Company Reports

No-moat Xinyi Energy’s first-half 2024 net profit fell 30% year on year to HKD 394.5 million, in line with preliminary guidance of a 25%-35% drop. While the interim dividend was lowered by 32%, the payout ratio was stable at around 48%. The weak earnings are mainly attributable to the depreciation of the Chinese yuan, electricity curtailment loss due to grid constraints and higher volume of market-based electricity trading, which fully offset a 7% growth in electricity generation. After cutting our 2024-26 earnings forecasts by 29%-33% to factor in the poor results, we reduce our fair value estimate to HKD 1.24 per share from HKD 1.60. Although the firm is currently undervalued with a 2024 dividend yield of over 5%, we think share price performance will be weak in the near term as concerns about further curtailment, falling tariffs, and rising leverage linger. While we believe China’s increasing investment in the national grid is a positive to ease curtailment risks, we only forecast a turnaround in 2026.

Xinyi Energy Holdings is the solar farm operation unit of its holding company Xinyi Solar, a leading solar glass manufacturer and solar farm developer in China. Unlike most solar power suppliers with integrated upstream solar project development, Xinyi Energy mainly acquires utility-scale ground-mounted solar projects and focuses on downstream solar farm operations. The company's unique business model largely shields it from construction risks and regulatory risks such as project approvals, leading to a more stable returns profile. Previously, the company aimed to distribute not less than 90% of its distributable income annually. However, Xinyi Energy changed its dividend policy in 2023—it now considers the firm’s financial resources and funding needs, with no fixed payout ratio.

No-moat Xinyi Energy guided that it expects its net profit for the first half of 2024 to decrease by 25%-35% year on year. This is weaker than our full-year 2024 earnings growth estimate of about 11% year on year. We keep our earnings forecasts and fair value estimate of HKD 1.60 per share unchanged for now, pending the release of the final first-half results on July 31. We expect Xinyi's near-term share price performance to be pressured by the disappointing guidance.

The year-to-date share price performance of China utilities under our coverage have generally staged a strong recovery since May, given improving sentiment in the Hong Kong equity market and their cheap valuations. In addition, the market is expecting more positive policy measures from the upcoming third plenary session in July. We have seen the National Energy Administration calling for increased investment in the national grid recently to avoid curtailment risk on the back of the significant rise in renewable energy capacity. While we are positive about this in the longer term, we caution that the concerns about slow subsidy settlements and falling tariffs will remain in the near term.

Xinyi Energy’s 2023 net profit of HKD 993.0 million, up 2.2% year on year, was below market and our expectations. We believe the disappointment is mainly due to lower utilization rates, grid curtailment issues, and slower-than-expected capacity expansion. Dividend per share for 2023 fell 60.3% year on year to HKD 0.06, but we think the market has priced this in, given the change in the dividend policy since second-half 2023. We cut our 2024-26 earnings forecasts by 18%-19% to factor in the weak results, which led to a lower fair value estimate of HKD 1.60 per share, from HKD 2.04. Trading at 2024 estimated yield of more than 6%, we think Xinyi Energy looks attractive now. However, we don’t expect a rerating in the near term, as concerns about subsidy settlement continue to linger, while it will take time for the firm to rebuild investor confidence.

Xinyi Energy Holdings is the solar farm operation unit of its holding company Xinyi Solar, a leading solar glass manufacturer and solar farm developer in China. Unlike most solar power suppliers with integrated upstream solar project development, Xinyi Energy mainly acquires utility-scale ground-mounted solar projects and focuses on downstream solar farm operations. The company's unique business model largely shields it from construction risks and regulatory risks such as project approvals, leading to a more stable returns profile. Previously, the company aimed to distribute not less than 90% of its distributable income annually. However, Xinyi Energy changed its dividend policy in 2023—it now considers the firm’s financial resources and funding needs, with no fixed payout ratio.

