Renewable Energy- Bullish divergence detected in the indicators.

From DMG:

Renewable Energy Asia Group: Transformation of core business begins (BUY, S$0.225, TP S$0.385)

Tan Chee How (6232 3894, chee-how.tan@dmgaps.com.sg )
Terence Wong, CFA (6232 3896, terence.wong@dmgaps.com.sg )

Earnings surged as wind business kicks in. Renewable Energy Asia Group (REAG) reported a PATMI of RMB11.7m in 1HFY11 (loss-making in 1HFY10) as revenue surged to RMB193m (+227% HoH; +370% YoY). Despite the huge improvement in results attributable to the contributions coming from manufacturing and Engineering, Procurement and Construction (EPC) units, the PATMI is slightly below expectations due to:

1) slower initial progress from manufacturing unit, and
2) lower than expected gross profit margins for manufacturing and fasterner businesses.

Hence, we lowered our FY11F/FY12F/FY13F PATMI by 24%/7%/11% respectively as we cut:

1) revenue contributions from manufacturing and EPC segments,
2) gross margins of the three business segments, and factored in 3) contributions from Nantong Huaishuo Investment Co (NHI) which owns a 49% stake in Datang Baotou Electricity (DBE).

Our TP is reduced to S$0.385 based on sum-of-the parts and blended FY11F/FY12F earnings.

Maintain BUY.

Manufacturing business expected to improve in 2HFY11F.

Manufacturing business contributed only RMB129m in 1HFY11F and posted a lower than expected gross margin of 17% vs our est 21% due to lower operational efficiency associated with initial phase of learning curve. For 2H11F, we expect manufacturing to contribute ~RMB290m in revenue on the back of:

1) a new manufacturing line addition, and
2) higher operational efficiency.

Furthermore, we lowered our FY11F/FY12F gross margin assumptions to 18%/19% respectively (prev 21%/21%).

Completion of acquisition of NHI expected in 2HFY11F. With the expected completion of NHI in 2HFY11F, REAG will be able to benefit from DBE’s wind farm which has a power generating capacity of 49.5MW and has started operations in mid-Oct 2010. We estimate DBE’s wind farm will achieve operational hours of 1,000 hrs during its first six months of operations. This will lead to estimated net profit contributions of RMB1.1m to REAG

REA to spend $7.2m to acquire stake in Chinese wind farm


Singapore-listed Renewable Energy Asia Group (REA) will spend RMB48m ($7.2m) to acquire a 49% stake in a completed wind farm in Huaishuo town in Baotou, Inner Mongolia.

If anyone is interested in reading their FY2010/11 H1 results...


info.sgx.com/webcoranncatth.nsf/VwAttach...ultsannouncement.pdf

info.sgx.com/webcoranncatth.nsf/VwAttach.../REAPressRelease.pdf
Profit up 153% YoY!!!

Let's hope the wind keeps blowing in this direction!

From DMG:

Buy Recommendation

TP: 0.385

Wind farm operation begins

Acquisition of the entire stake in Nantong Huaishuo Investment (NHI). Renewable Energy Asia Group’s (REAG) wholly-owned subsidiary, Renewable Energy Asia (China) Co Ltd (REA), has entered into a Sale and Purchase Agreement (SPA) with Jiangsu Maritime Engineering Services (JMES) to purchase the latter’s 100% stake in NHI for RMB48m. NHI owns 49% stake in Datang Baotou Asia Electricity Co (DBE), which is the developer and operator of the 49.5MW capacity wind farm in Huaishuo, Inner Mongolia. The remaining 51% stake in DBE is owned by China Datang Corporation, the second largest power generator in China. Given that our previous forecast has already factored in contributions from DBE, we are maintaining our earnings estimates and TP of S$0.385.

Maintain BUY.

Completion of acquisition of NHI in the next five days. With the expected completion of NHI in the next one week, REAG will be able to benefit from DBE’s wind farm which has started operations in mid-Oct 2010. We have already factored in RMB1.3m contributions from the 49% stake in DBE to REAG’s FY11F PATMI. This is based on assumption of 1,000 operational hours during Oct 2010 – Mar 2011.

