SANLI ENVIRONMENTAL: A Play on Asia's Water Story

This article by Jennifer Tan (left, Director, Research & Products,  Equities & Fixed Income, at the Singapore Exchange) was published in SGX's kopi-C: the Company brew series on 9 February 2018. The article is republished with permission.

Winning Strategy

To build a stable earnings stream, Sanli focused on servicing municipal contracts. Currently, nearly all of Sanli's revenues are derived from the Singapore government.

"We chose to go into the municipal sector, because the government is a good paymaster and a consistent revenue generator," Sim said.

"With industrial clients, the possibility of facing losses and write-offs is much higher, while competition is stiffer and the margins thinner."

That proved to be a winning strategy - "As a result, we've grown in tandem with the Singapore water story," he added.

Sanli Environmental Ltd listed on SGX's Catalist Board in June 2017. The environmental engineering company, which has a market capitalisation of over S$75 million, has seen its shares rise more than 24% from their initial public offer (IPO) price of 22.5 Singapore cents.

We chose to go into the municipal sector because the government is a good paymaster and a consistent revenue generator. - Sim Hock Heng CEO Sanli Environmental

In the 2018 year-to-date, the stock has registered a price gain of 3.7%, compared with declines of 2.2% for the FTSE ST All-Share Index and 2.3% for the benchmark Straits Times Index.

The Group has expertise in the design, delivery, installation, commissioning, maintenance, repair and overhaul of mechanical and electrical equipment.

It also handles process, instrumentation and control systems in wastewater treatment plants, water reclamation plants, NEWater plants, waterworks, service reservoirs, pumping stations and incineration plants.

It has two core business segments - Engineering, Procurement & Construction (EPC,) which provides services in water and waste management, as well as Operations & Maintenance (O&M), which offers repair and maintenance services for equipment used in water and waste management infrastructure.

Heliconia Capital Management, the private equity arm of Singapore government investment firm Temasek Holdings, holds a 7.97% stake in Sanli post-IPO.

For the six months ended 30 September 2017, Sanli reported a pretax profit excluding one-off IPO expenses of S$2.3 million, compared to S$2.7 million in the previous period. Gross profit margin rose to 15.8% from 14.4% in the year-ago period, while net assets increased to S$22.3 million as at 30 September 2017, from S$8.5 million as at 31 March 2017. It had a net cash position of S$4.8 million as at end-September.

Other water stocks on SGX include SIIC Environment Holdings Ltd, China Everbright Water Ltd, Hyflux Ltd and Moya Holdings Asia Ltd.

Keeping it Simple

Sim's mantra revolves around the principle of simplicity. "If you focus on the basics and build up your fundamentals, everything will fall into place," he said. "When the right opportunities come, you will be able to reap the benefits." Conservatism is another watchword. "We should start small and go slow. Stability plays a very important part in achieving consistent growth," he added. With water being such an essential and scarce commodity in the region, Sim is optimistic about the Group's outlook. Stock price  28c 52-week Range 26c to 37.5c Market Cap S$75.2m Price/Book 3.4 x Price Earnings 15.7 x Dividend Yield - Source: SGX StockFacts "I'm not worried about prospects. The opportunities are there, the only issue is prudence." According to market research firm Hexa Research, the global water and wastewater treatment market is forecast to reach US$674.7 billion by 2025, driven by rising demand for freshwater for drinking, industrialisation and agriculture. Asia Pacific was the largest market, accounting for about 44% of the revenue share in 2016. This is anticipated to gain momentum over the forecast period, driven by growing demand for filtered water for various applications. In Singapore, the government has announced various initiatives to boost the city-state's water infrastructure as domestic demand escalates. To develop its reputation as a global hydrohub, the Ministry of Environment & Water Resources set up the Environment & Water Industry Development Council to coordinate efforts of various government agencies. The Council is led by PUB - Singapore's national water agency - and the Economic Development Board. Between 2000 and 2015, Singapore spent about S$430 million every year in water infrastructure, and this expenditure is expected to rise to S$800 million annually between 2017 and 2021 to fund major investments in water plants, pipes and pumps, Deputy Prime Minister Teo Chee Hean said in March 2017. This will prepare Singapore for the 2061 expiry of its second water agreement with Malaysia, which now meets about half the island's water needs, Teo added. By 2060, Singapore's water use is forecast to more than double from about 430 million gallons a day currently, according to PUB data. Reclaimed water - or NEWater - and desalinated water are expected to make up for 85% of supply, up from 65% today. In 2000, the government also implemented the Deep Tunnel Sewerage System (DTSS) - a super highway for used water management. The DTSS is an overhaul of Singapore's entire sewerage system, where used water from across the island is collected and treated at three centralised water reclamation plants. The second phase of the DTSS is targeted to be completed by 2025, and is expected to translate into a series of project tenders over the next few years. "Sanli will get a fair share of these domestic municipal contracts because there are limited bidders in this sector," Sim noted. "We're targeting contract values of $200 million to $300 million in this segment."

