SIIC Environment Holdings - 2016 outlook: Most prepared for WWT plant upgrade

We expect continued profit growth from operations at a 48% CAGR for 2015E-17E, driven mainly by water treatment volume growth with unit profit improvement from plant upgrade. Maintain OUTPERFORM with a revised TP of S$1.5/sh (from S$1.3/sh).

SIIC remains disciplined to grow with quality, in terms of project location, population flow, and higher potential for upgrade. We expect SIIC to benefit from China's WWT plant upgrade, especially on the back of the 13th five-year plan. By incorporating a full I-A upgrade and 50% of "quasi-surface water IV" upgrade by 2020E, we estimate 25% in earnings improvement and 13% in valuation.

The progress of the Longjiang acquisition and HK listing are still the key events for the stock. We think Longjiang is under a due diligence study and awaiting approval by early 2016E, a potential addition that could boost earnings by 3-13% in 2016-17E in our estimates. We believe a HK listing is postponed to 1H16E.

We lower SIIC's 2015-17E earnings by 3-12% to reflect the slower-than-expected construction pace (and revenue) as the industry trend, the accelerated water plant upgrades (mostly reflected in 2018-2020E), and a mild impact from VAT tax.

We expect high earnings quality to sustain, with profit from operations at 90%-95%. The project pipeline remains strong with good quality. We estimate SIIC has 6.8 mn t/d capacity on hand, 75% above its current operating capacity, with a better quality profile in terms of population growth (+3% vs 1-2% of major peers), and average plant size (148kt/d vs 38-118kt/d of major peers), paving the way for higher project return and upgrade potential. By incorporating a full I-A upgrade and 50% of 'quasi-surface water IV' upgrade by 2020E, we estimate 25% in earnings improvement and 13% in valuation.

The progress of the Longjiang acquisition and HK listing are still the key events for the stock. We think that Longjiang is under a due diligence study and awaiting approval by SIIC by early 2016E, a potential addition that could boost earnings by 3-13% in 2016-17E, in our estimates. Its HK listing is postponed to 1H16E in our estimates.

Technical Analysis
Daily Chart
We revise down earnings for SIIC by 3-12% for 2015-17E to reflect the slower-than-expected construction pace (and revenue) as the industry trend, the accelerated water plant upgrades (mostly reflected in 2018-20E), and a mild impact from VAT tax. Our target price of SG$1.5/share is based on a DCF with a WACC of 9.0%. We estimate the VAT impact on earnings to be less than 4% and can gradually pass through with the plant upgrade. (Read Report)

Source : Credit Suisse Asia Pacific Equity Research

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