Third Quarter Results Financial Statement And Related Announcement
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Explanatory Notes for WITHOUT financial effects of Convertible Bonds:
- Financial effects of Convertible Bonds consist of unrealised foreign exchange translation, amortised interest expenses (inclusive of interest charges) and fair value gain/ (loss) of Convertible Bonds.
- Included in the 9M2018 and 9M2017 profit attributable to equity holders of the Company is foreign exchange loss (net) of RMB 11.7 million and RMB 22.1 million respectively, of which RMB 14.2 million and RMB 22.1 million exchange loss relate to the unutilised proceeds from the issuance of the Convertible Bonds on 3 March 2017. Hence, net profit attributable to equity holders (after excluding foreign exchange loss of unutilised Convertible Bonds) for 9M2018 and 9M2017 was RMB 129.2 million and RMB 85.8 million respectively, a 50.6% increase year-on-year. During 2Q2018, the Company transferred the unutilised proceeds from its USD account to a RMB account. Accordingly, there will be no further foreign exchange differences arising from the unutilised proceeds.
Review of Performance
The Group's performance for the third quarter ended 30 September 2018 ("3Q2018") as compared to that of the third quarter ended 30 September 2017 ("3Q2017")
*Based on actual financial performance WITH financial effects of Convertible Bonds*
The Group's revenue increased by approximately RMB 356.5 or 87.5% from RMB 407.2 million in 3Q2017 to RMB 763.7 million in 3Q2018. This was attributed to the increase in (a) revenue of RMB 149.1 million or 36.6% from 3Q2017 from the Manufacturing and Services ("M&S") segment, and (b) revenue of RMB 207.4 million or 100.0% from the Green Investment ("GI") business.
Gross profit increased by approximately RMB 74.7 million or 84.9% from RMB 88.0 million in 3Q2017 to RMB 162.6 million in 3Q2018. The increase was mainly attributable to the increased revenue contributions from both M&S and GI segments. Gross profit margin for 3Q2018 is 21.3%, which is almost stable with 3Q2017.
Profit before Income Tax
Profit before tax decreased by approximately RMB 121.9 million or 68.9% from RMB 176.9 million in 3Q2017 to RMB 55.0 million in 3Q2018. The decrease was mainly attributable to the following factors:
- Decrease in fair value gain on Convertible Bonds of RMB 146.0 million between 1 July 2018 and 30 September 2018 as compared to the period between 1 July 2017 and 30 September 2017;
- Increase in administrative expenses of RMB 31.3 million caused mainly by the increase in personnel expenses of RMB 16.3 million and other office expenses arising from the expansion of the GI business;
- Increase in foreign exchange loss of RMB 8.7 million due to unutilized Convertible Bonds; and
- Increase in finance costs of RMB 25.5 million due to the accrued interest effect of Convertible Bonds and interest expense from GI projects that are in operation.
- Increase in other operating income of RMB 21.1 million mainly due to an increase in government grants.
Income Tax Expense
Excluding the non-tax deductible effect of the Convertible Bonds, the effective tax rate for 3Q2018 would have been 21.1%.
Profit for the Financial Period
As a result of the above, the Group's net profit attributable to the shareholders decreased by RMB 138.6 million or 81.1% from RMB 170.9 million in 3Q2017 to RMB 32.3 million in 3Q2018.
Review of the Group's Financial Position
*Based on the statement of financial position WITH financial effects of Convertible Bonds*
The Group's total current assets decreased by RMB 146.3 million or 4.9% from RMB 2,966.4 million as at 31 December 2017 to RMB 2,820.1 million as at 30 September 2018 mainly due to the following:
- Decrease in cash and cash equivalents of RMB 454.9 million, mainly due to the usage of funds for Build-Operate-Transfer ("BOT") and GI projects;
- Decrease in trade receivables of RMB 103.1 million arising mainly from an aggregate decrease in trade receivables and notes receivables with third parties of RMB 105.1 million.
Approximately 41.2% and 4.3% of the trade receivables at 31 December 2017 and 30 September 2018 respectively were collected as at 31 October 2018. Most of the trade receivables are due from customers that are state-owned enterprises, listed companies or multinational corporations. Overall, the Group's customers are credit-worthy but payments remain slow due to tightening credit in China.
The above decrease was mitigated by the following:
- Increase in inventories of RMB 143.6 million primarily due to an increase in work-in-progress of RMB 112.4 million for project use and an increase in raw materials and consumable of RMB 26.0 million;
- Increase in pledged bank deposits of RMB 75.4 million as collaterals were mainly required for the credit facilities granted; and
- Increase in other receivables, deposits and prepayments of RMB 191.8 million due mainly to the increase in order book.
The Group's total non-current assets increased by RMB 1,280.7 million or 63.0% from RMB 2,033.9 million as at 31 December 2017 to RMB 3,314.6 million as at 30 September 2018 mainly due to the following:
- Increase in property, plant and equipment of RMB 520.0 million mainly resulting from the acquisition of GI project;
- Increase in lease premium for land of RMB 89.4 million due to acquisition of GI project; and
- Increase in intangible assets of RMB 177.0 million due to service concession arrangements relating to "BOT, BOO, TOT" projects on hand as at 30 September 2018.
