Excerpts from analyst's report

Deutsche Bank analysts: Yuxiao Peng, CFA & Michael Tong, CFA

400 SIIC projectSIIC Environment is still pursuing a dual listing in HK.
Photo: Company
Strong 3Q15 results as expected; Reiterate Buy

SIIC reported strong 3Q15 results, with reported earnings up 33% yoy, largely in line with our estimates. We think SIIC offers a better risk-reward among peers, with stronger earnings growth but more attractive valuation (at c.30% discount to peers’ average in 2016E PE).

Despite the uncertain timetable subject to external acquisitions and overall market situations, SIIC is still firmly pushing for asset injection of the c.17% stake in Longjiang Environment from its parent SIHL and dual listing in Hong Kong, which could become potential share price catalysts.

3Q15 earnings growth accelerated with contribution from Fudan Water
SIIC announced its 9M15 results after market close today. Reported earnings increased 23% yoy in 9M15, while the growth accelerated to 33% yoy in 3Q15 with Fudan Water acquisition completed in May 2015.

Stripping out one-off items (mainly the FX loss, one-off compensation for late payment in 3Q14, and fair value loss), recurring earnings rose 65% yoy in 9M15. The 9M15 recurring earnings were at 71% of our previous FY15 earnings forecasts, largely inline.

Project wins of 1.54mt/d YTD; already achieved company target
SIIC has secured 1.54mt/d new projects YTD and already achieved the upper limit of its target of 1-1.5mt/d. The company expects more projects could be obtained organically (directly from the local governments) than from M&As going forward, as it has built up regional teams across 15 provinces.

DCF-based target price of SGD1.40; Buy; risks
We are fine-tuning our earnings forecasts slightly, with target price unchanged at SGD1.40. Our DCF valuation (WACC of 6.2%) incorporates long-term growth and is not affected by the mismatch between reported earnings and cash flows under concession accounting.

"Risks: lower-than-expected project wins; EPS dilution from potential equity placement; delay in passing through VAT rule change impact; receivable risks from local governments."  -- Deutsche Bank

Near term impact from VAT rule change yet to be passed on
The impact from VAT rule change may have been exaggerated in 3Q15 earnings, in our view.

Wastewater treatment revenue was booked excluding the 17% VAT in 3Q15, but other income only increased by Rmb6m, lower than our estimates of over Rmb20m.

Not all the VAT had been rebated in time yet, as smooth implementation of the new rule takes time, therefore VAT rebate income was not fully booked in 3Q15.

Realistically, pass through of VAT impact by adjusting treatment fees may only happen from 2016 when local governments start to make their new budgets for the year and it would be a gradual process.

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