Second 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 1H2018 and 1H2017 is foreign exchange loss (net) of RMB 14.1 million and RMB 10.8 million respectively was foreign exchange translation loss of RMB 14.2 million and RMB 9.6 million arising from 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 1H2018 and 1H2017 was RMB 72.5 million and RMB 58.2 million respectively, a 24.6 % increase from 1H2017. 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 second quarter ended 30 June 2018 ("2Q2018") as compared to that of the second quarter ended 30 June 2017 ("2Q2017")
*Based on actual financial performance WITH financial effects of Convertible Bonds*
The Group's revenue increased by approximately RMB 222.2 million or 59.1% from RMB 375.9 million in 2Q2017 to RMB 598.1 million in 2Q2018. This was attributed to the increase in (a) the Green Investment (GI) business revenue of RMB 86.2 million, contributed mainly from the Changrun and Xinyuan projects, and (b) the Manufacturing and Services (M&S) revenue of RMB 136.0 million due to the increase in order book.
Gross profit increased by approximately RMB 27.8 or 32.7% from RMB 84.7 million in 2Q2017 to RMB 112.5 million in 2Q2018 The increase was mainly attributable to the increased revenue contributions from GI and M&S segments. Gross profit margin decreased from 22.5% for 2Q2017 to 18.8% for 2Q2018 mainly due to higher raw material prices experienced in the manufacturing business.
Profit before Income Tax
Profit before tax decreased by RMB 113.5 million from RMB 35.1 million in 2Q2017 to a loss before tax of RMB 78.4 million in 2Q2018 due mainly to the following factors:
- Increase in fair value loss on Convertible Bonds of RMB 94.4 million between 31 March 2018 and 30 June 2018;
- Increase in administrative expenses of RMB 19.5 million caused mainly by the increase in personnel expenses of RMB 15.8 million and increase in depreciation expense of RMB 2.6 million arising from the expansion of the GI business;
- Increase in foreign exchange loss of RMB 11.7 million due to unutilized Convertible Bonds;
- Increase in finance costs of RMB 11.5 million due to accrued effective interest of Convertible Bonds and interest expense from GI projects that are in operation.
Income Tax Expense
Excluding the non-tax deductible effect of the Convertible Bonds, the effective tax rate for 2Q2018 would have been 15.3%.
Profit for the Financial Period
As a result of the above, the Group's net profit attributable to the shareholders decreased by RMB 112.9 million from a profit of RMB 32.0 million in 2Q2017 to a loss of RMB 81.0 million in 2Q2018.
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 increased by RMB 141.8 million or 4.8% from RMB 2,966.4 million as at 31 December 2017 to RMB 3,108.2 million as at 30 June 2018 mainly due to the following:
- Increase in pledged bank deposits of RMB 51.0 million as collaterals were mainly required for the credit facilities granted;
- Increase in trade receivables of RMB 47.9 million arising mainly from increase in trade receivables of RMB 101.7 million which was offset against the decrease in notes receivables with third parties of RMB 54.2 million.
Approximately 33.4 % and 3.3 % of the trade receivables at 31 December 2017 and 30 June 2018 respectively were collected as at 31 July 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;
- Increase in other receivables and prepayments of RMB 138.7 million mainly due to the increase in advance payment for purchases to fulfil the orders on hand as at 30 June 2018;
- Increase in inventories of RMB 51.1 million primarily due to an increase in work-in-progress of RMB 56.1 million for project use, offset by a decrease in raw materials and consumables of RMB 5.0 million; and
The above increase was mitigated by the following:
- Decrease in cash and cash equivalents of RMB 147.2 million, mainly due to the usage of funds for BOT and GI projects.
The Group's total non-current assets increased by RMB 320.2 million or 15.7% from RMB 2,033.9 million as at 31 December 2017 to RMB 2,354.1 million as at 30 June 2018 caused mainly by the following:
- Increase in property, plant and equipment of RMB 151.8 million mainly resulting from acquisition of GI project;
- Increase in lease premium for land of RMB 36.2 million due to acquisition of GI project; and
- Increase in intangible assets of RMB 115.3 million due to service concession arrangements relating to "BOT, BOO, TOT" projects on hand as at 30 June 2018.
The Group's total current liabilities increased by RMB 142.6 million or 6.2% from RMB 2,306.0 million as at 31 December 2017 to RMB 2,448.6 million as at 30 June 2018 mainly due to:
- Increase in trade payables of RMB 281.6 million as a result of the aggregate increase in customer advances and trade payables with outside parties of RMB 328.6 million, offset by the decrease in notes payables with third parties of RMB 47.0 million; and
The above increase was mitigated by:
- Decrease in other payables of RMB 129.1 million as a result of the aggregate decrease in accruals and accrued payroll costs of RMB 129.6 million.
