Surging expenses led to earnings miss. VPower released FY18 results. Revenue surged by 38.6% YoY to HK$2,421mn, driven by expanding IBObusiness and surprisingly good SI genset sales. Admin expanses and financialcosts exhibited significant growth of 32.9% and 148.5%, respectively,substantially higher than our estimates. Mgmt. explained major admin andfinance costs increments were related to IBO-Iquitos project in Peru, which theCompany consolidated in early FY18. Other gain and expenses were largely inline. VPower recognized a share profit of HK$6mn from its PE fund investment,where the Company acted as a co-GP with a subsidiary under CITIC Pacific. TheCompany realized net profit of HK$213mn in FY18, representing a decline of35.7% YoY, and 22.7% lower than our estimates. We believe VPower is stillunder its transformation path from regional to global operation after its IPO,which led to its shuffling in earnings performance. We expect the Company’sperformance will start to turn stable from 2019.
IBO segment to release capacity growth in 2019. VPower added 88MW newprojects in FY18 （79.8MW in Peru, and 8.2 in China）， while 56.2MW old projectcontract expired in Indonesia. By end-FY18, VPower had 613MW IBO operatingfleets. We believe VPower is about to get rid of pipeline project delay due topolitical and operating uncertainties in emerging markets. According to mgmt.,the Company just had 109.7MW capacity commenced operation in Myanmar inFeb 2019, and had 212.6MW projects pending to be added from Sri Lanka,Brazil, China and UK. We expect VPower will release its capacity growth from2019, and those new capacity will have full year contribution in 2020.
New IBO projects will change revenue and margin structure. GPM from IBOproject exhibited decline by 13.2ppt to 44.2%, due to consolidation of Iquitosproject which included fuel pass-through as a component of total revenue. Mgmt. disclosed several new projects from Brazil and UK will also adopt thesame revenue recognition method, which will 1） lead to lower overall IBO GPMas contribution from such projects becomes higher; 2） increase the risk levelthat VPower will bear from changing fuel costs; but also 3） leave more room forVPower to pursue higher project return through superior energy efficiency andfuel costs management.
Surprising IS sales will resume normal in 2019. VPower realized 33.5% SIgenset sales growth in FY18, significantly higher than mgmt. guidance of lowteens. Mgmt. explained it was due to early fulfilling shipment from orderspending to deliver in 2019 as per data center customers’ request. The Companyexpects SI sales to resume normal, and may exhibit a YoY decline in 2019. Weexpect the decline will not affect overall earnings growth of the Company.
Adjusting business structure to control gearing. Rapid expanding IBO fleetshad brought significant gearing pressures on VPower’s earnings as well asbalance sheet. Mgmt. was aware of the issue, and planned to adjust businessstructure for a healthier balance sheet and sustainable future growth. TheCompany announced to establish a JV, and planned to sell all IBO projects tothat JV with consideration ranging from US$150-165mn. The action will moveVPower’s IBO projects in Indonesia off balance sheet, and turn those projects aspart of equity investment. Mgmt. expected to reduce gearing from the action,and the newly established JV could help the Company to participate in moreproject opportunities with larger scale. According to the book value of thoseassets held for sale at HK$957mn, we expect VPower to at least realize adisposal gain of HK$213mn. We had not yet factored in the assets sale in ourmodel until further disclosures.
Core earnings growth to accelerate in 2020. Based on operating and pipelineupdates, we adopt more conservative assumptions on IBO capacity assumption. We trim FY19/20E EPS estimates by 25.0/1.1% from HK$13.9/19.1 cents toHK$10.4/18.8 cents. We expect VPower to deliver FY18-21E earning CAGR of39.4%, and earnings will likely to experience significant growth in 2020, due tofull year contribution from new capacity added during 2019. Our DCF TP isrevise down by 11.5% from HK$4.16 to HK$3.68 per share. Maintain BUY.