China Everbright (formerly: HanKore Environmental Tech Group)

[yawnyawn]

2Q'2014 Press Release

2Q'2014 Results Announcement

Excerpts
HanKore’s 1HFY2014 net profit increases 63% to RMB59.8 million on a 126% revenue increase to RMB332 million
 Higher revenue achieved through its recurring water treatment income, topped with higher construction and new contract revenue
 Group expects boost in recurring income through higher water treatment capacity and higher water discharge fees from completed EPC projects

Outlook
First phase of Sanmenxia project and second phase and upgrading work of Yangzhou and Nanjing Liuhe plants have been completed as of 31 December 2013. These projects are currently in the commissioning stage and will contribute positively in the second half of FY2014.

On 30 December 2013, the Group has entered into a framework agreement with China Everbright International (“CEI”) to acquire all of CEI’s water treatment assets. Total consideration of the acquisition will be satisified by the allotment and issue of new shares. After the completion of the acquisition, CEI will become the controlling shareholder of HanKore. The holding company of CEI, China Everbright Group is one of the four state-owned enterprises that operates directly under the state council of China. CEI is mainly involved in the development of environment protection business. Its core business sectors include waste-to-energy, alternative energy and environmental water, where water treatment projects make up around 25% of CEI’s revenue.

Mr. Chen added, “We see this potential alliance as a strategic step to improve market penetration and competitiveness in China’s rapidly growing water treatment sector. Given that the water industry in China is a highly capital intensive industry, the water asset injection from CEI will place us in a more favorable position to compete with other water players and clinch more wastewater treatment projects to further reinforce our recurring income streams.”

Results look good and awaiting for more information with regards to the RTO. Share price closed today 17/02/2014 at 0.121 with total vol at 307,673 lots

[yawnyawn]

A commentary at the date of the announcement of the competitive conditions of the industry in which the group operates and any known factors or events that may affect the group in the next reporting year and the next 12 months.

Recently, we learned from the Ministry of Housing and Urban-Rural Development of PRC (MOHURD) that China will enhance its assessing strength in sewage processing in cities and towns in 2014; at the end of the 12th Five-Year Plan, the goal of each county having their own sewage treatment plant shall be realized, and it is required to strengthen the effort of water quality supervision to push the water quality to reach a set standard, which will undoubtedly help the development of the water industry.

In 2013, the investment growing rate in the industry was obviously accelerating, and the total fixed asset investment completed in domestic ecological environment and environment governance industry in the first 11 months was 128.231 billion Yuan with the YoY growth of 32.25%; the growth rate was 24.98% higher than the same period last year; at the same time, the internal integration of the industry was also accelerating, and its merging amount was as high as 16 billion Yuan, and merging expansion became the driving force of the industry’s development.

Water enterprises with competitive strength will probably be listed in and supported by the 12th Five-Year Plan as one of the 50 professional environmental protection service companies with over 1 billion annual output value and international competitive strength.

In addition, the National Development and Reform Commission has made it clear earlier that “it seconded the suggestion of building water price allowance system proposed by the China Environment Chamber of Commerce, and the specific way and standard will be considered by the local financial department and development & reform (price) department, based on their conditions”, which means that the urban water supply enterprises are expected to unload their heavy burdens and get the water price allowance they deserve from the local finance.

Hankore is priced at a 24.2x P/E and 1.5x P/B

[CityFarmer]

Updated OSK-DMG after a Roadshow. The TP should be still $0.161.

Hankore without CEI, is not appealing at all. At the current price, the upside already priced-in. So I will give it a miss as special situation investment for the moment. Pending further update, valuation might change, and I will reconsider then.

I agree wit the analyst on the quality of asset owned by CEI, but the funding cost might not necessary cheaper. May be no more cheap funding from state, thus CEI needs to seek funds in SGX...

(not vested)