Estimated acquisition forward P/E is 10-12x. Assuming a full year operational hours of 2,200 hr for DBE’s wind farm and net margin assumptions of 15%-18%, the PATMI contributions to REAG would be RMB4.1m-RMB4.9m. Based on this estimated PATMI contributions, the RMB48m consideration implies a forward P/E of 10x-12x, which is at a 30%-40% discount to listed wind farm power generators’ average forward P/E of 17x. (China Longyuan: 19x FY11F consensus PATMI; Hong Kong Energy: 15x FY11F consensus PATMI).

Recent price drop unwarranted

Renewable Energy Asia Group - Return to black for HY11
From Philip Capital:

Renewable Energy Asia Group - Return to black for HY11

Revenue for HY11 up 369.6% y-y to RMB193.1m, net profit up to RMB11.7m

• HY11 results were within our expectations
• Revenue will be boasted by an additional production line and wind farm
• Maintain Buy recommendation and lowering our fair value slightly to S$0.45

we will see improvement in the margins after the start-up phase and the addition of 1 production line to meet the delivery schedule of its order book. Outlook for the second half of the year remains bright; its first wind farm which started operations in Oct’10 will contribute to its earnings and possible contract wins for its manufacturing arm.

Recent price drop unwarranted

After the successful placement of shares of REA at S$0.30, its share price has dropped about 30% to close at S$0.21 on 12th November 2010. We feel that this drop is unwarranted as the fundamental business is still doing very well and they are expected to record net profits of RMB47.5m for FY11E reversing from a loss a year ago. Its EPC and manufacturing segment will likely see more contracts from China Datang as China Datang renewable energy arm is expected to list at the end of the year. Second half of the year will also see the likely renewal of annual master contract with the European off-shore turbine manufacturer.

Agreement to develop a 1200MW wind farm in Jiuquan, Gansu Province

REA announced that it has entered into an agreement with the Jiuquan government to develop a wind farm of up 1,200MW in capacity over 10 years in two phases. The Jiuquan government will provide the land resources and infrastructure for the wind farm project. REA will also invest in a local production facility to produce wind turbine components and its products will be given first consideration to other wind farms operators in the city. The project will also involve other renewable energy sources like solar, hydropower and biomass power generation facilities. A wind farm of such scale requires large amount of capital and it can easily cost about RMB 9b to develop into its full capacity. We expect REA to start developing the wind farm in phases from Apr’11 once they received all the necessary approvals.

Valuation and Recommendation

We are maintaining our Buy recommendation and lowering our fair value slightly to S$0.45 to reflect the higher interest rates in China. REA provide Singapore investors a unique opportunity to participate in the fast growing renewable energy sector in China. We are valuing REA based on SOTP (unchanged), 9X FY12E expected earnings on its EPC and manufacturing business, using DCF model to value its wind farm business. Its manufacturing and EPC business will propel its growth for the first 2 years and they are likely to announce more wind farm equipment manufacturing contracts as more offshore wind farms are being developed around the world especially in China. However we would also like to see them disposing its fastening business which will likely result in a re-rating of REA. Our fair value translates to PE of 11X FY12E earnings which is still relatively cheap compared to its closest peer who is currently trading at a PE of 23.2X.

Placement exercise in Sept’10; a positive for REA Group

This placement exercise will allow REA Group to kick start its wind farm operations business providing the capital to buy the 49% stake in 49.5MW wind farm in Huaishuo as announced earlier. The capital raised will also be used for 1) working capital 2) partial payment for its manufacturing facilities that they are currently renting and 3) develop the wind farm concessions on hand.

