United Envirotech Ltd - Growing its recurring income stream (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.295

Fair Value: S$0.53

Invests in another waste-water project. United Envirotech Limited (UEL) has acquired another waste-water treatment project in China; this after exercising a call option to acquire the entire equity interest of Tongji Environmental (China) Pte Ltd (Tongji) for RMB34.03m. Tongji is the holding company of Aton Environmental (Shenyang) Co, where the latter has a 30-year BOT (Build-Operate-Transfer) concession agreement with the municipal government to treat 50k m3 of wastewater daily. According to management, the treatment facilities are valued at RMB69m, and are also located in Xinmin city, Liaoning Province, which is in close proximity to the group's existing treatment plants.

Expand presence in Liaoning and recurring income streams. The project - the group's third investment in Liaoning Province - will allow it to not only expand its presence in the economically developed province, but also provide potential opportunities for future upgrading and recycling using the company's advanced membrane technology. In addition, UEL says that the move is also part of its business strategy to increase recurring income streams through the investment in water treatment projects. With the plant already running at 80% capacity, UEL expects to see income contribution from Oct; and we estimate that the plant should generate around S$0.3m in quarterly income for the group.

Funding via internal resources. UEL intends to fund the investment using internal resources - which in reality just amounts to a cash payment of RMB0.53m; this as the remaining RMB33.5m will be offset against an earlier loan of RMB30m made to Tongji in Aug 2010 and the cumulative interest of RMB3.5m. However, UEL adds that it would also take over some RMB35m of debt for the plant, mainly due to working capital requirements. But we believe this is unlikely to cause any strain on UEL's resources.

Still positive on China's wastewater industry. Management continues to remain upbeat about the growth prospects in China's wastewater industry and intends to invest in similar projects in economically developed provinces. And with the proceeds from the issue of US$113.8m worth of convertible bonds to KKR coming in some time in early Oct, management believes that it should provide the group with enough powder keg for more potential acquisitions for the next one year.

Maintain BUY with fair value estimate at S$0.53. But until we see a more sizable EPC project, we maintain our FY12 and FY13 estimates for now, as we have already assumed such contract wins in our assumptions. Hence our DCF-based fair value remains at S$0.53. Maintain BUY.