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Sunpower Group (Ticker: 5GD) – Value Stock or Value Trap?

Questions › Category: Valuation Quadrant › Sunpower Group (Ticker: 5GD) – Value Stock or Value Trap?
1 Vote Up Vote Down
Royston Yap asked 2 years ago
Hi Victor and Fifth Person Team,  Will like to start off by saying I am a big long-time fan of your content and am grateful for all the teachings your team imparted to us through your website and Youtube Channel throughout the years! It is very much appreciated and hence I signed up for this course as 1) I will love to learn more from you guys and 2) a sign of gratitude and acting as a form of tuition fees to you guys (similar to Monish Pabrai's lunch with Buffett) =D  Now a warning to a lengthly post coming up but I think this might intrigue the team, so appreciate your patience on this. I have summaried below a background, my thesis, key risks that I identified and then my questions.  Background
  • I started taking notice of this obscure SGX listed stock, Sunpower Group (Ticker: 5GD) back in late 2021. This company was in two key businesses which are all situated in China, 1) manufacturing & services - High Efficiency Heat Exchangers and Pressure Vessels; Pipeline Energy Saving Products; Heat Pipe and Heat Pipe Exchangers etc. & 2) Green investments - distribution of energy and steam to local businesses and households in certain provinces in China 
  • When management decides to privatise its cyclical Manufacturing & Services business and distributed a special dividend, I was intrigued by their other business, Green Investments (GI), that they are keeping it public. To be clear, I started my investment post Ex-Dividend.
  • For GI, the management promises continuous and sustainable revenue growth and cashflow generation, with at least low-mid teens ROI on these coal-powered power plants. So far, they have kept to their promise with growing revenue and cashflow numbers, except during height of COVID period and when coal prices skyrocketed.
Thesis and Risks I shall start off with my thesis, which is relatively more straightforward. 
  1. I read through all their annual reports and prospectus since 2003, and the management has mostly delivered their promise of growing shareholder value and executing on their strategy as what was discussed in their annual reports.
  2. Realised shareholder value by giving out substantial dividend. 
  3. Management remained intact even after transiting to GI. 
  4. Valuations are "cheap", current metrics as at 22th Jun 24 - PE: 5.85; PS: 0.324; PB: 0.5
  5. Exceptional moat as they are running based on BOT models, with 30 years concession periods granted by local authorites
  6. Operating cashflow increasing YoY, CAPEX fluctuates
  7. Price mechanism in place to adjust selling prices of their steam and electricity, if coal prices increase (management doesn't mention about what happens when coal prices fall)
Now comes the risks:
  1. They have high long term (& short term) debt relative to cash.
  2. Their balance sheet overall seems strong as they are heavy-weighted on 'intangible' assets (projected future revenue from BOT projects and their existing plants), but most of it offset by high long-term debt.
  3. Current ratio as of most recent quarterly update is less than 1.
  4. Convertible bonds of ~USD170M due Apr 2025 paying ~10% interest to bondholders, on their current market cap of SGD206M. If all these CBs are converted to stock, outstanding shares will double.
My Questions
  • My DCA-ed average price is S$0.40 (diluted market cap of S$590M), stock currently trading at S$0.255 (as at 22nd Jun 2024).
  • Based on the above (may not be comprehensive but these are key details), my questions encompass most of the quadrants, and they are as follow:
    1. Do you think this business is 'high quality'? Recurring cashflows with virtually no competitors?
    2. From my understanding of utilities companies, they are usually leveraged up (e.g., Sembcorp Industries, Berkshire Energy etc.). Therefore, is it normal for Sunpower Group to have such debt levels? What are key risks in your opinion?
    3. If the operating cashflow or profits (although still growing) may not be able to cover their convertible bonds/debts, is it a red flag that I should get out before it is too late? i.e., going bankrupt or issuing more shares?
    4. Not sure if this is a weird question, but i have noticed that the format and wordings of their press releases and annual reports are roughly the same. Is this a red flag too? Although I understand their business doesn't deviate much...
    5. Am i missing something here that the market is getting correct but I am not?
If you have read until here, thanks for indulging with me in this puzzle that I had for the past 3 years, and hopefully not to many more...  Looking forward to how you see this from your perspective!
1 Answers
0 Vote Up Vote Down
Victor Chng Staff answered 2 years ago

Hi Royston,

I have not analysed this company before, but I did a quick look at it. Here are my thoughts about it.

 

 

 

1. I don't think this business is high quality, as the company constantly requires raising capital despite having a growing cash flow. Compare the past ten years of capital raised vs. the dividend given payout. The capital raised still exceeds the dividend.
 

2. I think the debt level is too high; they may have financial issues or need to raise more capital in the future.

 

 

3. All is explained in points 1 & 2.

 

 

4. It is very common in Asian markets.

 

 

5. This company has a history of being investigated by CAD. you can read the news here (https://www.businesstimes.com.sg/companies-markets/sunpowers-exec-chairman-exec-director-lodge-report-cad-over-unauthorised).

 

 

Feel free to ask me if you still have any more questions.

Royston Yap replied 2 years ago

Thanks Victor!

on 2., what is an appropriate debt to equity/Op cashflow for utility companies?

on 5., it seems like management borrowed loans against their shares (~10% of their shareholding – deemed interest of 150M and 130M shares) and found their shares ‘missing’ (https://www.eccourts.org/judgment/america-2030-capital-limited-v-sunpower-business-group-pte-ltd), hence they reported this to CAD. Is this the same as being investigated by CAD?

Appreciate your thoughts on the above =D

Victor Chng Staff replied 2 years ago

Hi Royston,

1. A reasonable debt level will be less than 5x for debt to cash flow.

2. My bad. I did a quick look without looking in detail. Overall, collateralising personal shares to take a loan is also a big red flag for us because if they default on the loan, the lender will likely force sell the share. I will deemed is behaviour as not so conservative for the management.

Royston Yap replied 2 years ago

Thanks Victor for your insights!

1. This less than 5x metric applies to utility companies too?

2. No worries! A lot of big/large cap companies’ CEOs also borrow against their stock holdings/options. Is this a red flag to you then? What will be key differences for both scenarios?

Victor Chng Staff replied 2 years ago

Hi Royston,

1. I will stick to that ratio criteria if I am analysing.

2. They are slightly different if you are talking about U.S. companies’ CEOs borrowing against their stock holdings. The U.S. CEOs did that because of taxation. If they sell their shares, there will be tax, but if they borrow against the stock, then the taxation is not there. Compared to here, Asia is a tax haven. In general, this behaviour, which I usually view as the CEO, is aggressive in nature, which I tend to avoid.

Just so you know, these are my opinions; I could be wrong too since I have never invested in companies where the CEO pledged their shares for a loan.

Royston Yap replied 2 years ago

Thanks Victor for this insights! I will think about it and monitor the company and growth in operating cashflows!

Victor Chng Staff replied 2 years ago

Welcome Royston :)