SIIC Environment Holdings - Set To Be On Stronger Footing
- With over 10m tonnes of daily treatment capacity, SIIC Environment (SIIC) is the third largest municipal WWT player in China.
- We believe its strong balance sheet and nationwide footprint could put it in better stead to acquire more projects compared to its peers. The company expects to undergo a dual-listing (the second being in Hong Kong) by Jun 2017.
- Maintain BUY, with a DCF- based TP of SGD1.13.
Supported by the Central Government’s favourable policies.
- Although the wastewater treatment (WWT) sector is relatively mature, we believe there are still an adequate number of projects that are up for grabs in 2017.
- Infrastructure spending may continue to be key to China’s economic growth in 2017. To arrest the slowdown in China’s economy, we can expect to see an increase in upgrading projects, stricter adherence to schedule and quicker approvals for water-related PPP projects.
- With the acquisition of Longjiang Group and Ranhill Water, SIIC Environment (SIIC) is now open to taking on more projects in China’s north-eastern region as well as projects in the industrial WWT space.
Dual-listing in Hong Kong.
- Management expects SIIC to complete its Hong Kong dual-listing by June. We view this favourably for SIIC as it opens a new realm of investors who would be more familiar with investments in this sector. This could be a potential re-rating catalyst for the stock.
Big asset acquisition could come after dual-listing.
- Shanghai Industrial has mentioned in the past that it would inject its 45% stake in General Water of China into SIIC, when SIIC’s WWT capacity becomes more substantial.
- Currently, Shanghai Industrial only owns about 37% of SIIC. We think it may potentially inject its other water asset in exchange for more SIIC shares after the dual-listing.
Maintain BUY, with a TP of SGD1.13.
- Our DCF-derived TP is based on a 9.8% cost of equity, 3% risk-free rate, 0.9x beta, 9.5% market return, 0.9% country risk premium and a terminal growth rate of 0%.
- Our TP of SGD1.13 implies a 19x FY17F P/E, which is at a slight premium to the regional peer average.
Key risk – IRR erosion.
- Local governments may bundle low-yielding projects such as water reclamation and pipe works together with WWT projects in the PPP model.
- While local governments will usually try to ensure a certain level of benchmarked returns for the company undertaking the projects, there is downside risk if other large SOEs bid aggressively for the projects and jeopardise project IRRs.