Hankore

Hankore: OSK DMG maintains Buy with TP $0.161. The house notes that HanKore Environment Tech (Hankore) chairman David Chen and ED/CFO Felix Yau participated in its 19 Feb non-deal roadshow (NDR) in Singapore. Hankore’s strong points include further progress in its merger with CEI, potentially lower financing costs and solid asset quality. As reiterated earlier, Hankore’s merger with CEI is making good progress. The injection of the latter’s assets should take place going into FY15 and will bring the former’s combined capacity to ~3.6m tonnes/day. The union between HanKore and CEI is a highly complementary one, given the location of their water assets. Each has a foothold in Jiangsu and Shandong, which are amongst China’s provinces with the highest GDP growth levels. State backing to lower HanKore’s financing cost. With CEI – a state-owned enterprise (SOE) backed by the State Council of China – as HanKore’s parent, will see the company’s financing costs fall to ~4% from 7.5% currently. This will give rise to cost savings as well as provide the company with higher returns on its wastewater treatment investments. HanKore’s existing 11 wastewater treatment plants, which have design capacities of ~155,000 tonnes/day on average, are the key large-sized plants in their respective regions. These plants have the potential to tap on rising economies of scale and operating leverage as they grow in operating capacity, thereby outperforming other plants of smaller scale through greater cost efficiencies. Re-rating in motion. Maintain BUY with $0.161 TP. The house believe that as HanKore draws closer to completing its merger with CEI, its valuations will re-rate. This process is already underway. At the current price of SGD0.123, the stock is trading at a 19x FY15 P/E (incorporating CEI’s asset injection), compared with the peer average of 30x.