After announcing good results for the first half of 2016, Societe Generale announced a disposal plan for the 150 MW photovoltaic power plant, which we believe will help the company reduce its net debt ratio to 26.9% in 2017. The long-awaited deal on the disposal of photovoltaic power plants in Xinjiang and Gansu shows the company's determination to improve its balance sheet.
In-hand orders of 500 megawatts will provide solid support for an expected 53% rebound in net profit in 2016. However, considering the high base of new installed capacity in the first half of 2016, we believe that market concerns about the decline in new installed capacity from the second half of '16 to the first half of '17 are still a limiting factor in the stock's valuation. As the recent rebound in stock prices has reflected these improvements, we maintained our holding rating and raised our target price to HK$4.76, corresponding to 6 times the expected price-earnings ratio in 2016.
The main factors supporting the rating
Asset disposal helps improve cash flow. We believe that asset disposal marks a good start to the company's asset restructuring and can help reduce the net debt ratio in 2017 to 26.9% from 78.9% in 2015. Furthermore, we anticipate that the disposal of photovoltaic power plant assets in 2016-18 may contribute 29-34 percent of the company's pre-tax profit.
Expected results for 2016 are solid, but the outlook for the industry remains bleak. Considering the company's current order of 500 MW and the delivery order of 170 MW in the first half of 2016, we don't think it would be difficult to deliver orders of 420 MW/500 MW in 2016/17, respectively. However, renewable energy subsidies and the recent reduction in PV bidding prices may still be a serious drag on the company's fundamentals and valuation.
The main risks faced by ratings
The PV EPC project from the second half of '16 to '17 fell short of expectations.
valuations
Our target price of HK$4.76 corresponds to 6 times the anticipated price-earnings ratio for 2016. We maintain our holding rating because we believe the improvement in cash flow from asset disposal has been reflected in the 39% rebound in stock prices over the past month.
We raised our 2016-17 net profit forecasts by 15% and 27%, respectively, because we drastically raised our EPC delivery forecasts to 420 megawatts and 500 megawatts, but also raised our foreign exchange loss forecasts.
