Hankore

Hankore: OSKDMG maintains Buy with a reduced TP of $1.50. HanKore will buy China Everbright’s (CEI) pool of 25 WWT and reusable projects of 1.892m tonnes/day design capacity for CNY5.8bn, or $1.2bn. The successful merger removes deal overhang and gives the combined entity gearing headroom to pursue growth via M&As, where the house ascribe HanKore a 36x FY16F P/E (excluding earnings growth forecast from M&As), a premium to the 30x peer average, given its low 9% gearing. Purchase price higher than expected but within range of recent M&A transactions. The consideration of CNY5.8b is higher than the initial expected figure of HKD4.0b (or CNY3.3b), but the price of CNY3,071/tonne of design capacity falls within typical M&A transactions prices of CNY2,500-3,000/tonne. As the merger will give HanKore distinctive state-backing advantages, the house find the transaction price fairly decent. The CNY5.8bn will be funded through the issuance of 1.94bn HanKore shares at $0.703 each (with adj. factor 0.889). CEI will own 78.0% of HanKore post share issuance, making the latter its subsidiary. The transaction represents a 1.56x NAV of CNY3.7bn. Merger lifts overhang; combined company to reap advantages and seek M&A-driven growth ahead. The transaction will boost HanKore’s waste water treatment (WWT) design capacity to 3.6m tonnes/day while the share issuance will lower the combined entity’s gearing to less than 9%. This may effectively give the group room to gear up for c. CNY2.6bn of funds (assume 40% gearing) for M&As that the company has intently expressed as its growth strategy in a consolidating WWT environment. This could potentially add 1.0m tonnes/day design capacity to its portfolio, assuming transaction prices of c. CNY2,500/tonne. Based on our proforma estimates, the house forecast the combined entity to make CNY0.205 EPS in FY16F (FYE June) based on its existing assets, without taking into account any M&A, owing to the lack of information. We value HanKore at a 36x FY16F P/E, higher than its state-backed peers’ average 30x, as its low gearing of 9% post consolidation places it in a prime position to acquire earnings-accretive WWT assets for longer-term growth.