SOUND GLOBAL - A sound 2Q (DMG)

BUY

Price S$0.625

Previous S$1.08

Target S$0.90

Sound Global (SG) announced a strong set of 1H11 results that made up 39.9% of our FY11 estimates - still within our expectations since 2H is typically stronger than 1H (1H09 – 33.7%, 1H10 – 41.5%). 2Q11 earnings came in at RMB109.6m (+47.2% YoY), on the back of a 63.1% YoY surge in revenue with contribution from the Saudi Arabia project, higher contribution from its Operation and Maintenance (O&M) segment as well as higher contribution from its turnkey Engineering, Procurement and Construction (EPC) services. With the continued strong demand for wastewater treatment in China, coupled with SG’s strong track record of project wins and robust order book of RMB2.4b, we maintain our BUY recommendation and our earnings estimates. Our new TP of S$0.90 (S$1.08 previously) is pegged to 14.9x FY11 earnings (17.8x previously) – the level SG’s China peers are trading at. Valuations remain attractive with SG trading at a prospective P/E of 10.3x – at least a 30% discount to its China peers.

2Q11 earnings within expectations. SG’s earnings came in at RMB109.6m for the quarter, up 47.2% YoY, on the back of a 63.1% YoY surge in revenue. 2Q11 revenue hit RMB670.2m, boosted by contribution from the Saudi Arabia project, as well as higher contributions from the turnkey EPC services and O&M segments.

Large order book and strong pipeline of projects. SG’s order book remains strong at ~RMB2.4b, of which RMB1.8b is from China, giving earnings visibility and margin sustainability. We understand that the company is currently in talks to invest in a number of BOT projects. With SG’s strong track record in both China and the international markets (it won a US$50m EPC project in Bangladesh in May 11), we believe SG would be able to continue securing more projects moving ahead.

Positive macro outlook. Outlook for the sector remains positive, with growth likely to continue in the form of 1) building new water treatment plants, 2)upgrading of existing water treatment plants and 3) outsourcing of O&M of treatment plants to third parties like SG.