XYE’s 2H23 results came in below our estimates, as the shift towards RMB borrowing seems a tad unhurried and resulted in higher-than- expected finance expenses. That said, we reckon XYE is becoming attractive again after the underperformance over the past 7 months. The rising returns of its new projects (thanks to declining unit capex) may drive up its ROE and DPS in the next two years, and undemanding valuations as well as low expectations are quietly rebuilding its investment case, even if it maintains current payout ratio of c.50%. Upgrade to BUY rating with a lower TP of HK$1.50, implying 0.9x P/B.
　　Key Factors for Rating
　　2023 results. XYE’s 2023 results of HK$993m was below our estimate, mainly due to higher-than-expected finance expenses (+34% YoY). The board recommended a final dividend of HK2.6 cents per share, putting full-year DPS at HK6 cents. The management expects largely stable payout ratio (c.50%) for 2024, which is subject to board scrutiny at next year’s board meeting.
　　New project acquisition. XYE also announced the decision to exercise call option to acquire 790MW solar farm from parentco Xinyi Solar (968 HK) for a consideration of RMB475m. The unit EV of the proposed acquisition was only HK$3.0/W on our estimates (two projects are not fully completed and may push up the final unit EV slightly), representing potentially higher profitability from the new projects. We believe the declining module price, coupled with XYS’s track record of efficient control of project costs, would help to improve XYE’s overall profitability, or at the very least help to combat the headwind of market-　based tariff uncertainties. XYE plans to add 700-1,000MW new grid-parity projects in 2024, and we expect this will help to lift its DPS to HK7 cents.
　　Financing costs. Roughly 13% of XYE’s loans are onshore borrowings, and the company plans to further shift to RMB borrowing in 2024 to take advantage　of the rate gap. It is able to secure 15-year project loans in RMB at 110-130bps　below 5-year LPR (3.95% since 20 Feb). We believe this will help XYE to stabilise and eventually reduce its overall borrowing cost over time.
　　Key Risks for Rating
　　Lower-than-expected realised tariff;
　　Higher-than-expected curtailment;
Higher-than-expected borrowing cost.
　　Valuation
Upgrade to BUY. We cut XYE’s 2024/25E earnings forecasts by 16%/14% mainly on higher financing cost assumptions. Our DCF-based TP is cut to HK$1.50 on lower EBIT and higher WACC assumptions (6.1%). Still, our new TP has 36% upside from last close and implies undemanding 0.9 forward P/B.