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Sineng Electric: Endless Energy for Limitless Green


300827.SZ


Key Points

  • Sineng Electric is in a fast-growing industry and can catapult its way to take advantage of the expansion in the sustainability trend
  • Sineng Electric is one of the top manufacturers in the PV inverter industry and is growing an energy storage business line to provide a one-stop solution for its clients
  • The Chinese government’s relentless push for solar PV to overtake hydropower to become the most significant contributor to China’s new power generation capacity for its 14th Five-Year Plan (FYP, 2021 – 2025).

(Reading time: 20 minutes)

“In Xi Jinping’s China, memories disappear like shadows. The country refuses to remember and prescribes future without past.”

 – 艾未未 Ài Wèiwèi –

The 21st century has proven to be a volatile, uncertain, complex and ambiguous environment and chaos in the form of anomaly, novelty, unpredictability, transformation and disruption regularly descends as what we have come to take for granted reveals itself as unreliable.

In today’s day and age, we are driven to stand on the frontier, one foot within order while stretching the other tentatively into the beyond. The EU targets to reduce net-zero carbon emissions by 2050 and to keep global temperatures below 2°C. It seems like the world is waking up just to realize that it is in a dire situation and that there is only limited time left to avoid a climate crisis. The shift towards increased sustainability is one of the major trends that are now shaping demand and changing many traditional industry structures.

Already today, the European Union requires all suppliers to show sustainability certifications. The energy sector is the source of almost 90% of China’s greenhouse gas emissions [1] and even without any further investment in new fossil fuel assets, China’s energy-related emissions would still only decline very slowly. If the existing emissions-intensive infrastructure in China today continues to operate in the same way it has in recent years, it could result in 175 Gt of CO2 emissions between now and 2060. This is the equivalent of one-third of the remaining global emissions budget that could limit the global temperature rise below 2°C. To meet the climate goals, the energy transition must expand the current energy infrastructure to encompass new insights into technologies and energy policy. Regulations are likely to extend along the supply chain and increasingly tighten sustainable energy requirements in manufacturing and upstream supply chain operations.

Within China, the population is growing more sustainability-conscious. 78% of Chinese companies cited “regulatory and standard requirements” as the top driver for improving their efforts to address climate change, 73% of Chinese consumers would be more loyal to a company if it helped them contribute to social and environmental issues and 55% of Chinese employees would prefer to work for a company that focuses on environmental responsibility, even if it pays a lower salary. For firms, following the status quo is no longer sufficient.

Stocks with an impact on the transition of energy markets are highly interesting for growth investors. This analysis helps you increase your understanding of the energy market, its developments and China’s Sineng Electric’s potential within tomorrow’s sustainability industry.

1. The Company

Sineng Electric Co., Ltd. (300827.SZ) manufactures and distributes solar energy equipment. The company produces grid-connected photovoltaic inverters, energy storage bidirectional converters, and other related products. Sineng Electric also offers photovoltaic power plant operation, maintenance, development, and new energy automobile charging services [2]. The company was established in 2012 and is headquartered in Wuxi City, China [3]. In 2020, Sineng created 90000 GWh of clean electricity and had an annual production capacity of 13 GW [4]. In 2021, Sineng opened a PV inverter factory in China’s Ningxia, increasing its annual production capacity to 23 GW [5].

Sineng offers a broad range of solutions and services spanning from commission, installation and maintenance [of solar energy equipment] across the world. Sineng Electric has established a modern PV inverter production base in Wuxi, China. It has been awarded the “Green Factory” award by the Ministry of Industry and Information Technology of China and has been contracted as the core supplier of inverter solutions for the “Chinese Photovoltaic  Top Runner Program” for three consecutive years. To meet exponentially increased local demands and provide on-time delivery and service, it has established a factory in Bangalore, India in 2018. Sineng was listed on the Shenzhen Stock Exchange in  2020 and it aims to increase investment in research and development (R&D) for strategic innovation to help get to that “next level” of product development. Sineng Electric is increasing investment in research and development (R&D) for next-generation product development.

