Xinyi Energy reported FY22 revenue of HK$2.32bn (+0.81% YoY), and profit attributable to shareholders was HK$0.97bn (-21.17% YoY), lower than our expectations. Committed to the promise of super-high proportion of dividends, the company plans to pay dividend of HK$551m around 4 Aug of HK$0.074 per share, and the full-year dividend reach HK$1.11bn (-11.4% YoY), but dividend distribution still accounts for 100% of the distributable income, with a dividend yield of 6.3% based on stock price on 10th March.
　　Installed capacity failed to meet expectations. In 2022, the company purchased 520MW PV power plants, which failed to reach installation target of 1GW, mainly due to the serious epidemic in 1H22, poor logistics, and high PV module prices, which affected company’s installation speed. By the end of 2022, the company has a cumulative capacity of the solar power stations of 3,014MW (20.9% YoY).
　　Profit decline due to tax cuts and subsidy policies expiring. From 2021, the central government no longer subsidize newly-filed centralized, industrial and commercial distributed photovoltaic projects and implement grid parity. In addition, Xinyi’s early projects before 2019 no longer enjoy the preferential tax period of the policy of Three exemptions and Three halving, resulting in an increase in company’s income tax rate. In 2022, Xinyi’s income tax expenses amounted to HK$0.298bn, with the effective income tax rate of 23.44% (+8.2ppts YoY). We believe that the company’s current income tax rate is close to 25%, and the impact of future subsidy reduction on profits will be reduced. Considering that PV power has power generation priority and guaranteed consumption, as the marketization of green power continues to deepen, we think company’s income from parity projects will increase, driving the company’s profitability to rebound.
　　Adhering to the direction of large parity projects, and actively exploring distributed projects. In 2023, Xinyi plans to acquire large-scale parity projects of 700-1000MW from its parent company Xinyi Solar Energy and independent third party companies, among which 300MW in Hainan has been acquired in February. The company acquired distributed PV project of 44.7MW in 2022.Last year, newly installed distributed PV capacity reached 51.1GW in China, accounting for 58% of the total installed PV capacity. Since Xinyi has rich experience in PV project operation, we expect distributed PV will become company’s second development curve.
　　Subsidy paid back smoothly, and adequate cash flow guarantees project development. The company has 19 projects of 1724MW that included in the subsidy list of renewable energy projects. As of 31 Dec 2022, the company’s receivables of electricity price adjustment reached HK$3.127bn, a decrease of nearly HK$2bn from HK$5.020bn in 1H22, indicating that the company received a significant amount of subsidy in 2H22. As of 31 Dec 2022, the company’s cash in hand amounted to HK$1.791bn. Considering that the reducing impact of epidemic and decreasing price of PV modules in 2023, the abundant cash flow will help Xinyi to expand installed capacity smoothly.
　　Maintain Outperform. Considering the weakening of electricity price adjustment income in the future, we revise down our net profit forecast from HK$1.343bn to HK$1.115bn in 23E, from HK$1.555bn to HK$1.255bn in 24E, and forecast net profit of HK$1.332bn in 25E, with EPS forecasts of HK$0.15 in 23E, HK$0.17 in 24E and HK$0.17 in 25E. We are still optimistic about stable dividend returns due to the increase in installed capacity. We expect the company to stick to its strategy of distributing 100% of distributable income and expect Xinyi’s DPS of HK$0.173 in 23E, and dividend rate reach 7.3% corresponding to the latest share price. Maintain Outperform rating.
　　Risks: Expectation of interest rise. The project development speed may be not as fast as expected.