Maintain BUY
Previous Rating: BUY
Current Price: S$0.31
Fair Value: S$0.53
Investing RMB100m in Maxrise. United Envirotech Ltd (UEL) recently announced that it has acquired a 40% stake in Maxrise Envirogroup Limited (Maxrise) for RMB100m (~S18.9); the other 60% is held by Memstar Technology Ltd, an SGX-listed company that specializes in the manufacture and application of hollow fiber membranes and membrane products. The move will result in UEL holding equity interests of four water treatment plants in Bazhou, Mengzhou and Jiangle cities, China. Upon completion of the second phase of expansion for the Mengzhou Shengfang municipal wastewater treatment plant at 25k m3/day, the aggregate treatment capacity of the four water treatment plants will reach 170k m3/day. UEL said it will fund the acquisition via a combination of internal resources, bank borrowings and proceeds from its recent TDR issue.
Also won RMB220m BOT project earlier. UEL had earlier also secured a RMB220m (S$42m) BOT project in Dafeng Jiangsu Province, China. This is to build a 50k m3/day wastewater treatment plant for an upcoming industrial park specializing in chemical production. UEL intends to fund this project using proceeds from its TDR listing. However, we understand that for the first phase, the capacity will be around 10k m3/day; as such, management expects to spend just RMB30m, which will be booked as EPC revenue in FY12. Meanwhile, UEL has an existing 15k m3/day wastewater treatment plant in Dafeng; given that this plant is already running at full capacity, we believe that UEL could be looking to upgrade/expand it soon.
Still looking for good acquisition targets. Going forward, management continues to remain upbeat about the wastewater industry and growth prospects in China. And it has been looking at more large-scale municipal projects (~50k m3/day) and also industrial (~10k m3/day) ones. While there are some concerns over a potential credit squeeze in China, we believe that UEL is not likely to face any funding issue, especially after inking a deal recently to issue up to US$113.8m worth of convertible bonds (CB) to KKR. UEL is scheduled to hold an EGM on 14 Sep to seek shareholders' approval on the matter; and assuming it gets it, management expects to receive the funds by the first week of Oct, which should give it an ample war chest to pursue its acquisition targets.
Maintain BUY with unchanged S$0.53 fair value. As the new contract and latest investment in Maxrise fall within our assumptions, we do not see any need to adjust our estimates at this stage. Hence our DCF-based fair value of S$0.53 remains. Maintain BUY.
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