The company has successively established strategic partnerships with famous world-class companies such as Tata and Softbank. As one of the world’s leading manufacturers of photovoltaic inverters, Sineng Electric has continuously introduced more advanced product solutions and services with its industry-leading R&D strength and technological advantages and has ranked among the top global exporters for many years. Sineng Electric’s PV inverter shipments in Asia ranked top three in 2019 and the company will strive to expand the international market, further implement the globalization strategy, and grow into a best-in-class, global power supply company [6].

Vision

Adhering to its philosophy of Sincerity, Unity and Progress, Sineng Electric is willing to absorb the outstanding business philosophy and technology platforms from leading players, so as to provide the world with advanced power electronics products and solutions underpinned by innovative technologies. Sineng Electric endeavours to provide clean energy for mankind, to realize sustainable development, and to innovate energy production, and become a world-class producer of power products [7]

History

  • 2012: Sineng Electric is founded
  • 2014: Sineng acquires Emerson‘s (a fortune 500 listed company) PV business and with it, cements its place as a world-class power electronics technology platform.
  • 2016: Sineng Industrial Park in Wuxi opens
  • 2017: Sineng starts expanding its market overseas and builds up its global service network.
  • 2018: Sineng opens 1st overseas manufacturing base in Bangalore, India
  • 2020: IPO in Shenzhen Stock Exchange ($56.43 million raised)

Products:

Sineng Electric has 3 product offerings: 1) PV Inverter, 2) Energy Storage, 3) Power Quality Control/ Maintenance

1) PV Inverter

2) Energy Storage

3) Power Quality Control/ Maintenance

Business Model – How the Firm Creates and Captures Value

Sales Model

  • Sells Solar/PV Inverter & Power Conversion System (PCS) to Big Electricity Companies or Energy Companies
  • Direct sales model
  • Acquires clients & projects through bidding and negotiation
  • Power Quality Maintenance segment: ODM (Original Design Manufacturing, known as private labelling> where an importer selects an already-existing product design from a factory catalogue, makes a few small changes and sells it under their own brand name.), act as a package product bundle together with their clients’ products
  • Sineng is also currently expanding its own sales channels through branding & marketing

Supply Chain Management

  • Continuously promote the infrastructure needed for its supply chain, including quality control, delivery management and cost management to ensure its products are in top-notch conditions, fast delivery and have a cost advantage
  • Built a platform of Planning > Purchasing > Manufacturing > Quality Checks > Crafting > Warehousing at its core which speeds up the turnover efficiency, decreases the warehousing costs, assures that Sineng’s suppliers get the highest quality of products

Research & Development Model

  • R&D is oriented by market demand, keep in trend for the latest development in the market
  • R&D Flow: Conceptualize > Planning > Development > Pilot Testing > Mass Production

Competitive Advantage – How the Firm Sustains Value

Management

2. Qualitative Analysis

The Macro-Environment

China continues to raise the stakes with large subsidies supporting billions of dollars of Chinese solar industry expansion. “Beijing’s goal is global dominance of this industry,” says Jeff Ferry, chief economist for the Coalition for a Prosperous America (CPA) in Washington. As a high technology industry, the solar industry benefits from tax reductions [11] and  China retains a chokehold on the industry through its dominance in the upstream supply chain [12]. The Biden Administration wants to reduce fossil fuel use and the President has said on his campaign trail that he is aiming to have upwards of 500 million solar panels installed nationwide [13]. The transition to renewable energy puts the West at the mercy of China.

China’s CO2 emissions are rising, but a peak before 2030 is in sight. The sooner the emissions peak comes, the higher China’s chance of reaching carbon neutrality on time. The leading sources of China’s emissions are the power sector (48% of CO2 emissions from energy and industrial processes), industry (36%), transport (8%) and buildings (5%) [14]. The country’s latest Five-Year Plan includes an 18% reduction in CO2 intensity and a 13.5% reduction in energy intensity during the period 2021-2025. There is also a non-binding proposal to raise the non-fossil fuel share of total energy consumption to 20% by 2025 (from around 16% in 2020).

China’s primary energy demand is projected to grow much slower through 2030 than the overall economy. This is mainly the result of efficiency gains and a shift away from heavy industry. A transforming energy sector leads to rapid improvements in air quality. Solar is expected to become the largest primary energy source by around 2045. Demand for coal is expected to drop by more than 80% by 2060, oil by around 60% and natural gas by more than 45%. By 2060, almost one-fifth of electricity is used to generate hydrogen.