Development of offshore wind farm sector

Huaneng Renewable Energy recently announced that it will invest RMB 6b in a 300MW offshore wind farm project located in Dafeng, Jiangsu Province. This project will likely enhance offshore wind farm equipment manufacturing capability and provide officials with a better idea on setting the laws for offshore wind farm development. The relevant authorities also plan to award another 4 projects with a total installed capacity of 1,000MW to winning bidders. The offshore wind farm projects are located in Binhai and Sheyang, Jiangsu Province. We think that these developments bodes well for REA Group as they currently has 3,000MW of offshore wind farm concession on hand which they could start developing when formal laws and feed-in tariffs are determined by the authorities

Good News for REA:
Solar Energy to Shine in 2011

---

27-Jan
Strategy Team, Saxo Capital Markets
SINGAPORE, Jan. 27, 2011 /PRNewswire-Asia/ -- Despite the failure to make "progress" on climate change issues at the Cancun climate conference in Mexico, climate change and energy policy are still hot international topics. Saxo Capital Markets Pte Ltd expects the sun will shine on solar stocks in 2011 with a potential upside of at least 30 percent from current levels. The main drivers are strong demand, expansion of valuation multiples, a stable political outlook and lower production costs.
Solar stocks will rise like a Phoenix from the ashes
The latest years have been brutal for the solar and wind industry, as seen in the performance of the Guggenheim Solar ETF and First Trust Global Wind Energy ETF that track the solar and wind industries. The indices are still trading 60-70 percent lower compared to the summer of 2008 and even had a lousy performance for 2010.
Solar & Wind industry share price development (2008-2010)
Valuations on solar stocks have been held back by concerns that excess supply relative to demand will crush the industry's profits.
Saxo believes the market is far too pessimistic and the latest outlook for 2011 demand from the leading solar companies First Solar and Trina Solar indicate higher demand in 2011 - even in Europe despite concern over subsidies and tighter budgets. As the 2011 quarterly earnings are released; they expect the market will change its mind on solar stocks and send P/E valuations much higher from current levels around 9.6. An industry for which demand is projected to grow 9.6 percent annually until 2030 should not be valued at 9.6 times earnings because earnings growth normally exceeds growth in volume (demand) due to higher operating efficiency and share buy-back programs later in an industry's growth cycle.
Why does Saxo like solar more than wind?
When looking at the market pricing relative to expectations, the solar industry's revenue is expected to grow 22.5 percent in 2011 compared to 15.4 percent for wind. Profits in the solar industry are expected to grow at 28.7 percent compared to 71 percent for wind. The high growth rate expectations for wind are due to the decline in 2010 profits. With 2011 forward P/E for the solar industry at 7.5 compared to 15 for wind, the margin of safety is way larger in solar stocks. The current forward P/E for solar stocks indicates that investors doubt the earnings growth rate in solar stocks; and this is where the upside lies. If the solar industry even gets close to 28.7 percent growth in earnings (anything over 15 percent might even suffice), this could send solar stock valuations way higher. On the other hand, the current forward P/E of 15 for wind on a 71 percent expected earnings growth makes wind stocks unattractive compared to solar stocks. If the wind industry does not deliver there will be pressure on wind stocks throughout 2011 unless expectations for 2012 earnings are revised significantly higher.
Solar & Wind industry EBITDA margin (2005-2010)
From the perspective of industry-profitability, solar energy is also more attractive than wind energy. Solar companies have historically produced slightly lower returns on equity compared to the wind industry with the drag coming from lower leverage and asset utilization. This is about to change as the solar industry is expected to deliver higher return on equity in 2010 and 2011 compared to wind, driven by increasing asset utilization and significantly higher profit margin.
Generally, the solar industry has higher operating (EBITDA) margins and less leverage compared to wind. This signals a healthier competitive situation and if the solar industry is able to increase asset utilization, return on equity could easily pass the 15 percent mark in 2012.
The extended tax grant program (1603) in the U.S. will support solar demand in 2011 and into 2012 and Saxo believes it will compensate the expected slowdown in Spain and Germany due to cutbacks on subsidies there.
With bullish expectations for 2011 from all solar companies, low valuations, increasing asset utilization and stable EBITDA margins, Saxo expects solar stocks are positioned to go much higher in 2011 when valuations multiples are expanding on strong earnings.
Risk assessment
Investing in solar stocks provides huge upside but this obviously comes with a couple of risk factors such as political, currency, demand and supply risk.
