Investing activities Capex Others Cash flow from investing activities Financing activities Bank loan movement Dividend paid Interest paid Others Cash flow from financing activities Net increase/decrease in cash and cash equivalents Cash and cash equivalents at beginning of the Year Cash and cash equivalents at end of the Year Ratio Analysis Growth (YoY%) Revenue EBIT Net profit Diluted EPS Margins Gross profit margin EBIT margin Net profit margin Other ratios Sales/ avg. assets Return on average assets Return on average equity ROIC Dividend payout ratio Valuation measures PSR (x) PER (x) PBR (x) Dividend yield Key Ratios Debt to equity Net debt to equity Capex/ Sales Current ratio (x) Quick ratio (x) Interest coverage (x) Days inventory (days) Days receivable (days) Days payable (days) Cash conversion cycle (days)
2015
2016
2017E
2018E
2019E
129 (43) (6) 80 (205) (125)
196 (24) (24) 148 (111) 37
334 0 (43) 291 (659) (368)
473 0 (62) 411 (640) (229)
586 0 (76) 510 (452) 58
(12) 3
(16) 43
(40) (5)
(40) 10
(40) 10
(10)
27
(45)
(30)
(30)
166 0 (18) 1
(67) (31) (17) 26
473 (56) (37) 15
500 (80) (59) 17
200 (98) (79) 11
149
(89)
405
389
43
14
(25)
(17)
119
61
114
128
103
86
205
128
103
86
205
266
2015
2016
2017E
2018E
2019E
51% T/A T/A T/A
10% 64% 131% 125%
48% 80% 55% 55%
43% 45% 43% 43%
21% 25% 24% 24%
34% 13% 8%
39% 20% 17%
40% 24% 17%
41% 25% 18%
41% 25% 18%
53% 4% 7% 7% 19%
51% 8% 15% 14% 21%
57% 10% 20% 17% 25%
60% 11% 23% 21% 25%
58% 11% 24% 21% 25%
2.81 35.28 2.47 0.56%
2.58 15.34 2.14 1.39%
1.73 9.92 1.77 2.52%
1.22 6.94 1.46 3.60%
1.01 5.61 1.21 4.46%
2015 44% 31% 2% 1.44 1.18 5.88 124 260 123 261
2016 32% 22% 2% 1.66 1.32 9.66 176 299 139 336
2017E 64% 61% 3% 1.45 1.21 8.36 150 250 126 274
2018E 86% 77% 2% 1.41 1.18 7.51 150 250 131 269
2019E 82% 68% 2% 1.48 1.23 7.04 150 250 139 261
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Rating Definitions
Disclaimer and Risk Statement
BUY
We expect the stock to have a total return of > 15% over the next 12 months HOLD We expect the stock to have a total return of < 15% and >-15% over the next 12 months SELL We expect the stock to have a total return of < -15% over the next 12 months
This document is published by Quam Securities Company Limited (“Quam Securities”), a licensed corporation (central entity number AAC577) regulated by the Securities and Futures Commission in Hong Kong. This document is for distribution in Hong Kong only to persons who are “Professional Investors” as defined in Part 1 of Schedule 1 of Securities and Futures Ordinance (Cap 571) of Hong Kong and any rules made thereunder. This document is not intended for distribution to or use by, any person or entity who is a citizen or resident of any jurisdiction where such distribution or use would be contrary to applicable law or regulation within such jurisdiction. This document does not constitute an offer or a solicitation of an offer to buy or sell any securities. This document is circulated to addresses solely and may not be reproduced or redistributed to any other person or published, in whole or in part, for any purpose. The research is based on information obtained from sources believed to be reliable, but Quam Securities does not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without prior notice. Any recommendation does not have regard to specific investment objectives, financial situation and particular needs of any specific addressee. Quam Securities accepts no liability whatsoever for any direct or consequential loss arising from any use of this document. Quam Securities and its affiliates as well as persons associated with any of them from time to time may or may not have interests in the securities mentioned in this document. The prices of securities may move up or down, and past performance is not an indication of future performance. Investors shall consider seeking separate legal or financial advice before making investment decisions.
Disclosures
Analyst Certification: The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Kaiwen “Kevin” Sun (CE No. BIH180), the author of this document and his associates declare that as of the date of the publication of this report, they do not hold any financial interest in the company.
Sun King Power Electronics (580 HK)
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