From Philip Capital:

Renewable Energy Asia Group - Return to black for HY11

Revenue for HY11 up 369.6% y-y to RMB193.1m, net profit up to RMB11.7m

• HY11 results were within our expectations
• Revenue will be boasted by an additional production line and wind farm
• Maintain Buy recommendation and lowering our fair value slightly to S$0.45

we will see improvement in the margins after the start-up phase and the addition of 1 production line to meet the delivery schedule of its order book. Outlook for the second half of the year remains bright; its first wind farm which started operations in Oct’10 will contribute to its earnings and possible contract wins for its manufacturing arm.

Recent price drop unwarranted

After the successful placement of shares of REA at S$0.30, its share price has dropped about 30% to close at S$0.21 on 12th November 2010. We feel that this drop is unwarranted as the fundamental business is still doing very well and they are expected to record net profits of RMB47.5m for FY11E reversing from a loss a year ago. Its EPC and manufacturing segment will likely see more contracts from China Datang as China Datang renewable energy arm is expected to list at the end of the year. Second half of the year will also see the likely renewal of annual master contract with the European off-shore turbine manufacturer.

Agreement to develop a 1200MW wind farm in Jiuquan, Gansu Province

REA announced that it has entered into an agreement with the Jiuquan government to develop a wind farm of up 1,200MW in capacity over 10 years in two phases. The Jiuquan government will provide the land resources and infrastructure for the wind farm project. REA will also invest in a local production facility to produce wind turbine components and its products will be given first consideration to other wind farms operators in the city. The project will also involve other renewable energy sources like solar, hydropower and biomass power generation facilities. A wind farm of such scale requires large amount of capital and it can easily cost about RMB 9b to develop into its full capacity. We expect REA to start developing the wind farm in phases from Apr’11 once they received all the necessary approvals.

Valuation and Recommendation

We are maintaining our Buy recommendation and lowering our fair value slightly to S$0.45 to reflect the higher interest rates in China. REA provide Singapore investors a unique opportunity to participate in the fast growing renewable energy sector in China. We are valuing REA based on SOTP (unchanged), 9X FY12E expected earnings on its EPC and manufacturing business, using DCF model to value its wind farm business. Its manufacturing and EPC business will propel its growth for the first 2 years and they are likely to announce more wind farm equipment manufacturing contracts as more offshore wind farms are being developed around the world especially in China. However we would also like to see them disposing its fastening business which will likely result in a re-rating of REA. Our fair value translates to PE of 11X FY12E earnings which is still relatively cheap compared to its closest peer who is currently trading at a PE of 23.2X.

Placement exercise in Sept’10; a positive for REA Group

This placement exercise will allow REA Group to kick start its wind farm operations business providing the capital to buy the 49% stake in 49.5MW wind farm in Huaishuo as announced earlier. The capital raised will also be used for 1) working capital 2) partial payment for its manufacturing facilities that they are currently renting and 3) develop the wind farm concessions on hand.

Development of offshore wind farm sector

Huaneng Renewable Energy recently announced that it will invest RMB 6b in a 300MW offshore wind farm project located in Dafeng, Jiangsu Province. This project will likely enhance offshore wind farm equipment manufacturing capability and provide officials with a better idea on setting the laws for offshore wind farm development. The relevant authorities also plan to award another 4 projects with a total installed capacity of 1,000MW to winning bidders. The offshore wind farm projects are located in Binhai and Sheyang, Jiangsu Province. We think that these developments bodes well for REA Group as they currently has 3,000MW of offshore wind farm concession on hand which they could start developing when formal laws and feed-in tariffs are determined by the authorities.