SIIC Environment (SIIC SP) - DBS Research 2017-08-15: Too Conservative On The PPP Market

SIIC Environment (SIIC SP) - DBS Vickers 2017-08-15: Too Conservative On The PPP Market SIIC ENVIRONMENT HOLDINGS LTD. BHK.SI

SIIC Environment (SIIC SP) - Too Conservative On The PPP Market

  • SIIC Environment's 1HFY17 net profit above our expectations due to stronger O&M revenue and higher gross margins.
  • Construction revenue to be driven by upgrade of 3-4m tons of capacity to grade 1A standard.
  • Growth in project portfolio is expected to be slow before dual listing in Hong Kong.
  • Maintain HOLD with TP of S$0.53.



What’s New 

  • SIIC Environment reported 26% growth in 1HFY17 earnings to Rmb240m, 12% above our expectations. The major discrepancies were stronger-than-expected O&M turnover and higher-than-expected gross margins. 
  • Turnover increased 78% to Rmb1,995m with gross margin at 35.5%, up from 32.9% in 1HFY16. This was due to a decline in sales percentage from construction, down from 42% of total turnover in 1HFY16 to 39% in 1HFY17. Following the acquisition of Longjiang Environment, treatment volume of waste water treatment and water supply jumped 81% and 49% respectively. 
  • No interim dividend was declared.
  • In 1HFY17, SIIC added 540,000 tons of daily treatment capacity into its water portfolio, representing growth of around 5%. Most of these projects are traditional BOT / TOT projects with 385,000 tons to be upgraded or constructed in the near term. 
  • In addition, 3-4m tons of capacity (accounting for about 30-40% of total water capacity) is still below the grade 1A standard which has to be upgraded before 2020. Following the upgrade, treatment tariff is expected to increase 50-80%. These will be the major driver for construction revenue going forward. Thus, we have raised our estimates for construction revenue by 69% and 40% for FY17 and FY18 respectively. 
  • We have also increased our projection for O&M turnover by 16% and 9% respectively to reflect the better than expected showing in 1HFY17. 
  • Effective interest rate of 4.7% in 1HFY17 was higher than expected. Although management does not expect any interest rate hike in China in 2H, we have raised our assumption on interest expense. 
  • All-in, we have raised our FY17F earnings estimates by 3% but reduced FY18F earnings by 3%.
  • The progress of the stock’s dual listing exercise in Hong Kong remains slow although some professional expenses regarding the listing are expected to be incurred in 2H.
  • The progress of the stock’s dual listing exercise in Hong Kong remains slow although some professional expenses regarding the listing are expected to be incurred in 2H. Before the completion of the listing, we do not expect any major transactions or M&A deals to be concluded. Thus, the growth in the project portfolio will be small at < 10% in the next 12 months and growth will mainly rely on project upgrades. 
  • In addition, management’s scepticism on the PPP market would mean that SIIC is missing a large part of the potential in the water market. As many water plants have been packaged into the large scale PPP projects, we reckon it is getting difficult to grow by securing the traditional water plants and M&A, which will have a negative impact on the growth of the order backlog in the medium term. Thus, we have lowered our target PE from 25x to 22x. 
  • Accordingly, our TP is revised down to S$0.53. Maintain HOLD.




Patricia YEUNG DBS Vickers | http://www.dbsvickers.com/ 2017-08-15
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.530 Down 0.550



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