Xinyi Energy: Time Needed to Restore Investor Confidence; Shares Undervalued

No-moat Xinyi Energy’s year-to-date close-to-50% share price fall has been disappointing, with the market reacting to reduced dividend payout, uncertainty over the collection of subsidy payments, and rising financing costs. We cut our fair value estimate to HKD 2.04 from HKD 2.64 after incorporating the depreciation of the Chinese yuan, and higher midcycle accounts receivable days given the slow subsidy collection. We also raise our weighted average cost of capital to 9.6% from 8.6% to reflect the increased uncertainty. Being a non-state-owned enterprise, we think Xinyi Energy may be at a disadvantaged position in terms of getting preferential borrowing rates and speedy settlement of subsidies owed to it when compared with its SOE peers. While the firm remains undervalued, we don’t expect a rerating in the near term, as it will take time for Xinyi Energy to deliver earnings improvement and rebuild investor confidence.