No-moat Xinyi Energy’s year-to-date close-to-50% share price fall has been disappointing, with the market reacting to reduced dividend payout, uncertainty over the collection of subsidy payments, and rising financing costs. We cut our fair value estimate to HKD 2.04 from HKD 2.64 after incorporating the depreciation of the Chinese yuan, and higher midcycle accounts receivable days given the slow subsidy collection. We also raise our weighted average cost of capital to 9.6% from 8.6% to reflect the increased uncertainty. Being a non-state-owned enterprise, we think Xinyi Energy may be at a disadvantaged position in terms of getting preferential borrowing rates and speedy settlement of subsidies owed to it when compared with its SOE peers. While the firm remains undervalued, we don’t expect a rerating in the near term, as it will take time for Xinyi Energy to deliver earnings improvement and rebuild investor confidence.

Xinyi Energy Holdings is the solar farm operation unit of its holding company Xinyi Solar, a leading solar glass manufacturer and solar farm developer in China. Unlike most solar power suppliers with integrated upstream solar project development, Xinyi Energy mainly acquires utility-scale ground-mounted solar projects and focuses on downstream solar farm operations. The company's unique business model, along with its weighted average lifetime of about 15.7 years for its solar farm portfolio as of end-2022, largely shields it from construction risks and regulatory risks such as project approvals, leading to a more stable returns profile. Previously, the company aimed to distribute not less than 90% of its distributable income annually. However, Xinyi Energy changed its dividend policy in 2023—it now considers the firm’s financial resources and funding needs, with no fixed payout ratio.

Xinyi Energy’s first-half 2023 net profit of HKD 566.9 million, down 9.0% year on year, was below expectations. We believe the miss is mainly attributable to the depreciation of the Chinese yuan and more conservative assumptions on tariff adjustment. We cut our fair value estimate to HKD 2.64 from HKD 3.12 after updating our model assumptions. While the firm remains undervalued, we think share price performance will be weak in the near term, given negative investor sentiment after the disappointing change in the dividend policy.

Xinyi Energy Holdings is the solar farm operation unit of its holding company Xinyi Solar, a leading solar glass manufacturer and solar farm developer in China. Unlike most solar power suppliers with integrated upstream solar project development, Xinyi Energy mainly acquires utility-scale ground-mounted solar projects and focuses on downstream solar farm operations. The company's unique business model, along with its weighted average lifetime of about 15.7 years for its solar farm portfolio as of end-2022, largely shields it from construction risks and regulatory risks such as project approvals, leading to a more stable returns profile. Previously, the company aimed to distribute not less than 90% of its distributable income annually. However, Xinyi Energy changed its dividend policy in 2023—it now considers the firm’s financial resources and funding needs, with no fixed payout ratio.

We think Xinyi Energy’s 1-for-10 rights issue on a nonunderwritten basis at HKD 2.19 per rights share will help to improve its balance sheet. However, near-term share price performance may be capped by this dilutive exercise, in our view. Despite that, we keep our fair value estimate of HKD 3.12, and we believe the shares look attractive now with dividend yield of more than 7% in 2023.

Xinyi Energy’s 2022 net profit of HKD 971.5 million, down 21.2% year on year, was below expectation. We believe the miss is mainly due to a HKD 223.8 million write-off of subsidy receivables, slower capacity expansion on the back of COVID-19 disruptions, and high solar module costs. Consequently, total dividend per share for 2022 dropped 13.2% year on year to HKD 0.151. Meanwhile, core performance is intact, as 2022 adjusted EBITDA margin at 92.4% was in line with our expectation. We keep our fair value estimate of HKD 3.12 after reviewing our assumptions and we think the shares look attractive now with dividend yield of about 7% in 2023. However, share price performance may be capped by the disappointing write-off in the near term. In our view, the write-off is a prudent provision by management to reflect potential risk in the subsidy audit by the government. This is one-off in nature, and we do not rule out the possibility of a reversal later on.

