Hankore, SIIC

Environment / Water / Hankore, SIIC: CLSA has a sector report out today, which comes days after CS sector initiation report, suggesting that foreign brokers are latching on to the water play. Overall, the house foresee a mad rush to enforce the new pollution policies China introduced this year, going into 2014. Recent tour across China confirms that waste, water and renewables plays remain good investments. Note that in the short term, air pollution pales in comparison to the impact of dirty water and soil, where the house met with water distributors and wastewater processors to see the impact of tightening standards and better transparency. Fundamentally, the house still likes environmental blue chips China Everbright Intl and Longyuan, but in the near term, like smaller, cheaper names like Huadian Fuxin. On the flip side, investors across industries could get caught off-guard by rising environmental and social-compliance costs. That being said, attention could be shifted back to our local water plays, Hankore and SIIC environment, which has been gaining traction by investors. Hankore recently hosted a plant visit, which was attended by local broking houses, suggesting that interest is building up. Accordingly, Coal producers are the main culprit of China’s air pollution, and CLSA notes that it would not be surprised if social costs and regulations gets tightens up for some of the energy producers, which could impact on their margins. We note that the increasing coverage on the sector, bodes well for Singapore listed waterplays, notably, HanKore and SIIC Environment, which has seen a pick-up in investors interests in recent months. Compared to its HK-listed counters that trades at P/E valuations of between 17x and 38x, Hankore trades at just 12.5x P/E and SIIC Environment at 19.8x P/E, and could be poised to play catch up, as investors continue to ride on the China water theme. Both companies build, own and operate a portfolio of waste water treatment plants in China; their pipeline of facility upgrading programs are expected to underpin rapid capacity expansion and selling price improvements over the next few years, leading to strong earnings growth. Both companies have also emerged from a corporate restructuring, and now boast backing from institutional shareholders. With an improved financial profile, the companies now have an added option for more rapid expansion via M&A. There is no rating on either counter at the moment.