The level of investment required for China to achieve its goals is well within its financial means. Energy sector investment is expected to climb in absolute terms but will fall as a share of overall economic activity. Total annual investment is predicted to reach USD 640 billion (around CNY 4 trillion) in 2030 – and nearly USD 900 billion (CNY 6 trillion) in 2060, almost a 60% increase relative to recent years. Annual energy investment’s share of GDP, which averaged 2.5% in 2016-2020, drops to just 1.1% by 2060.

Industrial Processes Evolve From Production Line to Supply Chain

Industrial processes are the backbone of all manufacturing operations and the key to improving efficiency. Currently, the energy supply in industrial manufacturing processes relies heavily on fossil fuels, which are either used directly for heating or indirectly for utility systems. A recent Deloitte survey found that manufacturers plan to achieve 45% of their industrial processes electrified by 2035. Resource conservation and controlled operations that enable lean manufacturing are driving the electrification of plants and shops. In addition, three-quarters of surveyed manufacturers plan to electrify their plants and shops by 2035 with the help of manufacturers surveyed plan to meet 60 percent of their energy needs with renewable energy by 2035. By 2040, 30% of the growth in electricity demand is expected to come from industrial motors. Industrial motors are used in compressors, elevators, pumps and other equipment and are key to helping industrial companies achieve their electrification goals.

The energy storage industry has drawn increasing attention and requires supportive policies from the government for its success. Germany is the strongest in terms of comprehensive measurements, followed by China, the U.S., and Japan. While the United States shows the strongest technological innovation abilities, the Chinese government experiments with novel ways to fund science and technology, especially venture capital. In the middle kingdom, non-regulation, experimentation and trial testing continue to be used as pervasive policy instruments [15].

The Industrial Fleets’ Electrification Pace is Much Faster Than Expected

Industrial companies are piloting strategies to electrify their equipment and industrial fleets. Some companies are gradually moving to tugboats, forklifts and other electrical equipment. The average maintenance and operating costs of such electrical equipment are lower than diesel equipment and are faster and easier to operate, making them more suitable for indoor use. At the same time, major companies are considering the advantages of transitioning to electric vehicle (EV) fleets. The transition implies an upfront investment in vehicles and charging facilities that will consume energy over the lifetime of the electric vehicle.

Photovoltaic Inverter and Storage Industry Standing

Chinese Energy Storage Providers by Megawatt Hour (2019)

Even though Sineng is only a moderately sized player in the local energy storage business, it is one of the leading PV inverter shippers globally [16].

Benchmarking

National Benchmarking (Inverter Business)

International Benchmarking (Inverter Business)

Strategic Analysis

Corporate Analysis

Business Lines

Looking at Sineng’s business lines, we can see that Sineng’s main focus is its Solar PV Inverter with 88.90% of its total revenue contributed by this business with a moderate growth at 8.82%. This is in line with its already matured string inverter technology which has been extensively adopted by its Chinese customers. Adding to that, only a few companies manufacture both central and string inverters, Sineng is in a good position to catapult its way to the global inverter market, including India and the APAC region [16].

Another interesting takeaway from this revenue breakdown is that we can actually see a quadruple growth for Sineng’s PCS (Power Conversion System) business which is the storage segment of the company. Storage technologies will allow for more reliable and flexible operation of the electricity distribution and transmission grids, enhancing electric power quality and making renewable energy user-friendly for Sineng’s customers. Looking at the potential of this segment, Sineng has already seen this coming since 2019 and has been offering its DC/AC coupled energy storage solution with various rating PCS. Its energy storage solutions have extensively been adopted in various places in China and Korea etc [17].

3. Quantitative Analysis

Income Statement Analysis

Despite the COVID-19 pandemic and the Sino-US Trade War, Sineng still witnessed positive revenue growth of 8.8% in 2020, with an impressive 43.5% more in the first half of 2021. However, this growth is outpaced by the COGS growth at 13.13%, which resulted in negative YoY gross profit growth. Fortunately, gross profit growth for the first half of the year for Sineng is still strong at 7.5%, with 6 months to go until its Financial year-end of 2021. Sineng reported a net income of 77.5 million CNY in 2020. However, this is a decrease of 7.5% due to an increase in Research and Development expenditure by 30% and the impact on remittance due to the depreciation of the US dollar [18]. On the bright side, Sineng managed to record a net income of 71 million CNY for the first half of 2021 (which is 92% of last year’s total net income of the year) with a fueling demand due to the acceleration of economic recovery of COVID-19 in Mainland China and its other overseas markets (India, South East Asia and Europe). Adding to that, Sineng’s Research and Development expenditure is at a record high at 85.5 million CNY (a 12.2% increase), which shows the company’s relentless focus to invest in the future and capture the growth in the global solar inverter market and is predicted to grow at a 15.45% CAGR for the next 5 years [19].

