United Photovoltaics:Acquisition of Tibet assets seems too aggressive,Dg GDPOLY 20s to Hold

Recently announced acquisition of Tibet assets is very aggressive

    We downgrade United Photovoltaics 20s from Buy to Hold as the company’srecent acquisitions in Tibet are much more aggressive than expected (Bid price102.7, bid ytw: 7.15% as we write) and we believe these acquisitions willelevate the company’s leverage. We expect its total debt/EBITDA to rise.Recently, the company announced acquisitions of various hydro, wind powerand solar (vast majority in hydro) in Tibet for HKD1.2bn (including HKD0.6bn ofcash and the rest to be equity placement to the seller). Yesterday, Moody’splaced United PV’s Ba3rating on review for downgrade and we believe thecredit rating will be downgraded by the rating agency. The company has beensuccessful in various equity fund raising exercises in the past several months,bringing in shareholders like Orix and Huarong.

    United PV does not have expertise in hydro segment

    United PV's new hydro power projects announced in Tibet will be very large insize if fully built (4.58GW of development rights in hydropower under TibetZangneng plus potential future acquisitions), per the company announcement,and we believe the capex will be a drag on the company's balance sheet. Thecompany said they have hired some people with expertise in hydro but hydrois not an area that United PV has a track record in, being focused on the solarindustry before. This is an aggressive acquisition given the size and the manyphases, and the fact that hydro is a relatively new segment for United PV. Thecompany indicated it would be able to get some financing from policy banks ata good rate, given the government stance towards hydro. According to UnitedPV, the hydro project could take 20-25years to complete, and will be built invarious different phases (Phase 1has estimated capacity of 400MW and willstart construction in 2018with an estimated completion time in 2023). Thecompany estimates the construction cost for hydro projects in Tibet is aroundRMB18per Watt.

    Downgrade GDPOLY 20s to Hold and risks to our call

    We downgrade GDPOLY 20s from Buy to Hold. Upside risks to GDPOLY 20sinclude slowdown in acquisitions, larger-than-expected fund raising activities,and stronger-than-expected liquidity. Downside risks include lower margins,delays in subsidy, and more aggressive acquisitions.