Sun King Power Electronics INDUSTRIAL€¦ · Sun King Power Electronics INDUSTRIAL ... NPM 14.4%...

Sun King Power Electronics (580 HK) 1

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

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

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) FY15 FY16 FY17E FY18E FY19E Revenue 782 857 1,272 1,813 2,194

Growth 51.2% 9.6% 48.4% 42.5% 21.0% Operating profit 104 170 307 446 557

Growth T/A 64.3% 80.5% 45.1% 25.0% Net profit 62 144 223 318 394

Growth T/A 131.0% 54.7% 42.9% 23.7% CAGR FY17E-19E 33.0%

EPS (RMB Cents) 4.50 10.35 16.02 22.90 28.33 PER (x) 35.28 15.34 9.92 6.94 5.61 PBR (x) 2.47 2.14 1.77 1.46 1.21 Dividend Yield 0.6% 1.4% 2.5% 3.6% 4.5% Dividend Payout 18.6% 21.4% 25% 25% 25%

Source: Company data, Bloomberg

Recommendation

Ticker 580 HK

Quam’s Rating BUY

Last Close HKD1.79

Target Price HKD3.35

Previous Target HKD2.55

Up/Downside 87%

Previous Rating BUY

Share Information

52-week range 1.03-1.99

ADT (3M) (HK$’mn) 2.77

Market Cap. (HK$’mn) 2,499

Shares outstanding (‘mn) 1,396

Free float (%) 52.3

SH-HK Connect No

SZ-HK Connect No

Major Shareholders

Xiang Jie 34.59%

Jin Hyenmi 7.36%

Share Price Performance

Source: Bloomberg

Kevin Sun

: +852 2971 5439

: [email protected]

mailto:[email protected]


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


Forecast Revision Yet better performance anticipated in FY17&18

Figure 1: New Estimate VS. Original Estimate FY2017E FY2018E

(RMB 'mn) 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%

NPM 14.4% 17.5% 3.1 ppt 15.9% 17.5% 1.6 ppt 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


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



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)

RMB550mn Jinbei – Nanjing (晉北-南京)

Ximeng – Taizhou (錫盟-泰州)

Shanghai Temple – Shandong (上海廟-山東)

2017 - 2018

Jarud – Qingzhou (紮魯特-青州)

RMB580mn

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)

2018 - 2019

Mengxi – Wuhan (蒙西-湖北武漢)

RMB600mn 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) Source: Company data and Quam Securities


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.


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)

RMB255mn Zhoushan Flexible DC (舟山柔直工程)

Southern Suzhou Project (蘇南示範工程)

2017 - 2018 Jinsha River Project (金下混合直流工程)

RMB1,300mn Zhangbei Flexible DC (張北柔直工程)

2018 - 2019 Zhangbei Flexible DC 2nd Phase

(張北二期) TBC


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



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



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.




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.



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.


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



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



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



Financial Statements Income Statement (RMB ‘mn) 2015 2016 2017E 2018E 2019E

Revenue 782 857 1,272 1,813 2,194

Cost of goods sold (515) (523) (760) (1,071) (1,296)

Gross profit 267 334 512 742 898

Other income and gains, net 30 33 21 29 35

Operating expenses (193) (197) (226) (326) (376)

EBIT 104 170 307 446 557

Finance costs (18) (17) (37) (59) (79)

Gains/Losses of JV/Associates (7) 18 0 0 0

Profit before tax 79 171 270 386 478

Income tax expense (18) (24) (43) (62) (76)

Profit after tax 61 147 227 325 402

Minority interest 1 (3) (5) (6) (8)

