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Below is the transcript of an interview with Sunseap Group Co-founder and CEO, Frank Phuan. The interview will play out in CNBC's latest episode of Managing Asia on 14 June 2019, 5.30PM SG/HK (in APAC) and 11.00PM BST time (in EMEA). If you choose to use anything, please attribute to CNBC and Christine Tan.
Christine Tan: You started the company in 2011. But the solar business is not entirely new to you. In fact, your late father actually had his own solar panel manufacturing business. What made you venture out on your own?
Frank Phuan: I recall I was always in the solar business with my father since young. In 2001, we started Sunseap Enterprises which was the solar manufacturing arm. Selling solar panels is a tough job and you get a one-time profit from each sale. So, Lawrence and I are good friends and we decided to do something that's more sustainable. We decided to sell energy that the system produced and that makes a recurring income every year, rather than selling solar systems. So, we started selling solar energy as a service in 2011 with Sunseap Leasing.
C: How did you know it would work, because it's a completely different business model? You're actually selling solar energy as a service instead of selling solar panels as a product. It was a completely different model from your father.
F: That's right. I think we had been selling solar systems for so many years that it came to a point we had to put our money where our mouth is. We need to believe in the solar systems we're selling. And to me, it's a financial calculation that if the system does work for the next 20, 25 years and you do indeed produce that amount of energy, then you should make that amount of profit. It's all forecastable, predictable and hence, bankable. From that perspective, we have a track record in terms of data collection over the last 20, 30 years. So, we know that our systems work. Hence, there's that amount of confidence when we go into selling solar energy and collect that revenue through time. Even my dad wasn't at first a believer as well. He always took it from a very traditional, Asian businessman point of view – you collect the money in your pocket and you go to the next deal. Whereas, investing in a solar system and selling solar energy require many years of return on investment. So, that wasn't his cup of tea. It took some convincing for him to believe in this business model as well.
C: So essentially you became your father's customer?
F: (Laughs) Yes.
C: You drove a hard bargain?
F: For sure. Although we had a manufacturing arm here in Singapore, we had to be competitive. I recall negotiating panel prices over the dinner table with him and pitting his product prices against Chinese-made products. I drove a hard bargain. (Laughs) So, it wasn't a pleasant discussion to say the least.
C: You essentially are bearing the cost of the entire system installation as well as the commissioning costs. So, all the customer has to do is just pay for the electricity consumed. How long does it actually take for you to breakeven and recoup some of the installation costs? What sort of timeframe are we looking at?
F: So, typically when we invest in any solar projects, we are looking a time frame between eight to 10 years. Sometimes even 11 years, depending on the amount of discounts we give to our customers. So, if our customers drive a hard bargain, we will probably stretch it to about 10, 11 years.
C: So only after 10, 11 years you start making money on the systems you've installed?
F: Yes. So, for probably the first five to eight years, we will have to look at how we can use the cash flow and return the debt that we have borrowed from the financial institutions.
C: How do you do that?
F: So, we got to make sure that our cash flows generated from the project itself allow us a healthy return from both debt and equity. So, it's a lot of financial work that's required to work with the banks to allow for that as well. I must admit that it wasn't easy because like you said, we are de-risking our customers here in Singapore. We spend 100 percent of our CAPEX upfront and our customers spend nothing. So, there's almost no risk for our customers at all to buy solar energy or to enjoy clean and green energy for themselves. In de-risking the customer, we put all the risk on our end. So, we got to be very confident that our cash flows generated from the project can meet the debt. We don't want to end up in a situation where the cash flow generated is unable to meet the debt servicing. So, that means we have to consistently maintain and optimize the health of our solar systems. That's why we have a very rigorous process on how we monitor our systems. If there's any form of power degradation from our systems, we make sure that we can troubleshoot it first hand at a quick time to rectify the situation. In doing so, we keep ourselves on our toes literally for the next 20 years, making sure that the systems generate power. Because there are too many times or scenarios I've seen in the past when I was selling solar systems instead of selling energy where it was not properly maintained and became a white elephant on the roof.
