Societe Generale Solar announced a year-on-year decline of about 75% in net profit for the first half of 2017. We lowered our EPS forecast as follows:
It was lowered from 0.66 yuan to 0.31 yuan in 2017 (down 50.6% year on year), from 0.71 yuan to 0.33 yuan in 2018 (up 7.3% year on year), and from 0.73 yuan to 0.36 yuan in 2019 (up 6.7% year on year). The target price was lowered from HK$3.95 to HK$2.29. There is 15.7% room for the current price to decline from the target price, so the rating was downgraded to a reduction in holdings.
Profit warning. The company said the decline in profits had nothing to do with its normal operations. The company's one-time income from the sale of power plant assets reached 144 million yuan in the first half of 2016. In February 2017, the company issued $260 million of two-year senior notes with an annual interest rate of 7.95%, leading to increased financial expenses in the first half of the year. We expect additional interest expenses for the first half of 2017 to be around $57.7 million. In addition, the company incurred additional exchange rate hedging fees in the first half of 2017, reduced fair value earnings on convertible bonds, and accelerated amortization of repurchases of convertible bonds further reduced net profit. Considering rising financial expenses and possible future cost increases, we expect the company's net profit for the second half of 2017 to decrease 10% year over year, with net profit of about 253 million yuan for the full year (net profit for the full year of 2016 was 513 million yuan).
Costs are likely to rise. We have noticed a rise in PV module prices in July this year. The current spot price is $0.45 per watt, compared to $0.44 per watt in early June. Prices of other photovoltaic materials experienced a sharp decline in the third quarter of last year, but remained stable this year. We believe demand for photovoltaic materials will remain strong in the third quarter of this year.
Therefore, we anticipate that higher prices will increase the company's procurement costs and have a negative impact on its performance in the second half of the year.
Subsidies for distributed photovoltaic projects are likely to be lowered. In 2016, the company's PV EPC (Design, Purchase, and Construction General Contracting) project revenue accounted for 42.5% of total revenue. Attracted by the potentially high returns of distributed PV projects, more and more companies are entering this sector, leading to increased competition. Considering that the subsidy for distributed photovoltaic projects is 0.42 yuan/kwh, electricity prices in parts of the east have reached 0.9 yuan/kwh, and the cost of leveled electricity per kilowatt-hour is only about 0.7 yuan/kwh.
Therefore, we think it is likely that the country will cut subsidies for distributed projects this year, which in turn will affect photovoltaic EPC companies, including Societe Generale Solar.
The rating was downgraded to a reduction in holdings. We lowered our EPS forecast as follows: from 0.66 yuan to 0.31 yuan in 2017 (down 50.6% year on year), from 0.71 yuan to 0.33 yuan in 2018 (up 7.3% year on year), and from 0.73 yuan to 0.36 yuan in 2019 (up 6.7% year on year). The target price was lowered from HK$3.95 to HK$2.29, representing 6.1 times 17-year PE and 0.34 times 17-year PB, or 5.7 times 18-year PE and 0.32 times 18-year PB. There is room for the current price to fall 15.7% from the target price, so the rating was downgraded to a reduction in holdings.
