Leader Environmental Technologies: Sell-down unwarranted (DMG)

(BUY, S$0.162, TP S$0.47)

LET posted a strong set of 2Q11 results with RMB31.3m in revenue (+69.8% YoY) and RMB6.8m in net earnings (+55.9% YoY). Desulphurisation Engineering, Procurement and Construction (EPC) business continues to power growth, making up 85.5% of the group’s 1H11 sales. The bulk of its earnings (>80%) come in the second half. EPC order book currently stands at RMB100m, and we expect the group to secure another RMB250m worth of EPC contracts by the end of August. Reiterate BUY, with a TP of S$0.47 (previously S$0.53), based on 8.9x P/E (-1 SD industry P/E). The next key rerating catalysts of the stock are likely to be the green light to commence the Operate, Own and Transfer (OOT) business as well as its maiden contract breaking into the denitrification industry.

The right place to be in. Environmental protection industry, being top of the list of “seven strategic emerging industries”, will continue to receive tremendous support from the Chinese government in the next five years. With the recent approval of main pollutant emission control plan and the upcoming “Emission standard for air pollutants for thermal power plants”, more initiatives are being executed to meet the 12th Five-Year plan targets. LET is well-placed to tap on trends like the shift in desulphurisation demand and the upcoming denitrification market in this rapidly growing industry. Furthermore, once the OOT plan is approved, LET will gain a stable recurring revenue stream.

Unwarranted market panic, auditors give clean bill of health. The share price has dived more than 30% since May. It is clear to us now that the recent panic sell-down was unwarranted, making LET a bargain. There are two main reasons behind our belief on top of the group’s solid fundamentals. First, none of the major pre-IPO investors have reduced their shareholding even though the blockout period is over, casting their vote of confidence in LET. Second, both their external and internal auditors, Ernest & Young and Grant Thornton respectively, have audited LET’s account recently and have given it a clean bill of health.