BUY S$0.64
Price Target : S$ 0.81 (Prev S$ 0.84)
At a Glance
• 2Q profit of RMB109m in line, driven by robust EPC recognition despite higher than expected costs
• 50% of RMB2.4b EPC orderbook to be fulfilled by year end; new win pipeline remains strong
• Trimmed FY11/12F by 7%/5% to account for higher order assumption of RMB1.7b (vs RMB1.5b) but offset by higher cost and tax rate
• TP slightly lowered to S$0.81, Maintain Buy
Comment on Results
Revenue increased 63% y-o-y to RMB 670m while net profit rose 47% to RMB109.6m in Q2. Sales were ahead of expectation but profit was just in line. Net margin was lower than expectations. Apart from significantly higher finance costs (due to interest for convertible bonds) of RMB23.8m compared to RMB3.7m in 2Q10, admin costs and tax rate also came in higher than expected. Other expenses also rose on translation losses arising from USDdenominated CB proceeds and provision of doubtful debt amounting to RMB7m. At half time, 1H net profit met 40% of our FY11 forecast, compared to 42% in FY10.
Recommendation
SGL ended Q2 with RMB2.4b orderbook. Of which, management expects to fulfill 50% by year-end. Key projects within existing backlog include Saudi (20% left), Bangladesh and China including EPC work for rural sewage development. Going by its bidding pipeline, management is optimistic of equally strong orderflow in 2H. SGL has secured RMB982m contracts ytd. We have raised our new win assumption to RMB1.7b for FY11, up from RMB1.5b previously. We believe potential contracts could come from China and MENA. Nevertheless, FY11/12F earnings are revised down by 7%/5% due to higher costs and 16% tax rate, up from 12%. Consequently, our TP is lowered to S$0.81 from S$0.84. Maintain Buy in view of 26% upside to TP.
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