Hankore

Hankore: OSKDMG maintains Buy with TP $0.161. Note that HanKore posted a strong operational performance in 2QFY14, with net profit rising 19.7% y/y in 2Q and 62.5% y/y in 1H. This was driven by a massive surge in EPC/construction and a healthy growth in wastewater treatment revenues. The merger process with CEI is progressing well and we maintain our estimate for the asset injection to go through going into FY15. 1H net profit surged 62.5% y/y to CNY59.8m on strong operational performance. This was compared to 1HFY13’s CNY36.8m. The 1HFY14 result also formed 38.7% of the house full-year estimate. This profit surge was driven by a 297.2% increase in engineering, procurement and construction (EPC)/construction revenues to CNY219.7m on higher gross margins of 27.6% vs 9.1% in 1HFY13. This was partly attributable to Hankore Environment Tech’s newly acquired EPC arm Jiangsu Tongyong. Wastewater treatment income also grew 22.9% to CNY112.3m, with higher gross margins of 69.6% vs 62.0% previously. Merger process with China Everbright International or CEI (257 HK, NR) going well. A deal is likely to go through going into FY15 and the house maintain its initial 6-month estimate on the completion of this exercise for now. Also factor in the legal fees associated with the merger, higher capital market activities by management and higher employee share option expenses in 2HFY14, thus raising FY14 administrative expenses by 33.3% to CNY85.8m. Consequently, this lowers PATMI estimates to CNY135.0m (from CNY154.6m). 2H to see even stronger operational performance. With the completion and/or upgrade of Henan Sanmenxia Phase 1 (30,000 tonnes/day), Nanjing Liuhe Phase 2 (20,000 tonnes/day) and Shaanxi Xianyang Phase 2 (100,000 tonnes/day) by end of 1HFY14, HanKore Environment Tech is set to generate another surge in its recurring wastewater treatment income in 2HFY14. Meanwhile, construction activities at Jiangsu Kunshan Phase 3 and another Sanmenxia project should continue to lift the construction segment’s revenue in 2HFY14. Maintain BUY based on 25x FY1F5 P/E, with TP SGD0.161. Assuming its merger with CEI goes through, which is very likely, the house believe HanKore Environment Tech remains highly mispriced.