Hankore Environment Tech Group

CIMB Research, May 18

NO thanks to the one-off fair value loss of 110 million yuan (S$22 million) from its contingent liabilities to Tongyong and the marking-to-market of its warrants, Hankore's nine-month FY14 net profit was in the red, as expected. Core earnings were broadly in line with our expectation at 78 per cent of our full-year forecast. Due to the net effect of the reclassification of certain expenses as non-recurring and some downward adjustments of projected EPC (engineering, procurement and construction) revenues, we raise our FY14-15 EPS estimates by 3.2 per cent and 6 per cent, respectively.

The deal with China Everbright International (CEI) remains a key near-term catalyst. We upgrade from "hold" to "add", with a 2014 SOP-based (sum of parts) target price of S$0.125, based on the scenario that Hankore purchases CEI's water assets at 1.3x trailing NAV.

Nine-month FY14 turned into a loss mainly on a number of non-cash items, including the fair value loss from the contingent shares paid to Jiangsu Tongyong and the marking-to-market of the warrants. The reported fair value loss of RMB110 million was in line with our earlier estimate of RMB115 million. In addition, the group incurred non-recurring expenses totalling RMB30.1 million from employee share options and professional fees related to the CEI deal. Excluding the one-off items, our estimates indicated 142 per cent growth in HanKore's nine-month FY14 core earnings.

Expect FY14 to end up in a net loss of RMB41 million. We estimate another circa RMB20 million in staff options expense and professional fees in Q4. We have also factored in lower EPC revenue from the delay in Hankore's Suzhou plant. All in, we estimate FY14 core earnings at RMB113.8 million (FY13: RMB58.5 million).

We understand from management that both parties are still actively pushing for the deal and the recent stake purchase by the second largest shareholder, Alan Wang, also bolstered the market's confidence. We include a scenario analysis on the possible outcomes of the CEI deal.

Our target price of S$0.125 is based on the scenario that Hankore acquires CEI's water assets at 1.3x trailing NAV. The company could be worth S$0.148 if the CEI assets are acquired at 1.0x trailing NAV, while our target price falls to S$0.091 if the deal is called off.

ADD