The Group's total current liabilities increased by RMB 639.3 million or 27.7% from RMB 2,306.0 million as at 31 December 2017 to RMB 2,945.3 million as at 30 September 2018 mainly due to the following:
- Increase in trade payables of RMB 403.8 million as a result of the aggregate increase in customer advances, trade payables with outside parties and notes payables with third parties;
- Increase in other payables of RMB 353.6 million mainly due to consideration payable for newly-acquired GI projects.
The Group's total non-current liabilities increased by approximately RMB 399.4 million from RMB 1,291.3 million as at 31 December 2017 to RMB 1,690.7 million as at 30 September 2018 mainly due to the following:
- Increase in long term borrowings of approximately RMB 269.1 million to finance the acquisition of GI projects;
- Increase in fair value of Convertible Bonds of RMB 70.5 million in 3Q2018.
Review of the Group's cash flow statement for the third quarter ended 30 September 2018
*Based on the cash flow statement WITH financial effects of Convertible Bonds*
Net cash generated from operating activities amounted to approximately RMB 178.7 million, primarily due to operating cash flow before movements in working capital of approximately RMB 114.7 million that were derived from:
- Decrease in trade receivables of RMB 181.3 million, increase in other receivables and prepayments of RMB 45.4 million and increase in inventories of RMB 84.5 million;
- Decrease in trade payables of RMB 98.9 million and increase in other payables of RMB 60.7 million;
- Interest and tax paid of RMB 28.9 million in aggregate.
Net cash used in investing activities amounted to RMB 372.3 million mainly due to the purchase of subsidiary of RMB 242.0 million, increase in expenditure on intangible assets of RMB 99.7 million and purchase of land use rights and property, plant and equipment of RMB 16.5 million and RMB 14.1 million respectively.
Net cash used in financing activities amounted to RMB 114.2 million due to repayment of borrowings and pledged bank deposits of RMB 117.3 million and RMB 24.4 million respectively, which was offset by the contribution from minority interest of RMB 19.1 million.
Commentary On Prospects
In July 2018, China's State Council released the new 2018-2020 Three-year Action Plan for Winning the Blue Sky War that covers more cities. In addition, the Standing Committee of the National People's Congress has called for vigorous promotion of the clean and efficient use of coal due to rising prices and imports of natural gas. Such top-level official backing will drive the long-term growth prospects of China's environmental protection industry, particularly the anti-smog sector that the Group's GI business is targeting.
Excluding the financial effects of Convertible Bonds, the Group achieved record growth in top and bottom line in 9M2018, driven by the rapid expansion of its GI segment. Group revenue rose 76.1% YoY to RMB1,983.3 million, and EBITDA grew by 124.1% YoY to RMB269.7 million, resulting in the underlying net profit increasing by 50.6% YoY to RMB129.2 million. Revenue and EBITDA generated by the seven operating GI projects in 9M2018 totalled RMB419.0 million and RMB155.4 million, respectively. The net present value (NPV) of long-term GI cash flows is expected to considerably exceed the current EBITDA contributions.
Sunpower remains on the right track to execute its GI strategy with the goal of building up a sizeable and valuable GI portfolio which generates long-term, recurring and high-quality cash flows as its value creator and growth driver. To-date, the Group has invested and committed a total of RMB1.3 billion equity investment in its existing GI projects and is well positioned to invest a total of RMB2.5 billion in equity by 2021. Sunpower's GI projects enjoy an attractive double-digit internal rate of return (IRR), supported by concessions of typically 30 years and strong tariff collection due to the ability to require prepayments by customers.
Meanwhile, the M&S segment remains an integral pillar of growth for the Group, recording strong revenue growth of 38.9% YoY to RMB1.6 billion in 9M2018, buoyed by a robust order book. As at 30 September 2018, the total orders secured from external customers on hand amounted to RMB2.2 billion, after taking into account contract deliveries in 9M2018. The Group's proven track record in providing quality equipment and services has garnered a large base of reputable customers that includes BASF, BP, Shell, CNOOC, CNPC, SINOPEC etc. Moreover, Sunpower's 70% repeat customer base across over 15 industries has become one of the key sources for its record order book.
Based on the strong results and the acceleration in growth that it has already achieved in 9M2018, barring unforeseen circumstances, the Group expects the following business trends to benefit its operating performance in 4Q2018.
- The continued ramp-up of GI projects, which will include:
- Quanjiao and Lianshui Projects will continued to secure new customers driven by the closure of small "dirty" boilers,
- Full-quarter electricity revenue to be contributed by the Changrun Project, and
- Additional revenue from providing heating during winter by Xinyuan Plant.
- Full quarterly contributions from Yongxing Plant, which will benefit from higher seasonal activities in 4Q.
- The M&S segment is expected to benefit from a record order book of RMB2.2 billion and usually higher deliveries of work-in-progress products in Q4.