VPower’s 1H19 earnings indicated the Company was still suffering from its Asia to global transformation. We see some good signs coming from 1) release of announced project pipeline with accelerating pace; and 2) VPower’s refill of new project pipeline with substantial project scale through submitting more bids. We expect the Company to resume growth track in 2H19, and deliver high earnings growth in 2020.
- 1H19 profit declined 8.0% YoY. Revenue increased 10.5% YoY to HK$1,203mn, driven by sale growth of 6.4%/16.4% from SI/IBO business respectively. Major expenses were under well control on track with our full year estimates, while the Company recognized less other income and gains in 1H19 compared to last year. Finance costs continued to expand rapidly with YoY growth of 47.5%, and we believe it was a key item dragging VPower’s earnings. Net profit recorded HK$143mn, down 8.0% YoY.
- IBO pipeline in releasing phase. VPower added 175.5MW new IBO projects during 1H19, successfully replacing expired contract and expanding operating scales. The Company further enhanced its competitiveness in Myanmar market through adding another 109.7MW, and achieved breakthrough in Sri Lanka with project scale of 54.9MW. Mgmt. redeployed generators from Indonesia to other areas with higher profitability and longer contract terms. According to mgmt., VPower will have 70.3MW project in Brazil entering commercial operation by phases in 2H19. We believe those new IBO capacity will bring more capacity in 2020 with full year contribution.
- Future pipeline refilled with new opportunities. VPower released updated IBO pipeline projects with tenders/binding contracts of totaled 309.9MW, of which ~half are from UK peak shaving market. VPower made considerable IBO project bidding in Asia market during 1H19, and mgmt. expects results will be promising, which will likely enrich VPower’s project pool from 3-400MW to 1.2GW.
- Growth to resume from 2H19. VPower experienced significant earnings drag since 2H18 as the Company transformed from Asia to global platform. As the Company released its IBO pipeline, we expect VPower to resume growth in 2H19. Based on 1H19 results and more conservative assumptions on IBO project revenue as well as fuel costs, we trim FY19-21E EPS by 4.4%/29.9%/12.0% to HK 10/13/20 cents. Our DCF TP is cut from HK$3.68 to HK$2.90. Maintain BUY.
