China Water Play: and its not an S-Chip

In China, Infrastructure on 08/02/2011 at 9:44 am

United Envirotech is owned by local blue chip UEL

OCBC likes the stock despite revising its value downwards by 5% to 0.65. When report was issued on 2 February, the stock had closed at 0.455.

Profitability and recurring income improving: Lumpy revenue aside, we note that profitability has improved, with gross margin improving to 59.9 per cent in Q3 FY11, versus 46.6 per cent in Q3 FY10 and 42.3 per cent in Q2 FY11. The main reason is increasing recurring income that UEL gets from its wastewater treatment segment, which grew to $5.4 million; this segment typically comes with a gross margin of over 50 per cent. On the other hand, its engineering revenue slipped to $7.4 million. But we are not perturbed as UEL is sitting on an order book of over $100 million, which it will continue to deliver through to September 2011.

Outlook remains upbeat: Indeed, China has recently announced that it plans to double its investment in water conservation projects to four trillion yuan (S$777 billion) over the next 10 years as cities face shortages and irrigation facilities are badly in need of an overhaul. UEL is already in talks to acquire several TOT (transfer-operate-transfer) projects after raising $28 million from its TDR listing recently.

Revising fair value to $0.65: As some of the projects are still in the planning stage and UEL will probably recognise the revenue slightly later than expected, we pare our FY11 revenue estimates by 32.4 per cent, but due to the increased profitability, we pare our earnings forecast by a smaller 9.7 per cent. As such, our discounted cashflow-based fair value dips from $0.69 to $0.65. Nevertheless, in view of the good upside potential and the still buoyant industry outlook, we maintain our BUY rating.

Related post: Water, the new oil

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