<News Analysis> Growing renewable portfolio in China

  • Acquiring 35% stake in SDIC New Energy with 1.9GW renewable capacity, predominantly wind assets in Northwestern region of China
  • Pave the way for more partnerships with SDIC Power (owns remaining 65% stake in SDIC New Energy) to grow renewable portfolio in China, and potentially overseas
  • Expect earnings accretion of c.10% upon completion in 1H2022; minimal impact to gearing
  • Reiterate BUY; TP S$2.40

Sembcorp Industries (SCI) has signed an equity transfer agreement with China state-owned investment holding company, State Development Investment Corporate Group (SDIC)’s Shanghai SDIC Xieli Development Equity Fund Partnership (Xieli Fund), to take over its 35% interest in SDIC New Energy for an equity consideration of appox. RMB 1.5bn (or c.S$320m), to be funded by internal cash and borrowings. 

Commitment to go green. SDIC New Energy’s portfolio consists of 30 operational wind and solar PV assets with a total gross installed capacity of about 1.9GW located across seven provincial regions in China. The acquisition also signifies future partnership with JV partner, SDIC Power, the public-listed arm of SDIC that holds the remaining 65% stake in SDIC New Energy to deepen their renewable footprint in China. The acquisition will raise SCI’s renewable gross capacity in China by 135% from 1.4GW to 3.3GW. 

SCI seems committed to achieving Group target of 10GW of gross installed renewable capacity by 2025. Upon completion in 1H2022, SCI’s gross installed renewable capacity will be lifted by c.45% to 6.1GW (4.3GW attributable to SCI), including the 658MW acquisition announced 3-weeks ago. 

Some key takeaways from briefing:

  1. Financials. Based on SDIC Power’s releases, SDIC New Energy generated net profit of Rmb346m in FY20 and Rmb351m in 1H21. Strong 1H was predominantly driven by new capacity of ~350MW that comes online towards end of 2020. Assuming seasonally stronger 1H accounting for 60-70% of full year profit, it could deliver Rmb500-600m profit a year, implying S$35-40m profits attributable to SCI or ~10% boost to its bottomlineNet gearing shall not materially changePurchase Price Allocation will take place within 1-year from completion, which any residual consideration will be recorded as goodwill. 
  2. Valuation. Based on ballpark FY21 profit estimate of S$35-40m attributable to SCI, consideration paid implies 8-9x FY21 PE. Assuming the asset is 70% debt funded, SCI is paying c. US$1m/MW, which is also broadly in line. Valuation seems decent, considering good location of the assets in the Northwestern region and relatively young age average 4-5 year-old of the assets, amongst other factors. 
  3. Rationale. It was a good opportunity to acquire the interests from SDIC Fund that closed down the fund and reinvest into other sector, allowing partnership with SDIC to grow renewable assets in China and possibly overseas, leveraging on SCI’s regional experience. 

Reiterate BUY and TP of S$2.40. We will factor in earnings accretion after completion in 1H22.