Robust Momentum

On the private sector front, the management of industrial water use will increasingly become a priority for many water-intensive businesses operating in Singapore, particularly in the petrochemicals, electronics and pharmaceuticals sectors.

In light of this, Sanli is hoping to bag contracts for larger scale projects. "We want to compete with the big boys, such as Keppel and SembCorp. That was why we took the IPO route - this will give us better credibility and more funding."

Sanli's order book stands at over S$114 million as at 10 January 2018. "This will easily give us good momentum over the next two years," he added.

The Group is also exploring opportunities to expand into the ASEAN region, particularly in Malaysia, Myanmar, Vietnam and Indonesia, where there is demand for industry professionals to invest, build and operate privately owned water treatment facilities to mitigate the challenge of limited access to fresh water.

For overseas projects, it's all about the risk. There are plenty of opportunities, as demand for water is everywhere, but the risks are also very high. - Sim Hock Heng CEO Sanli Environmental

"For overseas projects, it's all about the risk. There are plenty of opportunities, as demand for water is everywhere, but the risks are also very high," Sim said.

Sanli has identified local partners in a number of markets, and is focusing on municipal as well as build-own-operate (BOO) projects.

"We are targeting contract values of US$20 million to US$30 million, and participation through partnership ventures or equity sharing. In this way, the risks will be very manageable," he added.

For Sim, every problem that crops up has a solution. "As an engineer, I believe there's nothing that cannot be solved. If you have the right mindset, you will be able to make a decision and move forward," he added.

Outside the office, Sim loves pottering around the kitchen. "I enjoy going to the market, buying ingredients and cooking dishes for my family," he said with a grin.

He usually prepares steamed fish for his youngest daughter, 11, and a meat dish - either fried pork or pork ribs soup - for his eldest daughter, 16.

Values he tries to impart to his children include staying focused and keeping a cool head. This principle is encapsulated in the Chinese phrase "净化", which means to cleanse or purify.

"The goal is to keep it simple - pursue happiness and stability in all things. This doesn't mean you won't face problems in life, but it does mean you can be steadfast and unshakeable in the face of difficulty and conflict."

As a result, nothing keeps Sim up at night.

"There's no point in worrying, because worry doesn't make you more effective. Instead, meet the challenge head on, and overcome it."

Financial results

* Excludes one-off IPO expenses
Source: company data

Sanli Environmental Ltd

Sanli, an environmental engineering company in the field of water and waste management, has more than 10 years of experience in the industry and over 1,000 completed projects in its portfolio. The Group's expertise lies in the design, supply, delivery, installation, commissioning, maintenance, repair and overhaul of mechanical and electrical equipment as well as process, instrumentation and control systems in wastewater treatment plants, water reclamation plants, NEWater plants, waterworks, service reservoirs, pumping stations and incineration plants.

The Group has two main business segments: Engineering, Procurement & Construction (EPC) and Operations & Maintenance (O&M). Under its EPC segment, Sanli provides services within the field of water and waste management, including process upgrading of existing water treatment plants, upgrading of pumping station capacities, replacement of aged equipment, and design and build of various treatment process systems. Through its O&M segment, the Group provides corrective and preventive maintenance services to ensure reliability and minimal disruptions to customers' operations.

For the company's financial results for the half year ended 30 September 2017, click here.

The company website is: www.sanli.com.sg.

The ccompany's Stock Facts page is here.