Attributable profit to shareholders

62 144 223 318 396

Per Share Items (RMB) 2015 2016 2017E 2018E 2019E

EPS (RMB Cent) 4.50 10.35 16.02 22.90 28.33

Diluted EPS (RMB Cent) 4.50 10.13 16.02 22.90 28.33

DPS (HKD Cent) 1.00 2.50 4.51 6.45 7.98

BVPS 0.64 0.74 0.90 1.09 1.31

Balance Sheet (RMB ‘mn) 2015 2016 2017E 2018E 2019E

Non-current assets

PPE 360 324 374 380 387

Available for Sales Investment 17 0 0 0 0

Intangible assets 57 77 76 74 73

Investment in JV/Associates 29 39 39 39 39

Others 160 135 214 272 309

Total non-current assets 624 575 703 765 808

Current assets

Inventories 175 252 312 440 533

Trade receivables 590 765 1,368 1,950 2,359

Prepayments 48 71 71 71 71

Bank balances and cash 128 103 86 205 266

Others 24 34 33 33 33

Total current assets 965 1,225 1,870 2,699 3,262

Total assets 1,588 1,800 2,573 3,464 4,070

Current liabilities

Trade payables 187 237 320 448 540

Other payables and accruals 61 146 146 146 146

Bank borrowings 395 327 800 1,300 1,500

Tax payables 24 26 24 24 24

Others 2 0 0 0 0

Total current liabilities 668 736 1,290 1,918 2,211

Non-current liabilities

Deferred tax liabilities 12 13 13 13 13

Deferred income 17 14 14 14 14

Other payable 0 8 8 8 8

Total non-current liabilities 29 35 35 35 35

Total liabilities 697 771 1,325 1,953 2,246

Shareholders’ equity

Share capital 119 119 123 123 123

Reserves 756 885 1,108 1,371 1,684

Total shareholders’ equity 875 1,005 1,231 1,494 1,808

Minority interest 16 25 16 16 16

Total equity 891 1,029 1,247 1,510 1,824

Cashflow Statement (RMB ‘mn) 2015 2016 2017E 2018E 2019E

Operating cashflow

EBITDA 129 196 334 473 586

Non-cash items & adjustments (43) (24) 0 0 0

Tax paid (6) (24) (43) (62) (76)

Operating cashflow before W/C 80 148 291 411 510

Change in working capital (205) (111) (659) (640) (452)

Cash flow from operations (125) 37 (368) (229) 58

Investing activities

Capex (12) (16) (40) (40) (40)

Others 3 43 (5) 10 10

Cash flow from investing activities

(10) 27 (45) (30) (30)

Financing activities

Bank loan movement 166 (67) 473 500 200

Dividend paid 0 (31) (56) (80) (98)

Interest paid (18) (17) (37) (59) (79)

Others 1 26 15 17 11

Cash flow from financing activities

149 (89) 405 389 43

Net increase/decrease in cash and cash equivalents

14 (25) (17) 119 61

Cash and cash equivalents at beginning of the Year

114 128 103 86 205

Cash and cash equivalents at end of the Year

128 103 86 205 266

Ratio Analysis 2015 2016 2017E 2018E 2019E

Growth (YoY%)

Revenue 51% 10% 48% 43% 21%

EBIT T/A 64% 80% 45% 25%

Net profit T/A 131% 55% 43% 24%

Diluted EPS T/A 125% 55% 43% 24%

Margins

Gross profit margin 34% 39% 40% 41% 41%

EBIT margin 13% 20% 24% 25% 25%

Net profit margin 8% 17% 17% 18% 18%

Other ratios

Sales/ avg. assets 53% 51% 57% 60% 58%

Return on average assets 4% 8% 10% 11% 11%

Return on average equity 7% 15% 20% 23% 24%

ROIC 7% 14% 17% 21% 21%

Dividend payout ratio 19% 21% 25% 25% 25%

Valuation measures

PSR (x) 2.81 2.58 1.73 1.22 1.01

PER (x) 35.28 15.34 9.92 6.94 5.61

PBR (x) 2.47 2.14 1.77 1.46 1.21

Dividend yield 0.56% 1.39% 2.52% 3.60% 4.46%

Key Ratios 2015 2016 2017E 2018E 2019E

Debt to equity 44% 32% 64% 86% 82%

Net debt to equity 31% 22% 61% 77% 68%

Capex/ Sales 2% 2% 3% 2% 2%

Current ratio (x) 1.44 1.66 1.45 1.41 1.48

Quick ratio (x) 1.18 1.32 1.21 1.18 1.23

Interest coverage (x) 5.88 9.66 8.36 7.51 7.04

Days inventory (days) 124 176 150 150 150

Days receivable (days) 260 299 250 250 250

Days payable (days) 123 139 126 131 139

Cash conversion cycle (days) 261 336 274 269 261


Rating Definitions Disclaimer and Risk Statement BUY 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.

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

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.

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