Hyflux

OCBC Investment Research, June 27

HYFLUX Ltd recently saw a massive correction in its share price, plunging nearly 13.1 per cent from a high of $1.37 on June 10 to a low of $1.19 on June 24.

Besides the slowing economic growth in China, sentiment is also likely spooked by the recent reports of credit tightening in the mainland, which alone probably resulted in the sharp 6.7 per cent drop on June 24.

No doubt these concerns are valid, given that waste water treatment projects require very large capital investments, but we believe that they may be overwrought. For one, industry watchers believe that water scarcity and pollution of water sources are two of the most serious problems for China and the government is likely to put in more effort to tackle these issues.

Secondly, Hyflux, being an "international" company, should be able to access other sources of funds besides the usual "local" project financing. And this may work in Hyflux's favour when it comes to bidding for projects against local Chinese companies.

Separately, the company's Tuaspring desalination project is progressing along nicely. Management notes that the desalination portion is on track to deliver water by Q3 2013.

It had also recently signed a US$138.7 million export credit financing agreement with KfWIPEX Bank GmbH to finance the purchase of key components for the 411MW combined cycle gas turbine plant, where construction work is also progressing well (likely to be completed by end-2014).

Nevertheless, as the market appears to be taking a more "risk off" approach, we now use a lower 20 times peg (versus 22 times previously) against our FY2013F EPS, which results in our fair value easing from $1.44 to $1.30.

However, value is starting to emerge, especially closer to its recent $1.19 low; hence we maintain our "hold" rating on the stock.

HOLD