SIIC

SIIC: 2Q15 results were in line, albeit on the low end of market expectations as net profit grew 26% y/y to Rmb83.1m on higher fair value gains and reversal of accrual expenses. This lifted 1H15 earnings to Rmb151.5m (+16.9%), making up 41.1% of full year consensus estimate.

For the quarter, revenue dipped 4.7% to Rmb416.6m, largely undermined by lower construction activities (-34.3% to Rmb106m), and a softer service income (-24.3% to Rmb31.6m) due to lower volume from operation and maintenance projects.

This was partially supported by stronger operating, maintenance and financial income from service concessions (+16.6% to Rmb260.9m), primarily from higher water treatment and supply sales volume, contributions of four recently-acquired assets, and completion of a transfer-operate-transfer project.

Gross margin improved 6.8 ppt to 43.4% as higher contributions from the more lucrative water treatment and supply business outweigh the slimmer margin construction work.

Bottom-line was slightly dragged by a FX loss of Rmb5.3m (2Q14: nil) and higher finance expenses (+13.3% to Rmb41.8m) due to an increase in interest-bearing debts.

Going forward, Maybank-KE expects a stronger 2H15 (+40% h/h) to be spurred by the consolidation of Fudan Water, higher construction revenue from Wuhan Hanxi Phase 2 project, and more contributions from JV/associates as well as new concessions.

Additionally, management indicated that they will not rule out a dual-listing in HK but prefers the group to grow larger before tapping into the market.

SIIC is currently trading at 22.7x forward P/E and 1.6x P/B. Maybank-KE maintains a Buy rating with TP of $0.26 on the counter.