C: One of your first projects here in Singapore was with the public housing sector. That was in 2011 when you won the leasing tender. And since then, you know, you've signed on multinationals like Apple and Microsoft. How much work is involved in the installation process and what sort of costs are we talking about?
F: Singapore is, some may say, a renewable energy-disadvantaged country because we don't have other sources of renewable energy. We don't have wind, we don't have hydropower and we hardly have any tidal energy. So, solar is probably the only option. But solar requires area and we don't have much land available for solar. Hence, we look at all sorts of areas including rooftops, even floating PV at sea and at reservoirs to make sure that we have enough area to generate solar energy. The largest landlord here is HDB that manages Singapore's public housing. So, we have installed solar systems on roughly about 10,000 HDB rooftops. I recall our first project was the Punggol-Pasir Ris Town Council, where we installed solar systems on 40 HDB rooftops. Collectively, it was two megawatts. So, to the layman, two megawatts roughly translates to around two football fields or two hectares of area. Obviously, each HDB rooftop doesn't have two hectares of space on top of them. So, you have to break it down to many small spaces – in this case, 40 HDB blocks to accommodate two megawatts.
C: Sounds tedious.
F: It's tedious. So, as compared to a land farm in let's say a country like Vietnam or Cambodia where land is plentiful, you probably need just one plot of land, two hectares and one single connection point. Or take our latest project with HDB, which is about 65 megawatts. So, just imagine 65 football fields – it's a huge area and one connection point. But in Singapore, you need to install thousands of rooftops just to get 65 megawatts. So, it's much more tedious.
C: In terms of price points are you as competitive as traditional energy?
F: For sure. So, I think the whole concept of grid parity differs from country to country. But in Singapore today, I daresay that we are beyond that grid parity. That's the only reason why we can offer discounts to our customers with solar energy. In fact, some might say that we are even close to the wholesale power price. We are way beyond retail price – we give discounts above 30 percent off the Singapore Power low tension tariff. So, we are beyond grid parity already.
C: But how reliable is solar energy?
F: Okay. So, in terms of delivery, we always use grid-tied systems. This means a two dual pipe – one pipe obviously is your national grid and the other pipe is your local solar power connection. So, because it's connected locally, you will use whatever generated from the solar systems first and if it's not enough, you draw from the main grid pipe. So, you don't see a loss of power to your load.
C: When solar cannot provide, the main electricity kicks in.
F: Exactly, you won't see your lights flicker. We supply to hospitals and schools and we never had any problems so far.
C: Energy itself is so highly regulated. What's it like dealing with the different policies, regulators and governments in the different markets?
F: I think it's challenging to be honest. But we do spend a fair amount of time looking out for our local partners.
C: So you never go in alone?
F: We never go in alone. None of our solar projects outside of Singapore are done by ourselves. We always go in with a local partner, so I think that is the winning formula for us. Once we get a right partner then of course, depending on wherever regulations allow us, we'll try to replicate our model here in Singapore which is a grid parity model. We don't depend on any incentives. If there are incentives on the ground we'll gladly take it, but if not we're happy to do the job as well.
C: Have you had problems finding the right partner overseas? Have there been issues where you've had to terminate a partnership?
F: There were. To be honest, there were partnerships that I recall not working out. Even though we spent a lot of time identifying them, once execution comes into place, some may say that it didn't turn out as they had expected. Some business developments were slower partially because of regulations and some of our local partners became impatient. Because they saw the success that we have in Singapore and thought that kind of success would be replicated quickly in their own country, but it didn't happen fast enough. So, not all countries are I would say, suitable in terms of replicating our Singapore model. Whatever the countries and their regulations allow, we will go for it.
C: Let's talk about China because you recently signed an agreement with two Chinese partners to set up an energy investment fund called the Guohe Starkle Energy Fund solely to invest in solar power projects in China itself. What's your outlook for the solar market in China? How fast do you see it growing?
