Investment Highlights
- New management, new beginning. With the appointment of a new management team in May 11, Hankore underwent a major restructuring and rebounded from a loss of Rmb407m in FY11 to a profit of Rmb103m in FY12. The group was also awarded one of China’s top ten new pioneer enterprises in the water industry for 2011 and one of the top ten fastest growing water companies in 2012. Hankore’s executive chairman, Mr Chen Dawei, is the largest shareholder with a 16.5% stake at a cost of S$0.04/share.
- Simple business model with a recurring income base. Hankore’s principal business is in the operation of waste water treatment plants in China. In FY12, Hankore derived 70% of its revenue and 94% of its profit through water tariffs from waste water treatment plants. With a minimum water tariff guarantee and supply undertake by the local governments, Hankore enjoys a stable recurring income from its water treatment plants.
- Growing recurring income. As at 31 Mar 13, Hankore had invested in 11 water treatment plants with a total capacity of up to 1.57m tons/day when fully completed. With the S$14.7m proceeds from the share placement to Mr Wang and S$50m from the recent issuance of fixed-rate notes, we believe Hankore is looking to acquire more water plants to grow its bottom line. It reported a 70% jump in net profit for 9MFY13.
Our View
- With the new management, Hankore enjoyed an earnings turnaround and was identified as one of China’s fastest growing water companies. However, marred by its controversial past, valuation has remained depressed at 13.1x PE vs its peers’ average of 24.5x. We believe the management’s major stake in the company is a show of confidence in Hankore. Mr Chen’s cost of investment at S$0.04/share will likely serve as a price support for the stock.
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