SUNPOWER: Eyes Green Assets in Battle for Blue Skies

This article by Jennifer Tan (left, Director, Research & Products,  Equities & Fixed Income, at the Singapore Exchange) was first published in SGX's kopi-C: the Company brew series. The article is republished with permission.

Engineer Frank Ma strives to live a life in 3D - the three Ds of diligence, determination and discipline, that is. For the Co-Founder and Executive Director of SGX-listed environmental protection solutions provider Sunpower Group Ltd, these defining qualities are touchstones. Frank Ma Ming, 53, co-founder of Sunpower Group. NextInsight file photo"Throughout my life, I've always set targets, and worked hard to achieve those goals," said the graduate of Nanjing Chemical Engineering Senior College, who also holds a Master's degree in Engineering Management from the University of Shanghai for Science and Technology. Ma's tenacious spirit was never more obvious than when he taught himself to speak English more than three decades ago. "During my university days, my English was really bad. After graduation, I decided to do something about it," he recalled. Having no teacher, and armed only with a dictionary and a voice recorder, Ma began memorising and reciting 20 English words every day for a year to build up his vocabulary. Today, his command of and fluency in the language belies that self-taught journey. To be sure, Ma's focus and perseverance have stood him in good stead in growing Sunpower, which he founded in 1997 together with his university classmate, Executive Chairman and Chief Executive Officer Guo Hongxin.

In the late 90s, China began developing its petrochemical industry through oil and gas enterprises like China Petroleum & Chemical Corporation, or Sinopec. But the need to import equipment - which resulted in long delivery lead times and escalating costs - was a serious bugbear.

"We were able to fill the gap in the market by supplying Sinopec with equipment, like pipe supports, that were made with local technology and know-how. This helped them save time and money," he said.

That was the milestone that marked the establishment of Sunpower's foundation business - Manufacturing & Services (M&S). This segment makes customised energy-saving and environmental protection products with proprietary heat transfer technologies for diverse industries, ranging from chemicals and petrochemicals to pharmaceuticals and metallurgy.

Sunpower has served over 1,500 customers, including top-notch global corporations in more than 30 countries to-date, and about 70% are repeat clients.

From its initial business of pipe supports, the Group went on to develop high-efficiency heat exchangers and pressure vessels, as well as heat pipes and heat pipe exchangers for recovery of waste heat in petchem, steel and chemical projects. Much later, it developed proprietary flare and flare gas recovery systems, used to recover petchem by-products from flare gas generated in a refinery during production.

China's Smog Woes

But the petrochemical sector has its downsides, including capacity limitations and a cyclical nature. "We realised we needed to diversify, and expand our technology to other sectors such as pollution control," Ma noted.

China has increasingly suffered the scourge of polluted air since the country began industrialising, with inefficient, coal-fired boilers in industrial parks identified as one of the biggest culprits contributing to the heavy smog that regularly blankets its skies.

The window of opportunity for Sunpower to break into this market finally widened in 2015, when the Chinese government stepped up efforts to impose stringent environmental protection laws - including compulsory shuttering of small boilers and promotion of clean coal combustion - to improve the nation's air quality.

In 2016, Sunpower repositioned itself as an environmental protection services provider through its Green Investments (GI) business. The unit invests in, develops and operates centralised plants to supply steam, heat and electricity on an exclusive basis in industrial parks, replacing existing, inefficient coal-fired plants.

While its technology cuts the amount of coal used in power generation, it also supplements with alternative feedstock, such as sludge. Using its proprietary energy-saving and long-distance steam distribution pipeline technologies, energy- and time-efficient delivery to customers is ensured.

Sunpower is building a sizeable portfolio of such GI projects to generate long-term, recurring and high-quality cashflows, based on typically 30-year concession agreements.

This unit - the Group's value creator and growth driver - boasts a fully integrated business model, backed by its own design institute, in-house manufacturing and services solutions, as well as proprietary technologies.

With more than 400 researchers and design engineers, the Group owns 154 patents, including 60 invention patents. It has also taken the lead, or has participated, in the drafting of five engineering-related national standards that have become benchmarks for the rest of the industry.

The long-term growth potential of its GI business is secured by a robust pipeline of projects in different stages of evaluation, with total value pegged at more than RMB3.2 billion. As at August 2019, eight projects are in operation, while another five are either under construction or in the design phase.

Although the GI unit is in early stages of development and still ramping up, it has already contributed significantly to the Group's underlying operating cashflow for the first half of 2019, which has more than doubled year-over-year. GI revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) in 1H 2019 also roughly tripled from the previous year, accounting for more than 36% and 65% of group revenue and EBITDA respectively.

For Ma, the GI unit is akin to an expressway toll booth. "Steam is a non-discretionary input for our clients, and we're exclusive suppliers for the industrial parks we operate in. That gives us captive customers and the ability to obtain advance payments from them," he said.