F: So, most of my friends who ask me about China will say, "How dare you go to China to compete against the Chinese players there?" But I would say we do it very differently. The outlook ever since last year where the Chinese government reduced or almost cut all incentives overnight was a big influence on the entire market. In fact, the entire market consolidated. The Chinese cut their manufacturing prices by almost 30 percent last year.
C: So, there's a big oversupply in the market right now?
F: There's a big oversupply but that is recovering. That was last year. This year, the entire domestic market is trying to recover again. There was global demand so prices actually went up slightly this year for the solar panels. That was against the trend over the last 10 years. But what we're doing in China is quite different. While the majority of the Chinese players are focused on utility-scale type of solar farms which are heavily dependent on government incentives and tariffs, we are not doing that. We believe that market is kind of reserved for the SOEs in China. For us, we're going in Singapore-style, doing rooftop by rooftop, building by building, selling to the building owners. So far, we've already done 30 over megawatts in the Jiangsu area. With this fund, we hope to achieve 250 to 300 megawatts in the next two years. More than solar generation, our idea is to move towards a distributed utility play. Instead of just selling solar energy to the building, we're now selling various other sustainable solutions, including energy efficiency solutions like energy storage. Some may even add in the virtual power plants type of play into the mix. So we're not only selling one solution to the building, but multiple services to the same building.
C: The Chinese government cutting subsidies is one thing, oversupply is another thing, there's also the U.S.-China trade war as well and a lot of people say that could impact the solar market in China. You still think there's still growth in the market there for you?
F: There's definitely growth. Actually, to be honest, with this trade war that is ongoing, the supply to U.S. becomes limited. That means there is more inventory for the Chinese manufacturers and indirectly that over-inventory will result in better pricing for us in Asia because the Chinese engine of manufacturing can't stop. That will continue. Solar, like I mentioned, is a technology so year after year the efficiency improves. This means year after year, we can expect the cost of solar energy to go down.
C: Instead of just using land, you're currently building a solar system that can float on water. I understand it took you two years to actually find the ideal site. What were some of the difficulties you faced finding the right location?
F: I think initially our thoughts were, wow, we just need a five hectare area. We wanted to demonstrate an ecosystem where we could work and live on water by generating power from coastal waters, an area that has not been previously used. Since Singapore is an island, we have water surfaces all around. But it turns out to be harder than we previously...
C: Easier said than done?
F: (Laughs) Yes, because we have to work with at least eight agencies and it must be a unanimous decision from all eight agencies with no objections. Every time we look at a parcel of area or sea area, we'll work with maybe seven agencies and the last one would have an objection, so we would have to restart the process all over again. So, it turns out to be a challenging task actually.
C: Were you close to giving up?
F: We were. We were. In fact, this was in collaboration with the EDB (Economic Development Board). It's a project to showcase coastal water PV deployment. We were close to giving up. We told EDB that we might not find an area after all. But I think what really helped was under the Ministry of Trade and Industry, there is a pro-enterprise division. So, that entity really helped us to collate all the agencies together and accelerate the entire decision-making process among all the eight to nine agencies that we were working with. So, we finally got an area that was allocated to us. Now we are going to start construction and we hope to finish before the end of the year.
F: (Pointing at solar panels) There are many types of solar panels here. This is unique one – we call this the bi-facial solar panel. So as you can see, unlike other solar panels it's much thinner. It's made of two pieces of glass sandwiching a silicon solar cell in the middle. You can see these are way thicker right?
C: Is this what you would use on your floating solar PV?
F: Yes, because glass is an inert material. So in the sea environment, you don't want the sea elements to come in from the back of the panels. Usually for a typical panel, what you have is a back sheet. The back sheet is made of a polymer material and if it is a polymer, then of course it is less reliable in the humid environment. So, for the marine type of use, we usually look at panels that are double glassed.
C: They're more durable?
F: For sure.
C: How is the solar technology that you have different from the rest of the market?