Cost of Goods Sold

Between 2019 and 2020, a cost of goods sold (COGS) growth of 15.12% was observed. It is essential for us to analyze whether any COGS growth was expected and to do this, we must compare COGS growth to revenue growth. Revenue increased by 8.8% in 2020; however, COGS grew more at 15.12%, this is a rather worrying indicator as Sineng COGS growth is 2x more than revenue growth and most of it is driven by Sineng’s inverter business, with an increase in cost of 9.59% compared to a mere increase in revenue at only 4.92%. Most of Sineng’s products (including inverters, storage and power quality controls) have very high raw material costs (95.15% of the total operating costs) compared to other operating costs, including labor costs and manufacturing costs; this indicates that Sineng is very reliant on the price of its product’s raw materials to control its costs while balancing it with its manufacturing output with increasing demand anticipated for the coming 5 years.

Revenue and Profit

Comparing revenue to gross profit, gross profit growth is at -6%, which is less than revenue growth (8.8%). This can be observed that Sineng’s COGS holds a significant influence on how much is left for the company to pay for other expenses and taxes for the year. Comparing it with the pre-tax income, we can see it is even worse than both revenue and gross income growth at -13.69% over the same period.

Interest and Expenses

A low proportion of interest expense represents a good income statement for a company. In 2020, Sineng recorded 15.65% of its interest expense over EBIT (operating income), higher than the recorded percentage in 2019, at 9.82%. The company is paying more to its debtors in 2020 than in previous years and has scaled up to more than 46.19% of its total liabilities compared to 2019; this is due to the increase in short term borrowings (accounts payable) as Sineng are more willing to take the risk to borrow short term loans and instead increase its financial leverage to fuel its growth for the next 5 years.

Looking at the Income Statement and Balance Sheet together, the company’s strength can be evaluated by three key areas: liquidity, financial strengths and how well the business is managed.

Liquidity

We need to look at how well the company can pay from existing assets for ongoing expenses, including payroll, inventory and investments in capital equipment. The first ratios we are going to look at are called the working capital ratio and the quick ratio.

The working capital ratio measures a company’s ability to pay obligations within a year.

The working capital ratio for Sineng has improved over the last five years from 1.19 in 2016 to 1.45 in 2020. However, we do need to be aware that only a working capital ratio of 2.0 or higher indicates the company has sufficient liquidity and is a sign of good health.

Sineng’s quick ratio is 1.12x, it has also been staying constant over the last 4 years from the range of 1.0x to 1.1x from 2017 to 2020.

The quick ratio excludes some of the current assets that cannot easily be turned into cash, such as inventory and represents immediate liquidity. A ratio of 1.0 or higher indicates adequate liquidity to operate.

Financial Strengths

Secondly, we evaluate the company’s financial strength through 3 parts. First, we analyze (1) debt-to-equity ratios, (2) interest coverage, (3) return of equity/return on assets.

(1) When evaluating company strength using debt to equity ratios, the smaller the ratio, the better, as a company is financially more robust, the less debt it has than equity.

The smaller the ratio, the better; long-term debt to equity is 0.3, which is excellent. However, when we look at total debt to equity, it is 1.66 and significantly higher. As the ratio is > 1.0, it indicates that more than 66% of its assets have been funded by debt. If this ratio grows larger every year, the company is becoming more highly leveraged by debt.

(2) It is crucial in evaluating financial health to look at its current operating profit versus the amount of interest it has to pay its debt holders.

We want the ratio to be above 1 to indicate that operating profit is more than interest expense, and usually, something at 5 to 7 is considered very healthy. Sineng has relatively high-interest expenses at 12.1 million concerning its operating profit, but its interest coverage ratio is very healthy at 6.39.

