Sound Global

Sound Global: 9M12 recurring earnings came in at Rmb341m, +8% YoY, largely in-line.The 8% YoY earnings growth was attributed by 1) a 16% increase in rev to Rmb1,963mn, offset by 2) a 1.9pp YoY decrease in gross margin to 30.5%; and 3) a 39% YoY rise in finance costs to CNY110mn. Rev, +% YoY, largely driven by a 12% YoY increase in EPC revenue to Rmb1,798m and a 162% YoY increase in equipment fabrication segment revenue to Rmb98.7m. Finance costs, +39% YoY to Rmb110mn due to newly issued USD senior notes in 3Q12. R&D expense was up 158% YoY to 19.2mn in 9M12. This was largely due to high R&D expense during 1H12. In 3Q12 alone, R&D expense fell 64.5% QoQ to CNY3.6mn, c.0.5% of 3Q12’s revenue (vs. a ratio of 0.4% observed in 3Q11 and 1.4/1.3% seen in 2Q12/1Q12). Nomura note that trading at 6.5x FY13F P/E (vs. peers under coverage’s 11x), valuation remains undemanding, in house view, given 1) its in-house R&D capability in WWT; 2) first-mover advantage in rural WWT development; 3) likelihood of capturing WWT upgrade opportunities during 12-5 period; and 4) its transition from constructor to operator is a re-rating catalyst in the mid- to long term. Maintain Buy.