The Group's total non-current liabilities increased by approximately RMB 274.6 million from RMB 1,291.3 million as at 31 December 2017 to RMB 1,565.8 million as at 30 June 2018 mainly due to:
- Increase in long term borrowings of approximately RMB 214.6 million to finance the acquisition of GI projects; and
- Increase in fair value of Convertible Bonds of RMB 50.7 million in 2Q2018.
Review of the Group's cash flow statement for the second quarter ended 30 June 2018
*Based on the cash flow statement WITH financial effects of Convertible Bonds*
Net cash generated from operating activities amounted to approximately RMB 95.0 million, primarily due to operating cash flows before movements in working capital of approximately RMB 72.4 million that were derived from:
- Decrease in trade receivables of RMB 58.0 million, decrease in other receivables and prepayments of RMB 63.2 million and increase in inventories of RMB 30.5 million;
- Increase in trade payables of RMB 49.0 million and increase in other payables of RMB 88.2 million; and
- Interest and tax paid of RMB 26.5 million in aggregate.
Net cash used in investing activities amounted to RMB 93.6 million mainly due to an increase in expenditure on intangible assets of RMB 10.5 million and the considerations paid for acquisition of subsidiaries of RMB 81.4 million.
Net cash generated from financing activities amounted to RMB 108.0 million due to cash inflow arising from the proceeds from new borrowings of RMB 371.1 million, which was offset by the repayment of borrowings and pledged bank deposits of RMB 225.0 million and RMB 33.9 million respectively.
Commentary On Prospects
The Group achieved notable growth in top and bottom line in 1H 2018, primarily driven by the increased contributions from the Green Investments (GI) segment. Group revenue rose 69.6% YoY to RMB1,219.6 million, and EBITDA grew by 69.3% YoY to RMB 145.4 million resulting in the underlying net profit increased by RMB14.3 million or 24.6% YoY to RMB 72.5 million. Revenue and EBITDA generated by the five operating GI projects in 1H2018 totalled RMB 211.6 million and RMB 60.6 million, respectively. The net present value (NPV) of long-term GI cash flows is expected to exceed considerably the current EBITDA contributions.
Sunpower remained focused on building a sizeable GI portfolio in 1H 2018 as its value creator and growth driver, and has taken concrete steps closer to its target of having GI contributing the bulk of its underlying value. The Group has entered into the final stage of completing the acquisition of Yongxing Plant at an attractive valuation multiple, and this acquisition is expected to contribute positively to revenue and net profit immediately upon completion in FY2018. To-date, the Group has invested and committed a total of RMB 1.3 billion equity investment in building up its GI portfolio including Yongxing Plant, and is on track to invest a total of approximately RMB 2.5 billion in equity. This GI portfolio is expected to deliver substantial NPV based on the recurring cash flows to the Group over the 30-year concession period.
Sunpower believes that it has established a unique competitive edge in its GI business, riding on the favourable policy trend in China, and will continue to benefit from the long-term sustainable growth of GI, on the back of:
- Fundamental demand – Increasingly stringent enforcement of smog-related policies by the government has forced industrial users that previously operated their own "dirty" steam boilers to switch to "clean" centralized steam providers such as Sunpower;
- Exclusive steam supplier – Sunpower operates its GI plants on typically 30-year concessions (with right of first refusal to renew) which makes them the exclusive steam suppliers in industrial parks;
- Industrial park expansion – The organic expansion of factories in the industrial parks will also bring in incremental demand for Sunpower's steam products as more factories are required to be concentrated in industrial parks;
- Proprietary technology – The Group is able to reduce temperature and pressure loss that lowers operating costs beyond industry norms, and cover a larger area through its long-distance steam distribution pipelines, allowing it to achieve economies of scale faster; and
- Strong long-term capital support – Investments/commitments of US$ 180 million, through two CB issues, by CDH and DCP, two of the most renowned and experienced PE funds in China.
Meanwhile, the M&S segment remains an integral pillar of growth for the Group, recording strong revenue growth of 40% YoY to RMB1.0 billion in 1H 2018, buoyed by a robust order book. As at 30 June 2018, the total orders secured from external customers on hand amounted to approximately RMB2.0 billion, after taking into account contract deliveries in 1Q2018. 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 has become one of the key sources for its record order book which has laid a solid foundation for its outlook in FY2018 and beyond.
Moving forward, the Group will continue to focus its efforts on building up a sizeable and valuable GI portfolio and it believes that its strong capital position and experienced management team will allow it to accelerate this process to take advantage of its first-mover leadership until it forms the bulk of the underlying value of the Group. In the near-term, the Group expects that the continued ramping up of its GI projects, new customer securement and contributions from Yongxing Plant as well other potential M&A contributions will benefit its performance in 2H 2018.