(3) Return on total equity and return on assets measure the company’s earnings on the equity that the shareholders have invested and the profit on all capital invested in the business, which was used to acquire assets, respectively.

The return on equity is good at 9.17%. Investors are pretty fond of that return in today’s market with low inflation and high risk, especially in volatile markets. The return on assets ratio eliminates the impact of the source of financing, regardless if it is debt or equity and measures management efficiency. 3.45% is an average return for unleveraged investments.

Business Management

Thirdly, we evaluate how well the business is being managed through 2 parts. First, we analyze (1) inventory turnover and (2) accounts receivable days outstanding & accounts payable days outstanding.

(1) Inventory turnover shows how well Sineng is managing its inventory. First, we look at the number of days that something is in inventory. We divide 365 days by costs of goods sold over ending inventory and receive 189 days. It takes Sineng an average of 189 days to sell all inventory from their inventory turnover; this is a relatively high inventory turnover compared to the industry competitors (Sungrow: 95 days, Ginlong: 118 days, Goodwe: 128 days) and indicates that the company is working with a massive amount of inventory stock.

(2) Account Receivables days outstanding measure how well management turns sales into cash and represents how long it takes to collect sales. We take the Accounts Receivable balance at the end of the period, divide it by sales for the past year and multiply it by 365 days.

Sineng takes an average of 262 days to collect on its sales. Therefore, it takes pretty long for the company to collect its bills. The late bill collection practices are an outlier in the industry as Sineng’s competitors (Ginlong: 58 days, Goodwe: 99 days, Sungrow: 186 days) takes around 2 months to 6 months to collect their bills is a concerning problem for Sineng’s management to fix. Nevertheless, its Account Receivables days outstanding for the first half of 2021 is 235 days, which is an improvement. We believe this improvement will keep going for Sineng with more negotiating power as it diversifies its customer base and more demand from smaller clients.

Accounts Payable Days Outstanding is an indication of how fast the company pays its bills. To calculate it, we take the accounts payable balance and divide it by the cost of goods sold and then multiply that by 365 days.

It shows that Sineng payables outstanding were 539 days. This is relatively high for days payable outstanding compared to its competitors (Ginlong: 186 days, Goodwe: 328 days, Sungrow: 296 days). Generally, having a high days payable outstanding is advantageous because it means that the company has extra cash on hand that could be used for short-term investments.

Sineng pays its creditors later and its Account Receivables days outstanding is 9 months faster than they pay its creditors; as these 2 metrics balance out to a certain degree, we should closely watch the accounts receivable ratio as it still takes them more than 9 months to collect payments from its sales.

Cash Flow Analysis

In 2020, net cash provided by operating activities was lower than the sum of the net cash used for investing activities and the net cash used for financing activities; we are left with a 2020 net positive change in the company’s cash position. In 2019, in contrast, we had a much lower change in the cash position for the company. This can be attributed to the high net financing cash flow in 2020 (raising more than 345.3 million in short-term debt) and the circumstances of the pandemic. It is always good to invest in companies that are increasing their cash position as it makes the firms more resilient towards change and crisis. Still, we do not have to consider this a red flag as the company has left operating cash flow throughout 2020 in a positive trend, which is a good sign for investors.

Overall, we can say that Sineng’s statement of cash flows gives positive signals. Having a positive net income over the last 5 years whilst remaining resilient and committed to reinvesting back its revenue for technological enhancement will help Sineng bounce back despite the negative impacts of the pandemic in 2020.

Discounted Cash Flow Analysis

Valuation

We will take you through each phase of the Discounted Cash Flow Model (DCF) and provide our key assumptions. Our analyst selected the DCF Multiple Exit model, where the driver of value is based on the forecasted cash flow of the company alongside the pricing of similar assets in the market. Furthermore, our analysts extend the growth period for 10 years, which reduces ‘valuation drag’ , the reliance of the intrinsic value on the terminal value which is important to shift value away from an abstract to a more tangible concept. We also expect the growth period of Sineng to continue in the next decade due to the company being in its growth phase with its recent IPO last year, rapid expansion in international markets (mostly in the APAC region) and increasing manufacturing output as highlighted below.

