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Sunpower's environmentally friendly Shantou Project nears completion, will buoy cash flow

The Edge Singapore
The Edge Singapore • 5 min read
Sunpower's environmentally friendly Shantou Project nears completion, will buoy cash flow
SINGAPORE (July 1): Pollution remains a problem in China. According to the Chinese press, the Lianjiang River in Guangdong has become a “black dragon”, with the riverbed seriously silted and the water black and smelly. The reason, it appears, is disch
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SINGAPORE (July 1): Pollution remains a problem in China. According to the Chinese press, the Lianjiang River in Guangdong has become a “black dragon”, with the riverbed seriously silted and the water black and smelly. The reason, it appears, is discharge from the textiles, garments, printing and dyeing industries in Shantou district.

Textiles and garments are two of the main industries, while printing and dyeing is the traditional key industry of Shantou, according to the local press. Large and small printing and dyeing enterprises are scattered all over the Lianjiang River Basin, making it difficult for pollution to be effectively managed and controlled, the Chinese press points out. In addition, unlicensed illegal dumping that greatly exceeds discharge standards makes this one of the main sources of pollution into the Lianjiang River, it adds.

To mitigate pollution, printing and dyeing factories that meet certain standards are being relocated in the textile circular economy industrial park in Shantou.

In other news, it was reported that the first batch of the printing and dyeing enterprises, which will use their self-built factories in the industrial park, will be ready for operation by August at the earliest.

Enter Sunpower Group, a builder of environmentally friendly power plants. Its new power plant — its Shantou Project — will be providing power to the textile circular economy industrial park. In effect, Sunpower provides proprietary energy-saving and clean power technologies, which it delivers through two sources. These are its original manufacturing and services division, and its new green investments (GI) division, which focuses on lowering pollutants and cleaner energy forms.

According to Sunpower’s presentation in May, its Shantou Project is expected to enter into trial production in 2HFY2019.

In December 2016, Sunpower announced that it, along with Citic Envirotech and Guangdong Keying Zhiran Environmental Co, had been awarded the tender for a public-private partnership project in Shantou Chaonan, Guangdong Province. The PPP project originally comprised cogeneration power and centralised steam facilities, an industrial wastewater treatment plant, a water recycling plant and related ancillary assets. The total PPP project costs about RMB3.2 billion ($631.8 million), to be completed in phases. Sunpower’s role in the project is to participate in the design, build and operation of cogeneration power and centralised facilities. The company has stated that it would not be participating in the industrial wastewater treatment and water recycling plants.

The project was scheduled for completion last year but was delayed because project specifications were changed in 2017. This was announced by Sunpower on Sept 19 last year. According to this announcement, the Shantou Project will expand from a 25mw electricity generator and centralised steam boilers with a capacity of 250 tonnes an hour to a maximum capacity of 100mw electricity generators, coupled with boilers. “As a result of the capacity expansion, the Shantou Project is expected to replace the existing 270 small coal-fired boilers with a capacity of 1,255 tonnes an hour that serve the demands of 132 companies to be relocated in the region upon its completion,” Sunpower said.

The total investment for Phase 1 of the Shantou Project is RMB760 million, of which Sunpower has a 51% stake. The usual internal rate of return for Sunpower’s GI projects is about 15%.

The company announced that it had “invested and committed RMB1.3 billion in equity to build up its GI portfolio [as at May this year] and is on track to invest RMB2.5 billion in equity by 2021”. To fund its GI investments, the company issued convertible bonds to two private-equity companies, DCP Capital Partners and CDH Investors, to raise US$180 million ($244.3 million).

Sunpower has seven operating GI projects, of which the largest is the Changrun Project Phase 1 with an investment value of RMB434.1 million (capacity of 2×220 tonnes an hour + 2×25mw), and Yongxin
Plant with RMB306 million of investment (capacity of 2×100 tonnes an hour +1×150 tonnes an hour + 2×18mw). When Phase 1 of the Shantou Project comes onstream with a capacity of 3×150 tonnes an hour+2×20mw, it is likely to match Changrun in size.

According to the company, GI contributed RMB87 million, or 65%, to earnings before interest tax, depreciation and amortisation in 1QFY2019. Total revenue grew 30.6% y-o-y to RMB811.6 million; and GI revenue grew 128.7% y-o-y to RMB286.7 million, accounting for 35.3% of revenue. GI contributed around 50% to recurring income in 1Q, the company says.

“As GI projects are still ramping up, the net present value of long-term GI cash flows is expected to considerably exceed the latest contributions,” the company says.

UOB Kay Hian has maintained a “buy” recommendation on the stock, with a price target of 88 cents, but whether this is a realistic target remains to be seen. Sunpower is focused on China’s domestic economy and is less affected by the trade war compared with the tech sector. The market usually values S-chips in general at a discount because of concerns over corporate governance and disclosure. So far, Sunpower has been prompt with disclosures.

Its share price has outperformed the market, up 56% since the start of the year, but underperformed the market over a one-year period, falling 18%. In contrast, the Straits Times Index is up 8.9% since the start of the year, and unchanged over a one-year period.

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