"In that sense, we're like toll-keepers, collecting cash regularly."

This first-mover advantage, combined with its technological expertise and strong track record, gives Sunpower a significant competitive edge, he noted.

"Our stable and growing M&S business complements our GI unit by efficiently controlling the cost of construction and eliminating project delays. This combination provides synergies that sets Sunpower apart from less-integrated firms."

Targeting Clear Skies

In 2019, the Group was recognised as one of the Best Managed Companies in China by Deloitte Touche Tohmatsu, the largest of the "Big Four" accounting and audit firms, in the first year the award was introduced to the country.

Listed on Singapore Exchange since 2005, Sunpower has a current market capitalisation of about S$365 million. In the 2019 year-to-date, the stock has generated a total return of 39.1%, outperforming total returns of 6.5% and 8.2% for the benchmark Straits Times Index (STI) and broader FTSE ST All-Share Index respectively.

Looking ahead, prospects are bright, with environmental protection and pollution control continuing to play increasingly pivotal roles in China's national policies. "There's still much to be done to meet the central government's pollution reduction targets, and this offers enormous opportunity for us," Ma added.

A case in point is the Ministry of Ecology and Environment's crackdown on Shandong provincial officials for missing air quality targets earlier this year. "Such stringent enforcement by top-level officials will drive the long-term prospects of China's environmental protection industry, in particular, the anti-smog services sector that our GI unit is targeting."

To boost its GI operations, Sunpower plans to invest RMB2.5 billion of equity in green assets by 2021, compared to its equity investment and commitment of RMB1.6 billion as at mid-2019.

In terms of capacity, which includes plants under construction, the Group aims to grow its current gross annualised steam capacity of 21.5 million tons to 30 million tons, and current gross annualised electricity generation capacity of 2.1 million megawatt hours to 3.5 million megawatt hours.

This expansion will be funded internally and via capital from its convertible bond tranches. In 2017 and 2018, two strategic private equity investors - DCP Capital Partners and CDH China Management - invested in Sunpower by subscribing for its convertible bonds.

The Group's mergers and acquisitions (M&A) strategy targets projects that serve a diversified customer base in stable, domestic-oriented, and cashflow-generative industries, such as textiles, printing and dyeing, food and beverage.

"We're also interested in brownfield projects that can contribute immediately to revenue and earnings, and where we can use our technology to further improve the acquired company's operating and financial performance," Ma noted.

Promising Potential

Currently, the Group remains focused on GI prospects within China. "The market potential is huge, and that's our priority," he said. "The challenge is choosing the right target that will guarantee success according to our financial objectives, and that's where careful analysis and due diligence come in."

A self-confessed "control freak", Ma is all about drilling down into the specifics. "I'm a very detailed person, and I always try to prepare, forecast and plan as much as I can," he said with a grin.

In this regard, managing a business will always be his first love. "My passion lies in industry - developing strategy, overcoming challenges, driving innovation, and turning that innovation into sustainable cashflows and profits."

His fervour for enterprise has its roots in China's industrialisation and urbanisation drive, which kicked off as early as the 1930s - a period in the country's history marred by civil war and political strife.

"Back then, many enterprise owners believed manufacturing would form a base for the nation's development, and the setting up of industries would build the fundamentals of our economy, and thereby save our country," Ma said.

That belief has also laid the foundation for China's speedy transformation into an industrial powerhouse during the turn of the century. "That's why I have chosen to stay in industry, even though there have been opportunities to break away and do something different," he added.

Sunpower Group Ltd

Founded in 1997, Sunpower is a China-based environmental protection solutions company specialising in proprietary energy-saving and clean power technologies, with a strong focus on anti-pollution investment projects. The Group operates two segments - Manufacturing & Services (M&S) and Green Investments (GI). The first segment develops customised energy-saving and environmental protection products with proprietary heat transfer technologies for diverse industries. The second segment - GI - focuses on the investment, development and operation of centralised heat, steam and electricity generation plants that replace existing, inefficient coal-fired plants in industrial parks. The Group is building a sizeable portfolio of GI projects to generate long-term, recurring and high-quality cashflows, based on typically 30-year concession agreements.

The company website is: en.sunpower.com.cn.

Click here for the company's StockFacts page.

For the six months ended 30 June 2019 financial results, click here.

For SGX's 10 in 10 report on Sunpower Group Ltd, click here.

About kopi-C: the Company brew

Text: Jennifer LH Tan Photo: Company file kopi-C is a regular column on the SGX Research website that features C-level executives of leading companies listed on Singapore Exchange. These interviews are profiles of senior management aimed at helping investors better understand the individuals who run these corporations. For previous editions of kopi-C: the Company brew, please click here.