Calculate the Weighted Cost of Capital (WACC)

Cost of Equity (CAPM)

We will treat Sineng as a Chinese business given where it conducts the majority of its operations (72.81% of its revenue comes from China). Treating the company this way should produce conservative estimates.  We will use a “bottom-up levered beta”, which is the volatility (risk) of a stock compared to similar businesses within an industry, averaged with a regression beta – The risk of a stock compared to the risk of the market.

Using the Capital Asset Pricing Model (CAPM) the inputs used is as follows:

10-Year Risk-Free Rate = 2.94% (10-year China Government Debt) – Capital IQ

Damodaran Equity Risk Premium = 5.40% [20]

Country Risk Premium = 0.68% [21]

Industrial Beta = 0.584 – Capital IQ

Plugging these figures into the equation:

Cost of Equity = Risk Free Rate + (Industry Beta * Equity Risk Premium) + Country Risk Premium

Cost of Equity = 6.7736%

Cost of Debt (Synthetic Credit Rating Approach)

Sineng doesn’t have an official credit rating; therefore by calculating its interest coverage ratio (EBIT/Interest Expense), a ‘synthetic’ credit rating can be created using professor Aswath Damodaran’s lookup table.

Interest Coverage Ratio = 6.39

Credit Rating = A+  [22]

Default Spread (A+) = 1.5%

Country Default Spread (China) = 0.62% [23]

Average Corporation Tax (China) = 15% [24]

10-Year Risk-Free Rate = 3.1% (10-year China Government Debt) – Capital IQ

Plugging these figures into the equation:

Cost of Debt = (Risk-Free Rate + Default Spread + Country Default Spread) x (1-T)

Cost of Debt = 4.437%

Weighted Average Cost of Capital (Discount Rate)

Total Debt (Current Debt + Long Term Portion of Debt + Current Leases + Long Term Leases) = 1402.3 million CNY

Market Equity Value (Diluted Shares Outstanding x Current Share Price) = 132 million x 127.40 = 16.82 billion CNY

Weight of Debt = 62.4%

Weight of Equity = 37.6%

Weight of Preferred Shares = 0%

WACC = 4.03%

Using 5-year historical financial statements and forecasts up to 2025 provided by Capital IQ. We extend the forecast period to 2031 by using conservative assumptions provided by our internal team and corporate partners. Our analyst used the XNPV function (XNPV = Discounted rate, cash flow, date) with midpoint discounting alongside the year fraction to ensure cash flows are discounted appropriately according to the fiscal year-end date. We use a 2.94% perpetuity growth rate which is appropriate as Sineng by the end of 10 years should be nearing maturity in a high growth Chinese emerging market and is in line with the 10-year risk-free rate of 2.94%, which is a reliable proxy to estimate the 10-year future growth of an economy and should produce conservative assumptions.

Base case – $29.21 Sineng Electric Co Ltd DCF – Base Case.xlsx

The base case is the most probable course of action of the growth and operations of a company as predicted by our analysts.

  • Implies 16.75% CAGR from 2021 to 2026
  • CAGR of 9.47% to 2031
  • EBIT Margin growing to 15.4%

According to the base case, there is a potential 53% upside from the current price at $19.04. The base case is a scenario where renewable energy is cheap and reached economies of scale OR regulatory enforcement prompted a lot of energy companies to shift their focus to renewable energy which is a good sign for the industry overall.

Grey sky case $20.32 Sineng Electric Co Ltd DCF – Grey Sky Case.xlsx

The grey-sky case is an alternative assumption that there is a worse than expected outlook for the growth and operations of a company.

  • Implies 13.02% CAGR from 2021 to 2026
  • CAGR of 9.05% to 2031
  • EBIT Margin growing to 11.55%

For this case, we are making the assumption that the renewable energy space as a whole remains expensive for consumers and there is only a lenient carbon regulation by the authorities enforced on energy companies. This is not a positive sign for the renewable energy industry and restrains Sineng from growing further.

Blue sky case $34.78 Sineng Electric Co Ltd DCF – Blue Sky Case.xlsx

The blue-sky case is an alternative assumption that there is a better-than-expected outlook for the growth and operations of a company.

