SIIC Environment

SIIC Environment: OSKDMG initaites Coverage with a Neutral Call and $0.18 TP. The house notes that SIIC is a top-tier, state-backed environmental player in China with a portfolio of 42 wastewater treatment projects and two waste incineration projects. With funds from a recent placement, it is set to embark on growth via expansion and M&As. However, its share price surge has rendered valuations less attractive. Strong parentage and strategic investors with vast resources and network a key differentiator. Being 46.7%-owned by a China state-owned enterprise (SOE), ie Hong Kong-listed Shanghai Industrial (363 HK, NR), SIIC Environment Holdings (SIIC) is well-poised to capitalise on attractive opportunities in China’s environment space. A 7.7% stake by strategic investor China Investment Corp (CIC) also adds to its appeal. ~30% earnings CAGR until FY15F buoyed by capacity expansion and M&As. SIIC aims to increase water treatment capacity by 1m tonnes/day annually, which will bring its total design capacity to 6.5m tonnes/day by FY15F (from 4.5m). These targets will boost SIIC’s recurring revenue from water treatment and water supply to CNY1.1bn in FY15F, nearly doubling from FY12’s CNY532.9m. Valuations appear fair; SIIC is currently trading at a 32x forward P/E vs the peer average of a 30x P/E. As its share price has risen rapidly in the past few months, valuations appear less attractive now despite its potential earnings growth. As near-term upside could be limited, we initiate coverage with a NEUTRAL and a TP of SGD0.180. Given that the house model currently takes into account growth resulting from future M&As and expansion, risks to call would be stronger-than-expected growth from M&As and expansion plans. Key business risks. These include: i) lumpy revenue recognition from the engineering, procurement and construction (EPC) business arm, and ii) although tariff charges are tied to cost input, they are subject to approval by Government authorities. Catalysts include tariff rate