The political risk in solar investments is high because the industry is still heavily dependent on government subsidies. Germany is talking about cutting the feed-in tariffs for PV solar systems by 16 percent on July 1, 2011; political decisions are obviously an important risk factor. As the industry moves closer to grid parity the political risk will, however, slowly decrease which will lower the risk premium on solar stocks. With Obama's extension of the tax grant program (1603) political stability in the U.S. is secured in the short-term and the road to strong growth in U.S. renewable energy in 2011 is paved.
The biggest risk to their forecast is a significant collapse in the Euro compared to Asian currencies, as 75 percent of global solar sales are in Europe, while production is located in Asia. If this happens then operating margins could be substantially squeezed. According to Bloomberg, the two most respected and accurate currency forecasters, Standard Chartered and Westpac Banking, are both short-term bearish on the Euro and expect it to decline to around $1.20-1.25 by mid-2011. Third quarter statements from solar companies indicate the industry believes U.S. demand will compensate the falling Euro and demand in the Eurozone.
Concerns over low demand in 2011 (particularly in Europe due to declining feed-in tariff environment and tighter budgets) and excess production of solar panels have previously prevented multiples to expand despite increasing aggregate earnings in the solar industry. The latest outlook for orders in 2011 somewhat contradict this concern. The extended tax cuts in the U.S. will also add support for solar demand.
Solar energy is the future
The solar industry has evolved from infancy into a rapidly growing industry with increasingly economics of scale. According to Exxon Mobil's "Outlook for Energy -- A View to 2030" renewable energy including solar is set to grow at 9.6 percent annually until 2030.
General Electric's chief engineer, Jim Lyons, is predicting grid parity in sunny parts of the United States by around 2015 and that solar will eventually be bigger than wind. The biggest driver in achieving grid parity is production costs on solar panels. Renewable Energy Corporation and Q-Cells, the two biggest makers of solar cells expect to continue lowering costs for solar panels next year.
Life insurance companies are also a supporting driver for solar demand because they have entered the market as owners and are providing financing because solar parks provide a relatively stable income stream that is also independent of other assets classes. With internal rates of return on solar projects running around 8-10 percent with fairly low risk, this is a great opportunity for insurance companies to diversify their investment income.
The growth potential is enormous. The largest PV market in Europe is currently Germany and here solar only supplies around 0.3-0.5 percent of the total power production; so there is plenty of room for growth on a global basis.
Drop the ideology and go for performance
Whether global warming is a true trend or not renewable energy is here to stay because governments around the world want a cleaner and more fossil fuel independent energy source.
What Saxo has learned through the financial crisis is that when governments and central banks intervene in the markets it tends to do it forcefully and investors should not underestimate its impact on investment opportunities.
Saxo's message is this: do not underestimate the will of governments to support the solar industry going forward. They do not prefer subsidies to certain sectors, but they have to be realistic about this. Solar is rapidly moving towards grid parity, demand is soaring, governments want this energy source, the solar industry will eventually become competitive without subsidies and its size will eventually dwarf the wind industry. In 2011, the sun may shine on solar energy.
Disclaimer:
Saxo Capital Markets Pte. Ltd. ("Saxo Capital Markets") is licensed as a Capital Market Services provider and an Exempt Financial Advisor, and is supervised by the Monetary Authority of Singapore.
The author(s) and Saxo Capital Markets are not responsible for any loss arising from any investment based on any recommendation, forecast or any other information contained herein. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Saxo Capital Markets that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially in leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated.
You should carefully consider whether trading in leveraged products is appropriate for you in the light of your financial circumstances. You should be aware that dealing in products that are highly leveraged carry significantly greater risk than non-geared investments such as share trading. As such, you could both gain and lose large amounts of money. You may sustain losses in excess of the moneys you initially deposit and also in excess of the margin required to establish and maintain any positions in leveraged products.
For further information, please see:
sg.saxobank.com/en/about-us/pages/general-disclaimer.aspx