  • Implies 18.11% CAGR from 2021 to 2026
  • CAGR of 13.95% to 2031
  • EBIT Margin growing to 19.25%

For this case, we are making the assumption that the renewable energy space as a whole is the norm in the country and energy companies that are using fossil fuels previously are fully regulated by the government. This scenario is an extremely positive sign for Sineng to thrive and grow exponentially in the next 10 years.

4. Risks

Sometimes change manifests itself gently, revealing its mysteries in experience. This is particularly likely, although not inevitable when a firm invests in R&D and looks beyond the internal operating silos to approach what it does not understand voluntarily, with careful preparation and discipline. Other times the unexpected makes itself known terribly, suddenly, accidentally, so industries are disrupted and unprepared corporations fall apart.

In order to thrive in the constant flux of the 21st century’s economy, companies need to not become overwhelmed by what is beyond them, or equally dangerously, stultified and stunted by dated, too narrow, or too pridefully paraded systems of value [25]. Due to novel changes and unprecedented industry trends, a firm’s knowledge of how to act in the world remains incomplete. Industries and organizations constantly need to learn, explore and prepare to fend off the threats evolving around them.

In this part, we highlight potential threats in the market and assess the potential impact on the sustainable energy industry and Sineng’s business model.

Analysis of Competitive Forces Upon Sineng Electric’s Industry Position

Rivalry:

→ Medium

15th in the market (2019), its photovoltaic business (which includes inverters & energy storage) has suffered a decline in revenue of 58.16% in 2020 due to the competitive market within the industry and COVID-19 impact

To tackle this, KSTAR has teamed up with CATL (Contemporary Amperex Technology Co. Limited) to establish a joint venture company called CATL-KSTAR SCIENCE & TECHNOLOGY CO., LTD. [26] to solely focus on the field of energy storage products. At present, the main project of the first phase of the joint venture has been completed, and the energy storage-related business can be better developed after it is officially put into operation.

The inverter manufacturing market is always competitive, but the past year was even more challenging for companies. Total revenue for the Top 5 global inverter vendors declined 10% last year due to price pressure and fierce competition. These issues caused numerous acquisitions and exits in 2019: ABB paid Fimer to take over its inverter business, Schneider Electric exited the utility-scale inverter business and KACO sold its string and central inverter businesses to Siemens and OCI Power, respectively. Even though global PV inverter shipments will continue to rise, market value is projected to decline through 2024.[27]

Many companies that have been able to hold on are focusing on diversifying their offerings by including comprehensive internet-of-things (IoT) platforms with inverters. For example, SolarEdge now provides whole-home solar + storage solutions, from power optimizers to EV chargers. All the pieces of the system can communicate through the company’s monitoring platform. Industry studies find that central and three-phase string inverters will see the sharpest drops in revenue of any product type through 2024, but microinverters, single-phase string inverters, DC optimizers and hybrid inverters will instead experience growth in that time frame. Sineng mainly manufactures central and three-phase string inverters and with the price for these inverters dropping in the foreseeable future, Sineng has to ramp up its manufacturing output to compete with its industry rivals.  With its new and more efficient 10GW Smart Inverter manufacturing factory in Ningxia Hui, China is on the right track. [28]

In addition to internal competition among inverter brands, tariffs have added more complexity to the market too. The Trump administration has placed 25% tariffs on Chinese goods including inverters since May 2019. Chinese inverter manufacturers made costly adjustments to try to get around these tariffs, including moving manufacturing of U.S.-bound inverters to other countries.

Bargaining Power of Buyers:

→ High

State-owned B2B clients decide the price for solar inverters and storage solutions based on national tender processes.

The Chinese consumer has grown increasingly conscious regarding green technology and green energy, which trickles down to the encouragement of sustainable sourcing practices within the B2B energy solution business. A recent IBV study found that 91% of Chinese consumers are willing to choose greener but potentially more expensive transportation options. 70% of Chinese consumers are willing to change their shopping habits to reduce their environmental impact. 65% of Chinese consumers say they are willing to pay an average 35% premium for brands that take on sustainability and environmental responsibility. 65% of Chinese consumers say they are willing to pay an average of 35% premium for brands that are sustainable and environmentally responsible.

