COMTEC Solar (712.HK) BUY (TP: HK$2.55 (from HK$2.08)) Timely capacity expansion yields returns Comtec’s expected strong 1H10 performance, as mentioned in its positive profit alert on July 26, 2010, is predicated on strong demand for its 156mm by 156mm wafers, lower polysilicon raw material costs, and improved production operational efficiencies. We believe that Comtec’s timely capacity expansion, following its Global Offering in October 2009, has helped it to avoid the industry blood bath in 2008 / 2009. More significantly, it has enabled Comtec to capture significant growth opportunities, at a lower cost base, in an industry where only the most robust will survive. We have revised upwards our EPS estimates for FY10F/11F/12F by 34%/20%/48% respectively. Our revised EPS estimates translate to a 163.5% CAGR (FY09A-12F). At the current price, Comtec’s 12-month forward (FY10F/11F) EV/EBITDA of 3.61x is below its peers’ 7.27x. We reiterate a BUY on Comtec, with a revised TP of HK$2.55, tagging the shares at 5.0x 12-month forward EV/EBITDA Around 60% of sales volume is based on longer-term frameworks. Based on a 1H10 period capacity of 100MW and 88% utilization, we estimate 1H10 consolidated turnover of RMB428.33m and a gross margin of 21.1%. This gross margin estimate is based on lower polysilicon costs of about US$50/kg currently, and is an improvement on the 17.2% achieved in 1Q10A. For the full year, our turnover estimate of RMB1.36bn is based on a production volume of 270MW (at 90% utilization). We believe that Comtec should be able to capitalize on the gradual decline in spot polysilicon price, as it purchases 87-88% of requirements from the spot market. This should enable it to expand its FY10F gross margin to 21.0% (from 10.8% in FY09A). Capacity expansion on track. By 3Q10, Comtec expects to have 600MW installed capacity, and plans to increase this to 1GW by 2011. According to management, at least two-thirds of FY10F/11F production capacity has been committed to longer-term framework agreements with major solar cell makers such as Suntech (STP US). This enhances revenue visibility. Reiterate BUY, with revised TP of HK$2.55. Incorporating an estimated 3.6% yield, this translates to a potential 35% upside over the next 12 months.
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