HanKore Environment

DMG & Partners Research, Feb 17

H1 PROFIT after tax and minority interests (Patmi) surged 62.5 per cent y-o-y to 59.8 million yuan (S$12.4 million) on strong operational performance. This was compared to H1 FY2013's 36.8 million yuan. The H1 FY2014 result also formed 38.7 per cent of our full-year estimate. This profit surge was driven by a 297.2 per cent increase in engineering, procurement and construction (EPC) / construction revenues to 219.7 million yuan on higher gross margins of 27.6 per cent against 9.1 per cent in H1 FY2013.

This was partly attributable to HanKore Environment Tech's newly acquired EPC arm Jiangsu Tongyong. Wastewater treatment income also grew 22.9 per cent to 112.3 million yuan, with higher gross margins of 69.6 per cent against 62.0 per cent previously.

Merger process with China Everbright International or CEI (not rated) is going well. A deal is likely to go through going into FY2015 and we maintain our initial six-month estimate on the completion of this exercise for now. We have also factored in the legal fees associated with the merger, higher capital market activities by management and higher employee share option expenses in H2 FY2014, thus raising FY2014 administrative expenses by 33.3 per cent to 85.8 million yuan. Consequently, this lowers Patmi estimates to 135 million yuan from 154.6 million yuan.

With the completion and/or upgrade of Henan Sanmenxia Phase 1 (30,000 tonnes per day), Nanjing Liuhe Phase 2 (20,000 tonnes per day) and Shaanxi Xianyang Phase 2 (100,000 tonnes per day) by end of H1 FY2014, HanKore is set to generate another surge in its recurring wastewater treatment income in H2 FY2014. Meanwhile, construction activities at Jiangsu Kunshan Phase 3 and another Sanmenxia project should continue to lift the construction segment's revenue in H2 FY2014.

Maintain "buy" based on 25 times FY2015 PE, with target price of S$0.161. Assuming its merger with CEI goes through, which we think is very likely, we believe HanKore remains highly mispriced.

BUY