F: So, for us as a B.O.O., we build, operate and own systems. We used to make the solar panels, but we are no longer making them. So, the technology is not from the panels per se, because we can buy them from manufacturers. The technology that we have is in the know-how; in how we monitor and maintain the health of our solar systems. We actually have monitoring systems that we've built in-house, to track power from our solar on a panel level to come back to us maybe every 15 minutes. So, we track the health of the systems, every system that we have. There are thousands of systems just in Singapore alone that we track every 15 minutes and we're able to rectify them with the data we receive. So, last time we used to do schedule-based type of cleaning and maintenance, but we no longer do that. Now we're doing our maintenance and cleaning based on data-driven decisions. So, that marks us apart from other so-called solar developers.
C: Compared to clean energy, solar is still seen as the most expensive or one of the most costly. Where do you see the cost when it comes to solar? Do you see it coming down? And what is the future of solar energy?
F: So firstly, that statement that solar is expensive is something we were educated from the media for the last decade. Solar in my sense is actually more affordable. That's confirmed by the fact that we're already giving discounts to our customers and still making some profits out from it. Otherwise we will not be able to give a discount. So, I recall last year in some areas, a desert in the Middle East for example, solar cost around two to three cents per kilowatt hour. That is easily the lowest cost of power anywhere in the world and compared to traditional, very low cost power source like hydro or coal, it's even lower than those at two cents. Some say that the solar cost in the desert is going towards one plus cents per kilowatt hour. So, today in comparison to many parts of the world, the energy retail for Southeast Asia is between 10 to 15 cents. So, solar is way below that cost in some of these regions, really.
C: Do you see costs dropping further?
F: Yes, because like I mentioned solar is a technology. Just like computing power, solar efficiency increases every year because of research and development. So, we expect solar efficiency to increase every half a year and that has been demonstrated quite accurately over the last decade as well. So, we expect that efficiency increase to continue in the years to come.
C: Does that mean that your profit margins will also increase?
F: More often than not, we will increase the discount to our customers and maintain our profit margin to enable more people to enjoy solar energy.
C: Let's talk about Sunseap. You spent the last year growing Sunseap, building up your expertise in solar energy. You've done that successfully you say without government incentives and grants. How are your financials looking today? How profitable are you?
F: I would say, we were EBITDA positive from day one. So, unlike majority of the startups today that I see, all the startup unicorns, they're loss-making but they continue to generate revenue and have fundraising, I don't think we are that type of company. We've been EBITDA positive like I mentioned, from our first day of operation till today. This means we're set for both growth and sustainable growth the more projects that we do, because the projects that we do are very long term. Every project that we sign allows cash flow to be stacked on. So, for every project signed, we have a 20-year forecastable cash flow and the more projects we sign, we stack on their profitability and revenue.
C: What sort of margins would you be happy with?
F: (Laughs) So, for our solar generation business, that has quite a good margin.
C: What is good?
F: I think when we look at project returns in Singapore for example, we'll expect a high single digit. Sometimes even low double digit returns. That's sustainable over the next 20 years compared to other trading businesses – I don't see that kind of sustainability there. In some other countries like Vietnam, project returns could be as high as 15 percent to even the high double digits. So, that is good profit margin. In my opinion, they're sustainable.
C: A couple of years ago, Shell's corporate venture arm made a sizeable undisclosed investment into Sunseap. What's it like having the Dutch energy giant on board as a key investor?
F: The investment amount in our opinion is I think, less substantial compared to the value of the partnership that we can work with Shell. I think that's more valuable in my sense. In fact, Shell is not my biggest shareholder. My largest shareholder is actually a Thai-based utility called Banpu. So they have businesses in power generation across Asia. They're also in coal. So, it's interesting to see the so-called the older technologies like Shell, who is in oil and gas, and Banpu which is in coal, investing in new energies like solar and Sunseap.
C: Are you talking to any other key significant investors?
F: We are talking to a few sovereign wealth funds or institutions.
C: You close to signing a deal with them?
F: (Laughs) I hope that I can give good news before the year is over.
C: Are you talking to any other key investors?
F: We are. We are currently in our E-round of fundraising - that's our fifth round already. Our nature of our business demands for fundraising every year after year. But we thought that that is a very tiring business -- fundraising. So we thought that at some point we need to tap on the capital markets. So, that's why we are looking ourselves to be listed in the next 12 months, to tap sources of fund from the capital markets as well.
