United Envirotech Limited

OCBC on 6 Sept 2012

United Envirotech Limited (UEL) has just signed a new agreement for a 30-year 20k m3/day BOT industrial waste-water project in Xintai City, Shandong, for S$20m, with construction to start immediately and complete within 15 months. We also got an update on the upgrading works of three industrial waste-water plants in Changyi City, Shandong, where UEL expects the works to complete by end-2012; existing tariffs to also improve once higher discharge standard is reached. In light of the latest contract win and potentially more contract wins in the pipeline (we estimate that UEL has the financial capacity to finance up to S$245m worth of projects), we are bumping up our FY13 revenue forecast by 13% and earnings by 27%. Applying the same 13.5x valuation peg to FY13F EPS, our fair value improves from S$0.425 to S$0.50. Maintain BUY.

New BOT project in Shandong
United Envirotech Limited (UEL) has just signed a new agreement for a 30-year BOT (Build-Operate-Transfer) project in Xintai City, Shandong Province, China. UEL will invest some RMB100m (S$20m) in the Phase 1 of the 20k m3/day industrial waste-water treatment plant.; this using proceeds from its convertible bond issue and bank financing in the usual 40:60 ratio. Construction for the project will commence immediately and management expects to complete the construction in 15 months.

Good execution track record in Shandong
As a recap, UEL first acquired two municipal waste-water treatment plants (total capacity of 80k m3/day) in Xintai City seven years ago. It adds its MBR (membrane bio-reactor) technology has already been used in the upgrading of three industrial waste-water plants in Changyi City, Shandong. We were also given an update of these plants and UEL expects the upgrading works to be completed before the end of 2012; and also tariffs to increase once higher discharge standard is reached.

Still looking for more opportunities
Management intends to pursue more such industrial waste-water projects in China, especially in Shandong, Jiangsu and Liaoning. We believe that UEL remains in a pretty strong financial position to compete against domestic bidders amidst still-tight onshore credit situation, given that it was sitting on a cash balance of S$98.6m as of end-Jun. Based on its usual 40% equity 60% debt funding ratio, we estimate that UEL can finance up to S$245m worth of projects. We understand that UEL has also been refinancing some of its existing projects on more attractive rates, which should further improve profitability.

Revising up fair value to S$0.50
In light of the latest contract win and potentially more contract wins in the pipeline, we are bumping up our FY13 revenue forecast by 13% and earnings by 27%. Applying the same 13.5x valuation peg to FY13F EPS, our fair value improves from S$0.425 to S$0.50. Maintain BUY.