CIMB initiates coverage of HanKore with a 15.6-c target
Analysts: Roy Chen & Gary Ng
Analysts checking out a facility of HanKore. File photo.HanKore’s revenue and earnings should expand in FY14-16 on the back of both capacity expansion and higher water tariffs.The RTO of China Everbright International’s water business, once sealed, should further improve its contract clinching and project financing.
With the deal currently at the due diligence stage, our preliminary SOP valuation indicates a target price of S$0.156.
Environmental problems spur investment: After years of rapid economic growth at the expense of the environment, the public is getting increasingly concerned about the environmental problems that have cropped up.
As part of its 12th five-year plan, the Chinese government plans to invest Rmb430bn in wastewater treatment.
Given the vast opportunities ahead and a relatively fragmented market, the water treatment industry outlook is bright over the next decade.
Strong capacity expansion and rising water tariffs: Out of HanKore’s total designed capacity of 1.57m tonnes/day, 0.56m is currently in operation.
We expect the full 1.57m designed capacity to come online within the next 2-3 years.Besides the capacity expansion, a number of HanKore’s water facilities are undergoing discharge standard upgrading. After such an upgrade, a 40-60% increase in tariff is not uncommon.
CEI deal a game changer: After the deal, CEI will own over 60% of HanKore. The benefits to HanKore include:
1) it can leverage CEI’s SOE background in clinching contracts;
2) it could enjoy lower borrowing cost (HanKore: 7.5-8.5%, CEI: 5.0-5.5%);
3) the duo's geographical overlap will lead to stronger presence in certain regions of China.
Our SOP-based target price of S$0.156 implies a CY15 P/E of 17.3x, less demanding than its peer average of 19.6x.
Key risks include: 1) the CEI deal does not go through (an unlikely scenario), and 2) the management fails to ramp up financial leverage to improve the group’s profitability.
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