Needless to say, China stocks aren’t exactly the darlings of the market now.

If you think that blue chips have fared badly during this volatile period, red chips have emerged even worse.

Part of the reason is that prior to the downturn, many of these Chinese counters have been overbought. At the moment, they are oversold.

The indifference shown towards Chinese counters is reflected in the paucity of buying interest in the red chips regardless of any good news.

Take Mainboard-listed Sunpower Group (SG) for example. On 30 June, SG announced an export partnership agreement with Sinopec, one of the major petroleum company in China. The agreement effectively brings SG into the global arena with the potential to tap into Sinopec’s vast network.

How did the market react? No reaction. Why the indifference? Afterall, SG is still growing.

Under The Microscope

Commonly known as a heat transfer specialist, SG is primarily engaged in the design and manufacturing of various energy-saving and environmental protection products utilising heat transfer technologies. Specifically, the company’s product line can be divided into four main types: Pipe supports, heat pipes and heat exchangers, pressure vessels and energy saving and environment protection systems.

First listed on the now defunct Sesdaq, SG transferred to the Mainboard in August 2007. With its solid reputation, SG has built up an extensive customer list that includes global companies such as China National Petroleum Corporation, Sinopec as well as General Electric.

Further, SG’s future appears to be promising with strong governmental support. Following the ballooning of energy costs, the Chinese government has made energy savings and efficiency a key focus of its policy, which will translate into future revenue for SG as the company’s products are geared towards energy savings. On top of it, key Chinese industries have also been encouraged to purchase equipment from domestic sources – another bonus for SG.

Growth Momentum Sustained

Aside from the export agreement mentioned earlier, SG received a series of orders since the beginning of the year. Notably, SG won a Rmb36m contract to supply waste-recovery system to Hyundai Steel Company. This contract marks SG’s foray into South Korea and the international arena. Apart from gaining a boost to FY08 revenue, the increased international exposure should stand SG in good stead in its overseas expansion.

Jiangsu Zhongneng Polysilicon Technology Development Company also placed an order with SG for Rmb79.6m worth of pressure vessels, proof of the reliability of SG’s products. As at February 2008, SG has a total order book of over Rmb748m.

Disappointing FY07

Despite a stunning 44.6% growth in the top line, earnings declined 1.7% in FY07. Profit fell because of the company’s policy of granting competitive pricing to customers in order to expand market share, particularly in the energy saving and environmental protection systems segment as well as increasing labour and finance costs.

Going forward, rising metal costs are expected to slash margins in FY08, unless SG is capable of passing costs to its customers. With an established client base, top growth should be sustainable but earnings may continue to come under pressure as SG seeks to increase market share at the expense of profitability.

Nevertheless, we view the international expansion of SG positively.