Thai Solar Energy

We have initiated coverage on TSE with a BUY rating. The current renewable energy climate strongly suggests that the IPO price of Bt3.90 is undervalued compared with other renewable energy stocks. We believe that a DCF-derived valuation is no longer appropriate and that a PEG valuation more clearly captures the premium that the market has given to the sector. Conservatively using 3-month average prices, the sector average PEG now stands at 0.43x; with our 3-year projected EPS CAGR of 43% for TSE, we have derived its FY15 PER at 18.4x and, thus, a YE15 target price of Bt6.50/share. We highlighted our key investment themes below.

Theme #1—expansive solar and renewable sector

Alongside rising overall power demand, the NEPC’s public hearings indicate broad civic acceptance of renewable energy, especially solar, biomass and waste-based projects. Initial capacity additions of 800MW (on top of the 576MW left over from the previous AEDP) for solar farms have been submitted and we also expect at least 200MW of the previously oversubscribed commercial rooftop solar capacity to be added. Over the longer run, we project at least 900MW in additional solar capacity to be allocated, as the new PDP2015 load projections will be extended through to 2036.

Theme #2—small player in a growing solar pool

As the outline for the revised AEDP starts to take form, we now expect immediate solar capacity availability of almost 1,600MW (1,376MW farm and 200MW commercial rooftop), as noted above. Assuming that TSE maintains 7% and 14% respective market shares for solar farms and rooftops respectively, its capacity would increase by 126MW. That implies 128% expansion over its current PPAs (which doesn’t take into account TSE’s expansion abroad, namely Japan and Indonesia, or entry into new solar or other renewable fields).

Theme #3—opportunities for growth

TSE’s strategic partnership with GPSC opens opportunities for it to develop greater technical expertise and expand its reach to other countries, especially CLMV markets. The firm also has a great advantage in the commercial rooftop industry niche, as it has Home Product Center Plc and The Mall group as partners. Home Product Center currently has 58 rooftops and The Mall has nine unoccupied rooftops (1MW per rooftop), which can be utilized once new solar capacity is up for grabs.

Theme #4—robust profit growth profile with limited downside risk

As TSE will start to realize substantial revenues, its profit growth will accelerate. We anticipate a core profit of Bt292m for FY14 (versus Bt125m for FY13) and a 119% surge to Bt640m for FY15 with a full operational year for its 4.5MW solar thermal farm, 80MW of solar PV farms and 14MW of commercial rooftop capacity. Apart from robust earnings growth, TSE is also the best protected solar utility player in terms of secured solar irradiation performance. On top of the standard 25-year 80% performance guarantee, the firm has additional output guarantees from its EPC and O&M providers—equal to 89% of normal operations. This will ultimately assure at least Bt144m in annual revenue for each of its 8MW solar PV farms.