SIIC Environment Holdings

DBS Vickers Research, Feb 10

INITIATING coverage on SIIC with "buy" for 33 per cent potential return to 12-month TP of S$0.25.

Strong parent support and positive industry fundamentals will drive 49 per cent net profits CAGR (compounded annual growth rate) from FY13-FY15.

Recent rally may not have factored in full growth potential, more acquisitions in medium term could drive further upside.

New rising star in China's water sector: SIIC is fast becoming one of the largest players in China's water treatment and supply industry by design capacity. The company is an owner and operator of water supply and wastewater treatment (WWT) facilities.

By the end of 2013, SIIC has quadrupled its total water treatment design capacity to four million tons per day (tpd) from one million in 2009. SIIC's current portfolio of 44 projects across 12 provinces in China generates about 64 per cent of total revenue. The balance comes from construction revenue for internal facilities or development of third party water plants.

Growth amid rising tide and strong parent support.

SIIC is 46.72 per cent owned by Shanghai Industrial Holdings Ltd (SIHL), a state-owned enterprise (SOE) which facilitates SIIC's acquisitions and gives it access to capital at preferential rates, thus enabling the firm to leapfrog rapidly into China's environmental industry. Apart from growing organically with expansion and upgrading of its existing plants, SIIC will embark on acquisitions given its low net gearing of 0.3x and access to attractive funding rates.

Asset injection by parent company is another pontential kicker.

Earnings CAGR of 49 per cent from FY13-15 forecast: Faster than expected project ramp up or capacity additions ahead of our RMB1.5 billion assumed investment/capex will be potential earnings upside drivers.

"Buy", TP S$0.25. Our sum-of-parts TP is based on 12x PE for Construction and 10-Year DCF (discounted cash flow) valuation methodology for Water Treatment, using 8 per cent WACC (weighted average cost of capital), zero terminal growth and flat tariff rates throughout the concession period.

BUY