C: Where did you get your entrepreneurial instinct from?
F: My father founded the business in solar many, many years ago. So, as I grew up working with him in solar, he always told me the one who can really harness the sun's energy will be quite influential. So, I always remember those words and think of ways and means to really harness solar energy and in our daily lives.
C: The reason why you set up your own company was because you and your late father had different management styles and there was friction (Frank laughs) in the way both of you managed the company. How would you describe your leadership and your management style? How different are you from your father?
F: Well, I would describe my father as a very traditional Asian Chinese businessman. So, he always believed in doing one deal and moving on to the next deal, making sure the money is in the pocket and I think he raised me up this way. Sometimes it's hard to argue with a man who raised you up this way and say that there's another way to do things. So, it was challenging with that kind of family dynamics coupled with business discussions. But I think I would describe my own management style as very open. There's hardly any hierarchy, if not functionally, in Sunseap. Over here, you can see that we have our own desk in an open area. I don't have a private room myself. Lawrence sits beside me at the open desk, just like everybody else. Any new executive that joins Sunseap will have the same-sized desk as us. We have town halls that we open to the entire company and we try to do that every two months. There is direct feedback from every staff straight to the founders or the senior management and we value that feedback. A lot of changes that happened in the last couple of years were actually based on feedback from our staff that has given the insight on what to change and what to keep. So, this kind of open culture has resulted in where we are today. I really want to extend and keep this culture despite the growth of the company.
C: You're the CEO, Lawrence is the President. Are, are you both like night and day? I mean, one is the financier (Frank laughs) while you're the engineer. So, how is decision-making carried out within the company?
F: So, to most of our friends, I'll be described as the "solar guy" and Lawrence is the "money guy". (Laughs) But I think that is kind of important as well and summarizes the work that we have been doing.
C: So, he holds the strings to the purse?
F: (Laughs) I think he looks at Sunseap financially for sure and Lawrence is largely in charge of majority of the fundraising exercise including debt discussions with banks. Whereas I chase for projects, do business development and make sure the execution of the project is on time.
C: Do both of you see eye to eye?
F: Not all the time.
C: What do you disagree on?
F: I think in terms of choosing and prioritizing projects. We do have our different views but I think more importantly despite our differences in character and decision-making process, we always base our decision for execution on common understanding between the two. If there is one that is not for the decision, we will not prioritize it. So, I think that is a healthy debate that we have continuously between each other. So, I will describe myself as the more gung-ho one while Lawrence is the more conservative one. But I think that is a good match.
C: And finally, lots of casualties in the solar industry. Consolidation is expected to continue. You think Sunseap has what it takes to be around in the long haul?
F: Yes. After being in this industry for the last 20 years I have seen the rise and fall of many solar companies. Some even giants, I would say, that came into the industry and fell out spectacularly as well.
C: Do you ever worry it might happen to you?
F: Yes, yes. I think for us, we have to be very disciplined in terms of our lending and our choice of projects. We don't chase for projects blindly just for revenue without any profitability. We have to be very disciplined in our IRR calculations and our cash flow analysis to deploy those cash into the projects. I think that discipline will turn out to be good for us in the long run because many of the companies that fall out of the industry, they have no discipline there. They were chasing after growth without understanding what their cash position was. So, I think for us, we learn from the mistakes that these companies have made and we make sure that we don't repeat them. As far as possible, we want to also inculcate this culture and discipline throughout the entire organization, from top to bottom. So, the individual staff in Sunseap, not only the founders or the senior management, is educated about what you're supposed to do within limits and not go beyond the limits to chase after projects.
C: So, the future looks bright, you're 100 percent confident you can continue your success at Sunseap?
F: I'm pretty sure because I don't see many other companies with guaranteed cash flows for the next 20, 25 years. So, every project that we sign, we're almost assured 20, 25 years of cash flows coming in. Unless the sun doesn't shine, right. So, that is another bigger problem. (Both laugh)
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