Xinyi Energy: Rights Issue Will Improve Balance Sheet but Weigh on Near-Term Sentiment

We think Xinyi Energy’s 03868 1-for-10 rights issue on a nonunderwritten basis at HKD 2.19 per rights share will help to improve its balance sheet. However, near-term share price performance may be capped by this dilutive exercise, in our view. Despite that, we keep our fair value estimate of HKD 3.12, and we believe the shares look attractive now with dividend yield of more than 7% in 2023.

The subscription price represents a 9.9% discount to the closing price on April 14. The exercise will result in a 9% earnings dilution if fully subscribed and raises about HKD 1.63 billion of net proceeds. Xinyi Energy plans to use the funds to refinance its bank borrowings and for general working capital purposes. In our view, the rights issue is a surprise for investors given that the firm’s financial health remains sound, with net gearing ratio of 27% as of end-2022. We think this could be a pre-emptive move for Xinyi Energy, given the funding needs for ongoing capacity expansion and the company’s expectation that global interest rates will continue to increase in the near term.

Looking past the near-term interest rate concerns, we think Xinyi Energy’s long-term outlook remains positive. We forecast Xinyi Energy’s capacity to grow at CAGR of 19.7% through 2022-27, underpinned by falling module prices and the parent’s pipeline of solar farm assets. Hence, we anticipate Xinyi Energy’s net profit to grow at a five-year CAGR of 15.6%.