SIIC Environment

SIIC Environment: Credit Suisse initaites coverage with O/p call and TP $0.26. The house views as an emerging consolidator in China's water sector, with a strong, potentially the strongest, growth profile. As a local government SOE, with on-the-ground networks through its regional platforms, access to capital and a management team with a solid track record and focus on growth, SIIC has the right ingredients to capture the sector’s growth and M&A opportunities. On an exconstruction income basis, the stock is at par with BEW on 2014E (30x), yet becomes more attractive as operations ramp-up (2016-17E P/E is 10-16x, or a 25-40% discount to BEW). SIIC quadrupled its water assets over 2009-13A, mostly through M&A. CS expects the company to further expand from 3.9 mn t/day in 2013A to 10.2 mn t/day in 2017E. A potential parent asset injection could add 4.3 mn t—implying a 27-39% capacity CAGR. With gearing at 22%, SIIC is better prepared for stronger growth versus peers. CS estimate that SIIC can potentially double its capacity before net gearing reaches 150%. Key risks are target profitability and acquisition prices. Expect SIIC to deliver 17% EPS growth in 2014E (92% net profit growth net of dilution), and 41% in 2015E, driven by volume expansion and higher construction income. Potential parent injection could swing our base case by -10% to +40% (versus 2015E), depending on assumptions for acquisition prices and asset profitability. TP is based on a sum of the parts (SOTP) including discounted cash flow (DCF) for water ($0.221) and WTE ($0.037). '2017E-multiple method' suggests fair value at $0.273, based on 20x P/E on 2017E earnings, discounted to 2015E. Estimate the floor valuation at S$0.148, based on flat volumes and margins.