United Envirotech: Regarding the formalization of KKR and CITIC’s offer to buy UENV at $1.65, Maybank-KE reiterates its view that CITIC’s involvement could be a long-term game changer for UENV, in two possible ways:
1) JVs with other SOEs:
As an engineering service provider, UENV still relies heavily on third-party contracts. As competition heats up in China, UENV would likely need new ways to thrive.
Concurrently, as China’s water-discharge standards become more stringent, and membrane-based technologies gain traction, there are tremendous opportunities for UENV from water treatment plants needing upgrading.
Maybank-KE thinks that the SOE JV model could address circumstances above. Already, the JV with Chengdu Xingrong is a good trial for this model. The JV is meant to provide membrane-based engineering services for expanding and upgrading Chengdu Xingrong’s plants, and will bid for future contracts too. This model is replicable and could yield more contracts from other SOEs via profit-sharing.
CITIC, with its connections and subsidiaries in energy, resources and manufacturing could also provide more jobs to UENV via this model.
2) Recurring income from M&As, asset injection.
Moreover, CITIC may not be contented with UENV’s portfolio size, which could spark corporate actions. Most Chinese water SOEs prefer to be asset-heavy, as owning recurring-income assets is a must to survive in the industry.
Capital injections by CITIC can strengthen UENV’s balance sheet and lower its source of funding, while its own water assets, albeit very small, can be injected into UENV at some point.
In sum, the $1.65 offer price, at 32x P/E and 16x EV/EBITDA is too good to reject from a short term point of view, especially considering 3QFY3/15 results could be weak.
Nevertheless, long term investors betting on a successful transformation might want to stay the course. On that front, Maybank-KE maintains Buy on UENV with TP of $1.93, based on 27x FY3/16E P/E, or a 10% discount to peers due to a smaller recurring income base.