• 49/51 JV with Chengdu Xingrong
• 1st block of projects underway
• TOT projects will be next catalyst

JV with Chengdu Xingrong

United Envirotech Limited (UEL) has formed a 49%/51%-JV with Chengdu Xingrong Investment Co (XRTZ) with a paid-up capital of RMB50m (S$10m) in Sichuan, China. XRTZ is a state-owned enterprise listed in the A-share of the Shenzhen Stock Exchange (RMB17.7b market cap); also owns around 5m m3/day of water treatment concessions. The new JV will provide EPC (engineering, procurement, construction) services using UEL’s membrane technologies and membrane products; will also undertake investments in water treatment projects in western China.

Kicking off first project immediately

According to UEL, the first block of projects the JV will undertake is the expansion and upgrading of wastewater treatment plants and recycling of treated wastewater with a combined capacity of 1m m3/day – this estimated to exceed RMB1.5b (S$300m). These projects will start immediately and be completed by end 2015. In fact, management reveals that the value of Memstar membrane products to be used in this first block of projects alone is estimated to be RMB300m (S$60m); this again highlighting the importance of UEL as a vertically integrated water treatment solutions provider.

Impact to be felt in FY16

Nevertheless, UEL notes that the first block of projects would not have any material impact on its FY15 (ending Mar 15) NTA and EPS; just share of JV profit in FY16 plus S$60m of membrane sales. But UEL’s share price did not react positively to the news. Instead, we suspect the market is more interested in knowing the progress of “a potential acquisition of shares in the company”, which we understand is unrelated to XRTZ.

Maintain HOLD with S$1.43 FV

In any case, we keep our fair value at S$1.43, now based on 24x (versus 28x previously, in line with its peers) FY16F EPS, and believe a re-rating would come when we see more TOT investments, which should increase its recurring income stream. Maintain HOLD.

Source: OCBC Research - 14 Oct 2014