Bargaining Power of Suppliers:

→ High

Components of a Solar Inverter [29]

  • Capacitors– are used to filter ripple contents (an undesirable phenomenon due to semiconductor switching) on dc lines. It is also used to keep the dc bus voltage stable and minimize losses between the PV array and the inverter.
  • Software and monitoring – the software designed to run on the inverter’s digital signal processor or microcontroller. Data monitoring is important since it lets owners and installers know its status and provides quick alerts if there are any faults.
  • Solid-state switches – they are basically a combination of power semiconductors – IGBTs, Metal Oxide Semiconductor Field Effect Transistors (MOSFETs) or both in some cases – to invert dc to ac power.
  • Magnetic components – these include the inductor and the transformer to filter the wave shapes, smoothen them and bring ac voltages to the correct levels for grid interconnection. They also provide isolation between the dc circuits and the ac grid.

95% of Sineng’s total operating costs come from raw materials of suppliers. This shows that its suppliers have a significant say in the company’s cost efficiency and profitability. Adding to that, Sineng’s top 5 suppliers in terms of purchasing value takes up 32.16% of the total purchasing amount which is considerably higher compared to its competitors (Ginlong: 27.4%, Sungrow: 18.71% & Goodwe: 17.44%) which indicates a higher bargaining power of Sineng’s suppliers as the top 5 can easily influence Sineng’s cost of production and supply chain risk exposure.

Competitors are multisourcing, but Sineng is focused on a few suppliers. They focus on bigger suppliers and this decreases their bargaining power. Sineng does not have a sophisticated multisourcing in place.

Threat of Substitutes:

→ Low

Solar photovoltaics (PV) capacity additions have outpaced those of any other country. China is the second-largest oil consumer in the world, but also home to 70% of global manufacturing capacity for electric vehicle batteries, with Jiangsu province alone accounting for one-third of the country’s capacity. [30] There is no direct substitute for Sineng Electric’s core products PV inverters and PV storage. But there exists the possibility to substitute photovoltaic energy sourcing as a whole. The main source of substitution still comes from established industry structures, such as coal. Coal accounts for over 60% of power generation – and new coal power plants continue to be built. Renewable energy substitutes include wind energy, hydroelectric, geothermal, hydrogen, biomass and ocean tide generated energy. But with solar PV power generation being one of the main focuses for renewable energy in China’s 14th Five Year Plan, the threat of alternative sustainable energy sources is low. [31]

Threat of New Entrants:

→ Low

It is very hard for new entrants to break into this market unless a new player has cutting edge technology and/ or a reputable brand name

Unlike companies that make solar panels and cells, solar inverter makers enjoy some insulation from the competition and the weak economy. Inverters are complex and harder to make, and prices have stayed relatively stable. A typical solar power system consists of photovoltaic cells wired together to make panels. The panels are connected to inverters that convert the direct-current power into a usable form of electricity. There is more internal design for an inverter company, so while it is easy to make an inverter, it is relatively hard to make a good inverter. This means higher entry barriers and somewhat better margin protection. Unlike solar panels, where the brand becomes less important as quality narrows, technology and a brand name can help sales for solar inverter companies [32].

5. Conclusion & Investment Strategy

The last years have proven that China is very powerful, thinks strategically and is doing good business. The western world can no longer keep pace with the changes; it no longer has a competitive advantage vis-à-vis China’s expansion policy. The west can’t even say no anymore. It relies on China’s resources, sales market and production facilities.

Sineng had an excellent performance and being one of the 2 inverter manufacturers to win a 5.5 GW inverter procurement tender in September 2021 by the Chinese state-owned mining and energy company – China Energy Investment Corporation, with Sineng winning orders of 1.1 GW of central inverters and Huawei secured orders for 4.4 GW of string inverters [33]. This proves that Sineng is one of its kind among competitors of its size in the business and with Beijing’s commitment to corner the global solar panel- and inverter market with policies to create supply and demand, ​Sineng is on the right track to grow exponentially for the coming years.

Sineng’s capabilities include its continuous automation, its scale and scope economies, cooperative partnerships as well as a fixed standardization of products to offer those at a competitive market price in the B2B business. Sineng is a preferred company in Chinese government tenders and the firm invests substantially in R&D to secure an innovation and first-mover advantage over their competitors [34]. China’s Solar- and Energy storage industries are set up for success and Sineng Electric is likely to benefit from that. All potential futures point to a positive trajectory for the firm and we give a buy recommendation for Sineng Electric’s stock.


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