Excerpts from latest analyst reports....
SIAS maintains ‘Increase Exposure’ rating on China Environment with intrinsic value of 37 cents
Analyst: Liu Jinshu
We visited China Environment Ltd’s headquarters at Longyan City, Fujian Province. We saw firsthand the complexity of building waste gas treatment systems, which involves design, steel fabrication, electronic and electrical engineering, construction and testing.
A typical gas treatment solution consists of both mechanical and electronic/electrical sub-modules. As the company produces both parts itself, it enjoys a cost advantage over peers that have to make up for technical capabilities they do not posses by outsourcing to contractors.
It has also been allocated a 200,000 square meter plot of land that it has yet to purchase. This allotment gives it the option to expand and take on more projects in the future.
Value Catalysts
China Environment is currently in talks with a partner to build a system that comprises of dust, NOx and sulphur removal modules.
To finance such large-scale projects, it is considering various funding options, which may include dual listing plans.
We see the realization of these events as value catalysts. In the long run, it intends to expand its capabilities to include technologies for water and noise pollution. Given China’s growing market for environmental protection equipment, we maintain our bullish outlook on China Environment.
Analysts: Terence Wong and Tan Chee How
China Environment manufactures industrial waste gas equipments (IWE) – a market segment which is set to grow in the next few years driven by government policies and regulations.
We believe China Environment is well-positioned to seize the industry-wide growth opportunity with its range of products, particularly the newly patented Electrostatic Lentoid Precipitator (ESLP).
In addition, China Environment is considering on venturing into other Asian countries where profitability could be higher.
Given the potential, we value China Environment at TP of S$0.320 based on blended FY10F/FY11F PATMI, which is a 67% discount to HKEx-listed peers’ P/E.
According to Frost and Sullivan, the IWE maker market size is slated to grow at 15% CAGR between 2009 and 2013 to hit US$9.6b.
It is expanding its product offerings to include Desulphurification system, DeNOx system, and Electrostatic Lentoid Precipitator.
In particular, ESLP shows great potential as preliminary findings illustrate that the product has better capability and is cheaper to build compared to ESP.
Price war the biggest risk
Key risks to our call on China Environment are:
1) increasing competition within the IWE manufacturing sector, and
2) consistently high receivable days which will drain the cash as its business expands.
DMG-OSK maintains ‘BUY’ call on United Envirotech after TDRs outperform Singapore listing
Analysts: Terence Wong and Selena Leong
32m TDRs were issued at a price of NTD15.65 (~S$0.66), equivalent to 40m new shares (1 TDR = 1.25 new share) issued at S$0.53 per new share.
As the first environmental company to issue TDRs, there is strong investor interest, as UE provides the Taiwan investing community with an opportunity in the rapidly growing water and wastewater industry in China.
The TDRs have performed very well, currently trading at NTD16.7 or equivalent to ~S$0.706, up 6.7%. This is approximately a 46% premium to its Singapore shares.
Secondary listing a positive move for UE.
The company is raising NTD500.8m (~S$21.2m) from the listing and this will be used to fund new investments in wastewater treatment plants/ BOT (build-operate-transfer) projects.
In addition, the TDR listing would enable UE to expand its operations in Taiwan.
Outlook remains bright, and dilution from issue of new shares mild.
We are maintaining our FY11 earnings, with our estimates for order books to come in at S$160m for FY11.
With the continued strong demand for wastewater treatment facilities in China and UE’s track record, we are maintaining our BUY call with a revised TP of S$0.635 due to share dilution (previously S$0.66), based on 12x FY11 earnings.
