SIIC ENVIRONMENT HOLDINGS LTD.
BHK.SI
SIIC Environment Holdings - Deserving Of a Rerating
- We hosted SIIC for a post-results NDR. Below are the key takeaways:
- Its aggressive growth story remains intact over the next five years;
- WTE and sludge projects are secondary growth drivers;
- Concerns on accounting treatment and collection of AR have been dismissed;
- Its SOE background and nationwide scale enable it to better withstand competitive pressures.
- Reiterate BUY with a DCF-derived TP of SGD1.26 (112% upside).
Aggressive growth story remains intact.
- SIIC Environment (SIIC) aims to be the industry leader by 2020. This sound like a tall order, as Beijing Enterprises Water (BEW) (371 HK, BUY, TP: HKD6.10), the largest waste water player in China, currently has a daily treatment capacity of 24.6m.
- We think this is a deliberate hint on:
- SIIC’s positive progress on its potential acquisition of Longjiang Environmental Protection Group (Longjiang Group);
- The potential asset injection of General Water of China from Shanghai Industrial;
- Its ability to exceed its targeted capacity growth of 1-1.5m tonnes of capacity each year.
Waste-to-energy (WTE) and sludge are the next legs of growth.
- SIIC has begun investing in these two areas for its next leg of growth as it thinks growth may taper in the waste water segment after 2020. We welcome the diversification to WTE and sludge projects since both offer a IRR of >10%.
Unwarranted concerns on accounting treatment and accounts receivable (AR) collection.
- We believe these concerns have deteriorated the valuations of the sector. However, we find this unwarranted for SIIC, as it has the industry’s most conservative construction gross margin of 12%. AR days for water tariffs were also stable, at an average of three months.
State-owned enterprise (SOE) background and scale give an added advantage.
- According to Global Water Intelligence, SIIC is one of the six key players in China that has a nationwide presence.
- Coupled with its SOE background, we think the group is in good stead to negotiate for new projects with local governments. Its SOE background also gives it access to a cheaper source of funds that would enable it to bid under more favourable conditions.
Reiterate BUY with a TP of SGD1.26.
- SIIC remains our Top Pick in the municipal waste water treatment sector.
- Our TP also implies 21x FY17F P/E, as we think the company’s strong fundamentals deserve a premium valuation to its peers.
- We also expect its robust growth story to be realised in 2H16.
- Internal rate of return (IRR) erosion from intensified competition and receivables risks are the key risks to our recommendation.
Juliana Cai
RHB Invest
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http://www.rhbinvest.com.sg/
2016-08-16
RHB Invest
SGX Stock
Analyst Report
1.260
Same
1.260
