Hankore

Hankore: Unveiled a strong set of 2QFY14 results which was largely in-line with bullish estimates, as net profit rose 20% to Rmb29.4m, taking 1H14 net profit to Rmb59.8m. Revenue at Rmb197.9m more than tripled to Rmb197.9m (+245%), led by: 1) Some of the group's projects entering the construction stage which buoyed construction revenue; 2) A few supplementary BOT contracts being signed over the past 12 mths, and 3) the acquisition for Jiangsu Tongyong Environment Engineering in May'13, leading to a rise in construction profits. Gross margins fell to 39% versus 51%, mainly due to a larger portion of construction revenue which was recognised during the quarter, as construction activities have a lower margin versus operation activities in general. Bottom-line was further weighed by a 52% spike in admin expenses to Rmb20.8m, led by a once-off equity settled share based payment, and higher fees due to capital market activities. Meanwhile income tax was significantly higher at Rmb7.12m (2QFY13: Rmb0.03m), attributed to the acquisition on Tongyong, as most of Hankore’s subsidiaries were still in the tax holiday period or had significant unutilized losses. Going forward, Hankore guides of the growing investment rate within China’s water sector , with total fixed asset investment in domestic ecological environment and environment governance industry, reaching Rmb128.2b (+32.3%) in the first 11 months. Overall, despite the relatively strong set of results, we note that investor’s attention would most be focused on the ongoing RTO of China Everbright International’s (CEI) water facilities, which will place Hankore at a more favorable position to compete with its peers and clinch more wastewater treatment projects to reinforce its recurring income streams. At the current price, Hankore trades at an annualized 21.9x 1HFY14 P/E and 1.5x P/B versus its regional peer’s average of ~30x.