• No additional placement needed
• China outlook remains positive
• Using higher 28x FY16F PER

CITIC offer closes with 86% acceptance

The unconditional voluntary offer by CITIC for United Envirotech Ltd’s (UEL) shares at S$1.65/each has closed on 16 Apr, with the offeror CKM (Cayman) company now holding 85.6% of the total number of issued UEL shares. As such, UEL would not need to make any new share placement for the purpose of restoring the free float above 10% to keep the company listed on the SGX.

CITIC partnership is long-term positive

As before, we view the move as positive as CITIC will give UEL access to cheaper funding, help open more doors and expand its reach into other regions of China. CITIC also intends to subscribe for another 30m to 50m new UEL shares at S$1.65 each. We note that the fresh cash injection of nearly S$50m (from 30m new shares) could help fund another S$165m worth of new projects, assuming the usual 30% equity financing model. This would definitely come in very useful as UEL had recently entered into an agreement to acquire Bishui Lantian Co Ltd (BSLT) for RMB500m (~S$111.1m), or 23x historical PER. BSLT currently owns a wastewater treatment plant with 200k m3/day capacity and a recycling plant with 20k m3/day capacity.

Outlook for China remains positive

We note that the State Council has released the “The Action Plan for Water Pollution Prevention and Control”, with 238 concrete measures to reduce pollutants, improve drinking water and promote water conservation. While details are still scant on how the regional governments will proceed to implement these measures, UEL’s integrated solutions model puts it in a good position to benefit from higher discharge standards and need for more water recycling.

Maintain HOLD with new S$1.70 fair value

While we are keeping our estimates unchanged ahead of its 4QFY15 results due out sometime in May, we raise our valuation peg to 28x FY16F EPS; this in turn raises our fair value from S$1.65 to S$1.70. Maintain HOLD rating for now until we see more clarity on the level of cooperation between CITIC and UEL.

Source: OCBC Research - 20 Apr 2015