Xinyi Energy Holdings is the solar farm operation unit of its holding company Xinyi Solar, a leading solar glass manufacturer and solar farm developer in China. Unlike most solar power suppliers with integrated upstream solar project development, Xinyi Energy mainly acquires utility-scale ground-mounted solar projects and focuses on downstream solar farm operations. The company's unique business model, along with its weighted average lifetime of about 15.7 years for its solar farm portfolio as of end-2022, largely shields it from construction risks and regulatory risks such as project approvals, leading to a more stable returns profile. The company targets to distribute not less than 90%of its distributable income annually.

We cut Xinyi Energy’s fair value estimate to HKD 3.12 from HKD 3.28, after incorporating higher interest rates, the depreciation of the Chinese yuan and a slower near-term acquisition pace in our valuation model. As Xinyi Energy’s share price has corrected over the past few months, we think the shares are undervalued now with an attractive dividend yield of more than 7% annually. However, we think near-term share price performance could be capped by the firm’s increasing gearing level and the rising interest rate environment.

Xinyi Energy Holdings is the solar farm operation unit of its holding company Xinyi Solar, a leading solar glass manufacturer and solar farm developer in China. Unlike most solar power suppliers with integrated upstream solar project development, Xinyi Energy only acquires utility-scale ground-mounted solar projects and focuses on downstream solar farm operations. The company's unique business model, along with its weighted average lifetime of about 16 years for its solar farm portfolio as of end-2021, largely shields it from construction risks and regulatory risks such as project approvals, leading to a more stable returns profile. The company targets to distribute 90%-100% of its distributable income annually.

We keep our fair value estimate for no-moat Xinyi Energy at HKD 3.28 per share following its largely in line first-half 2022 results. However, we think the firm’s share price may face pressure in the near term as earnings fall short of market expectations, based on FactSet consensus estimates. We believe the miss may be due to a higher-than-expected tax rate given the expiry of tax holiday for some solar projects and slower capacity expansion on the back of COVID-19 disruptions. First-half revenue rose 13% year on year, driven by the acquisition of 660 megawatts, or MW, of solar projects in 2021. However, net profit was flat due to higher operating and income tax expenses. A decent dividend yield of more than 5% may provide share price support, in our view.

Xinyi Energy Holdings is the solar farm operation unit of its holding company Xinyi Solar, a leading solar glass manufacturer and solar farm developer in China. Unlike most solar power suppliers with integrated upstream solar project development, Xinyi Energy only acquires utility-scale ground-mounted solar projects and focuses on downstream solar farm operations. The company's unique business model, along with its weighted average lifetime of about 16 years for its solar farm portfolio as of end-2021, largely shields it from construction risks and regulatory risks such as project approvals, leading to a more stable returns profile. The company targets to distribute 90%-100% of its distributable income annually.

We are transferring coverage of Xinyi Energy with no-moat and stable moat trend ratings and a fair value estimate of HKD 3.28 per share. We forecast Xinyi Energy’s net profit to grow at a five-year CAGR of 10.8%, with its operating margin falling to 65.2% in midcycle from 71.6% on average in the past three years due to increasing contribution from grid-parity projects. At current prices, we think the shares are not attractive given the firm’s increasing gearing level and the rising interest rate environment for its HKD-denominated debt.

Xinyi Energy Holdings is the solar farm operation unit of its holding company Xinyi Solar, a leading solar glass manufacturer and solar farm developer in China. Unlike most solar power suppliers with integrated upstream solar project development, Xinyi Energy only acquires utility-scale ground-mounted solar projects and focuses on downstream solar farm operations. The company's unique business model, along with its weighted average lifetime of about 16 years for its solar farm portfolio as of end-2021, largely shields it from construction risks and regulatory risks such as project approvals, leading to a more stable returns profile. The company targets to distribute 90%-100% of its distributable income annually.

We are putting Xinyi Energy under review, pending a change in analyst.