20161109-光大证券_香港_-协鑫新能源-00451.HK-Profit_Turnaround_16页_1mb

Summary of GCL New Energy (451 HK)

Core Content

GCL New Energy ("GNE") is a Hong Kong-listed company that has undergone a significant transformation from a printed circuit board ("PCB") manufacturer to a nationwide solar farm operator in China. This shift has led to a notable profit turnaround, with the company expected to turn a profit starting from FY16E. The report highlights the company's growth in installed solar capacity, electricity sales, and profit margins, along with its valuation and key risks.

Main Points

• Business Transformation: GNE has transitioned from a PCB manufacturer to a solar farm operator, driven by the strategic introduction of GCL-Poly Energy as its major shareholder in 2014.
• Profit Turnaround: With rising contributions from the high-margin solar energy business, GNE is expected to achieve profitability in FY16E. Net profit is projected to grow significantly from negative figures in FY15 to Rmb571m in FY16, and further to Rmb1,067m and Rmb1,615m in FY17E and FY18E respectively.
• Growth Projections:
  • Installed capacity is forecast to grow by 127.7% in FY16E, 40.2% in FY17E, and 19.1% in FY18E.
  • Electricity sales are expected to increase by 315.4% in FY16E, 49.8% in FY17E, and 32.6% in FY18E.
• Profitability:
  • Gross margin is projected to rise from 26.5% in FY15 to 48.3%, 54.8%, and 59.2% in FY16E, FY17E, and FY18E respectively.
  • Net margin is expected to improve from a negative value in FY15 to 14.4%, 20.1%, and 23.9% for FY16E, FY17E, and FY18E.
• Valuation:
  • The company is currently trading at a FY17E P/E of 6.8x, which is below the average of its HK-listed peers (8.7x).
  • A DCF-derived target price of HK$0.495 is set, representing a FY17E P/E of 7.6x and offering an 11.2% upside potential.
  • The report recommends Initiating an Accumulate rating based on the company's transformation and growth prospects.
• Key Risks:
  • Slump in on-grid tariffs: The government may reduce tariffs for solar energy, affecting revenue.
  • Ineffective implementation of minimum utilization hours policy: If not properly executed, this could impact the company's earnings.
  • Delay in new project development: Potential delays in project development could hinder growth.

Financial Highlights

Business Model

GNE is now the solar farm arm of GCL-Poly Energy, focusing on building a nationwide portfolio of solar farm projects through self-development and acquisitions. As of 30 June 2016, the company had 2,735MW of installed capacity and 705MW of projects under construction. Key regions include Inner Mongolia, Jiangsu, Shaanxi, Henan, and Hebei, which together account for 46.8% of the total installed capacity.

Revenue Contribution

• Solar energy has become the dominant revenue contributor, increasing its share from 31.1% in 1H15 to 55.6% in 1H16.
• PCB manufacturing contribution is declining, from 68.9% in 1H15 to 44.4% in 1H16, and is expected to fall further to 39.8%, 32.2%, and 26.8% for FY16, FY17, and FY18 respectively.

Financial Analysis

• Gross margin is expected to increase significantly due to the growth in solar energy business.
• Net gearing is projected to fall from 450.1% in FY15 to 346.9%, 259.2%, and 171.7% for FY16, FY17, and FY18 respectively.
• Free cash flow is anticipated to improve over the next few years, with a projected HK$0.495 target price based on DCF valuation.

Valuation and Peer Comparison

Average P/E (x): 13.1 (HK-listed)
Average P/B (x): 1.00 (HK-listed)
Average Yield (%): 1.4 (HK-listed)

Average P/E (x): 102.4 (PRC-listed)
Average P/B (x): 4.12 (PRC-listed)
Average Yield (%): 0.4 (PRC-listed)

Key Risks

1. Slump in on-grid tariffs: Potential government policy changes could reduce revenue.
2. Ineffective implementation of minimum utilization hours policy: This could affect the company's ability to generate consistent earnings.
3. Delay in new project development: Could hinder the growth trajectory.

Appendix

Corporate Development History

Top Management

Conclusion

GNE has successfully transformed its business model and is on track for a significant profit turnaround starting in FY16E. The company's focus on solar farm operations and continuous capacity expansion positions it well for future growth. However, the company must navigate potential risks such as tariff reductions, policy implementation challenges, and delays in project development. The DCF valuation suggests a target price of HK$0.495, which is attractive given the current P/E ratio and the company's growth prospects.