Xinyi Energy: Time Needed to Restore Investor Confidence; Shares Undervalued

No-moat Xinyi Energy’s 03868 year-to-date close-to-50% share price fall has been disappointing, with the market reacting to reduced dividend payout, uncertainty over the collection of subsidy payments, and rising financing costs. We cut our fair value estimate to HKD 2.04 from HKD 2.64 after incorporating the depreciation of the Chinese yuan, and higher midcycle accounts receivable days given the slow subsidy collection. We also raise our weighted average cost of capital to 9.6% from 8.6% to reflect the increased uncertainty. Being a non-state-owned enterprise, we think Xinyi Energy may be at a disadvantaged position in terms of getting preferential borrowing rates and speedy settlement of subsidies owed to it when compared with its SOE peers. While the firm remains undervalued, we don’t expect a rerating in the near term, as it will take time for Xinyi Energy to deliver earnings improvement and rebuild investor confidence.

On a positive note, major shareholder Xinyi Solar remains confident in Xinyi Energy’s outlook and continues to increase its stake in the company. Xinyi Solar currently owns about 51.6% of Xinyi Energy’s total issued shares, from around 50.9% in June 2023.

Given the declining solar module prices, we believe the firm should be able to achieve its plan to acquire 700 megawatts-1,000 megawatts in 2023. We forecast Xinyi Energy’s capacity to grow at a CAGR of 19.7% through 2022-27, supported by its sound balance sheet, with a net gearing ratio of 35% as of end-June 2023. The change in dividend policy should also free up more resources for the firm. Recall that Xinyi Energy previously aimed to distribute not less than 90% of its distributable income annually. However, it changed its dividend policy in 2023—it now considers the firm’s financial resources and funding needs, with no fixed payout ratio.