SIIC ENVIRONMENT HOLDINGS LTD
BHK.SI
SIIC Environment Holdings (SIIC SP) - Up And Coming Wave
- We resume coverage of SIIC as our Top BUY in this sector through a DCF-derived SGD1.18 TP (48% upside).
- SIIC is one of China’s largest players in the municipal wastewater industry. The introduction of the Water Action Plan ought to propel the growth of the water industry over the next few years. SIIC is therefore poised to benefit from water tariff reforms, new projects and liberalisation of water supply industry.
SIIC Environment (SIIC) is amongst the top five largest municipal wastewater treatment companies in China
- SIIC Environment (SIIC) is amongst the top five largest municipal wastewater treatment companies in China with a portfolio of more than 80 wastewater treatment and water supply contracts, which amounts to a daily contracted treatment capacity of 7.1m tonnes.
- Its largest shareholder, Shanghai Industrial Holdings (363 HK, NR), is the largest overseas conglomerate enterprise of the Shanghai municipal government and provides SIIC with strong financial support and government network to reach out for more projects.
Growing capacity organically and inorganically.
- Management has guided that an annual capacity growth target of 1m-1.5m tonnes/day over FY14-16F. This would be driven mainly through the acquisition of smaller companies or wastewater treatment assets.
- While we note that the acquisition landscape has become more competitive, we like the management’s commitment to stringent selection of M&A targets. So far, historical acquisitions have achieved IRR of 10-11%, which is higher than the industry average of 8%.
Current waste water tariff still low.
- With the government pushing for water tariff reforms through the introduction of the Water Action Plan, we believe it would be one of the beneficiaries.
- Currently, SIIC received an average tariff of ~CNY0.90/tonne, in line with the national average. However, from our channel checks, we see that some of the new projects can yield a tariff of CNY1.20-1.30/tonne.
- We believe there is ample room for potential fee hike as SIIC upgrades its project facilities.
Resume coverage on SIIC with BUY call.
- We use a DCF methodology to take into account the high capex and stable income stream of SIIC to derive at a SGD1.18 TP.
- This implies 26x FY16F P/E, which translates to 1.1x PEG in line with peers’ average.
- The report marks the transfer of coverage to analyst, Juliana Cai.
Key Risks:
- Potential dilution going forward since due to the capital intensive nature of wastewater treatment projects, SIIC issued new shares several times in the past for new investments.
Juliana Cai
RHB Research
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http://www.rhbinvest.com.sg/
2015-11-25
RHB Research
SGX Stock
Analyst Report
1.18
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