DBS Vickers’ top picks for water sector
Analysts: Tan Ai Teng & Patrick Yeung
Investors are upbeat on outlook but gripe on valuations.
Investors’ confidence in China water sector remains solid as favourable reform offers more business opportunities. Despite the mid-cycle valuation, we believe share price will move further up due to more contract wins along the value chain and aggressive targets expected in the upcoming Five-Year Plan.
Source: DBS Vickers Dec 16.
Epure – ready to be re-rated. The attractive valuation of Epure (the lowest amongst our top picks) has caught the attention of many investors.
In addition, Epure’s sound track record in earnings delivery and order book has fortified investors’confidence in the company. We believe Epure’s valuation has been penalized for being an S-chip.
However, we believe various factors could trigger re-rating, including potential injection of BOT projects from the Chairman, possible dual listing in Hong Kong or Nasdaq.
Hyflux – a niche player in desalination operation. Like us,investors do not doubt Hyflux’s expertise in seawater desalination, as good references were made in the first desalination plant in Singapore and its first project for Sinopec in Da Gang, Tianjin. We are also impressed by its ability in finding funding. It was the pioneer in setting up a water trust to recycle capital. It has successfully sought financial support from local governments in North Africa to provide funding at low interest rate for the projects. In addition, it has partnered with Japan Bank of International Corporation to explore new projects.
While some investors have been doubtful about the financial strength of governments in Middle East, particularly after the Dubai debt crisis, our checks with management confirmed that the company’s small private projects in the ME region including Dubai and UAE were delivered and paid. As for other countries such as Oman, Kuwait etc, which are still continuing their big municipal projects, Hyflux is evaluating potential projects very carefully. Essentially, Hyflux has no significant impact from the Dubai fallout. Meanwhile, the North African countries which Hyflux has substantial exposure - Algeria and Libya are some of the wealthiest of the African continent.
Wang Hong Chun, CEO, Asia Environment. File photo by Sim Kih
Asia Environment (30 cents, target price 47 cents) - Small but performing. Although quite a small cap, AENV’s undemanding valuations did catch some investors’ attention.
In terms of performance, AENV has maintained a rather consistent track record up until execution of its BOT projects were threatened by the sweeping credit crunch late last year. As the liquidity situation improves, AENV has secured project financing for its BOT projects to get back on the growth path.
Besides tapping on multi-lateral agencies such as IFC (which had already extended a convertible loan to AENV in 2007) and Asian Development Bank, the company has a substantial portfolio of BOT projects (capacity: 1m cu m/day; value: RMB1.8m) to establish a water trust. If successful, this would greatly relieve funding needs of the company.
At any rate, AENV had turned in better than expected results for the past two quarters. If the company continues to keep up with this performance, we expect AENV will continue to re-rate along with the entire industry.
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