Hankore

Hankore: OSKDMG Initiates Coverage with Buy Call and $0.161 TP. The house notes that in a game-changing deal, HanKore is set to acquire all of China Everbright International Ltd’s water assets. Assuming the acquisition takes place successfully, house expect a 21% fully diluted EPS CAGR in earnings until FY16. Trading at 17x FY15F P/E, HanKore is undervalued against a peer average of 30x. In a reverse takeover (RTO) deal, HanKore will acquire all water assets of HK-listed China Everbright International, which turns the former into CEI’s subsidiary. With an SOE backing, it now possesses a strong differentiator in parentage. The house expect a strong, systematic ramp-up of running capacity on organic plants to 1.14m tonnes/day by 2QFY16 from the existing 590,000 tonnes/day, as well as a lift in tariff rates on completion of HanKore’s upgrading and plant expansion initiatives. In addition, contribution from CEI’s portfolio of 1.84m tonnes/day capacity will greatly boost revenues from FY15F onwards. Water treatment revenues will hit CNY258m in FY14F and CNY1.1bn in FY15F, significantly up from FY13’s CNY201m. Recently acquired EPC arm Jiangsu Tongyong Environment Group (JTEG) will allow HanKore to recognise CNY456m in revenue in FY14F – a sharp 170.5% spike from FY13F’s CNY168.6m – and on higher gross margins of around 25% vs 9.1% previously. HanKore’s pipeline of expansion plans, valued at CNY1.5bn, should further boost JTEG’s EPC orderbook, as well as its own revenue and earnings visibility. Overall, the house ntoes that HanKore is undervalued against a peer average of 30x. Believe its strong growth profile and the top-tier SOE parentage backing does not warrant such a low valuation.