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HanKore Environment: Highlights From The Non-Deal Roadshow
(BUY, SGD0.123, TP: SGD0.123)
Sarah Wong, +65 6232 3883 (sarah.wong@sg.oskgroup.com)
Terence Wong, CFA, +65 6232 3896 (Terence.wong@sg.oskgroup.com)
HanKore Environment Tech (Hankore) chairman David Chen and
ED/CFO Felix Yau participated in our 19 Feb non-deal roadshow (NDR)
in Singapore. We have a BUY rating on the company with a SGD0.161
TP that is based on 25x FY15F P/E. Hankore’s strong points include
further progress in its merger with CEI, potentially lower financing
costs and solid asset quality.
Merger with China Everbright International or CEI (257 HK, NEUTRAL,
TP: HKD9.04) on track. As reiterated earlier, Hankore’s merger with CEI is
making good progress. The injection of the latter’s assets should take place
going into FY15 and will bring the former’s combined capacity to ~3.6m
tonnes/day. The union between HanKore and CEI is a highly
complementary one, given the location of their water assets. Each has a
foothold in Jiangsu and Shandong, which are amongst China’s provinces
with the highest GDP growth levels.
State backing to lower HanKore’s financing cost. With CEI – a stateowned
enterprise (SOE) backed by the State Council of China – as
HanKore’s parent, we will see the company’s financing costs fall to ~4%
from 7.5% currently. This will give rise to cost savings as well as provide
the company with higher returns on its wastewater treatment investments.
Asset quality to be key differentiator. HanKore’s existing 11 wastewater
treatment plants, which have design capacities of ~155,000 tonnes/day on
average, are the key large-sized plants in their respective regions. These
plants have the potential to tap on rising economies of scale and operating
leverage as they grow in operating capacity, thereby outperforming other
plants of smaller scale through greater cost efficiencies.
Re-rating in motion. Maintain BUY with SGD0.161 TP. We believe that
as HanKore draws closer to completing its merger with CEI, its valuations
will re-rate. This process is already underway. At the current price of
SGD0.123, the stock is trading at a 19x FY15 P/E (incorporating CEI’s
asset injection), compared with the peer average of 30x. Maintain BUY,
with our SGD0.161 TP based on a 25x FY15 P/E.

Ref: http://remisiers.org/cms_images/research...atters.pdf

[yawnyawn]

A report from HSBC on CEI(5 Mar), the company which is interested in acquiring Hankore.

HanKore: CEI is still doing due diligence for the HanKore (BIOT SP, not rated) acquisition and CEI intends to become the controlling shareholder of HanKore. Management likes the assets of HanKore as they are mostly located in the areas where CEI has a presence and therefore there are synergies between HanKore and CEI. CEI said it does not rule out the possibility of getting HanKore listed in Hong Kong, if the acquisition goes through.


  HSBC_Hankore05032014.pdf (Size: 334.93 KB / Downloads: 12)

[CityFarmer]

A report from HSBC on CEI(5 Mar), the company which is interested in acquiring Hankore.

HanKore: CEI is still doing due diligence for the HanKore (BIOT SP, not rated) acquisition and CEI intends to become the controlling shareholder of HanKore. Management likes the assets of HanKore as they are mostly located in the areas where CEI has a presence and therefore there are synergies between HanKore and CEI. CEI said it does not rule out the possibility of getting HanKore listed in Hong Kong, if the acquisition goes through.

Primary listing on both exchanges, may not be a good move. SoungGlobal was primary listed on both exchanges, but the market price was stagnant for quite some time. The market price in SEHK went up close to 2x, from the exit offer price of 70 cents, after it was delisted from SGX.

I am patiently waiting for the detail of the CEI/Hankore deal.

(not vested)

[yawnyawn]

CIMB has a target price of $0.156, seems like Hankore is a hot stock these days for many investors/traders having appeared in the Top 20 Value on SGX on numerous occasions.

http://research.cimb.com/index.php?ch=50...22&bb=file

CIMB value value HanKore by the sum-of-parts (SOP) method. The group’s business can be divided into two parts, water EPC business and water asset investment business (water treatment business).

Valuation of water asset EPC business - We use P/E to value the water asset EPC business.
Valuation of water treatment business – Due to the nature of concession arrangements, we judge that the sum of project NPVs better reflects the business nature of HanKore's concession arrangements, rather than a company level lump-sum DCF method that usually assumes a terminal value after certain years of expansion.

CIMB states that CEI's water segment equity is RMB 2,896m ~ S$ 597.2m using SGD/CNY at 4.85. If the RTO goes through, CIMB expects 8,495m new shares to be issued and CEI will own 63% of the new Hankore.

If the RTO fails, CIMB attached a value of $0.101 by valuing the EPC business at 8xFY15 earnings + net book value.

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(vested)

[yawnyawn]

This is my first time seeing revaluation premium when doing valuation.

After doing some research online, i realise there are many approaches when it comes to value a water/sewer utility and CIMB was using the total net BV + a premium multiplier approach

2. Total net book value plus a premium multiplier – normally applicable to publicly traded water companies. Premiums often range between 10% and 50% if there are value added benefits to the purchase. (Cost / Income Approach hybrid)
http://www.fcsgroup.com/news/documents/V...lities.pdf

CIMB attached a 75.6% revaluation premium. Going by what point 2 says, premium often ranges between 10-50%, i am not sure if the premium given is conservative. I welcome experienced forumers to provide their inputs.

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[CityFarmer]

Revaluation premium? A well-worded term. Base on my understanding on the article, it is just an arbitrary modifier to "adjust" the calculated value to market price of the company.

In a nutshell, WasteWater Treatment (WWT) business model is
- invests a sum of money, either self-funded or by debt
- adds an agreed premium in term of profit margins of construction and operation and maintenance (O&P) services. It is billed and became receivable once services rendered. This apply for BOT and TOT projects
- gets cash flow from the receivable plus interest, which basically is to offset inflation or the discount for present value

Some might take EPC projects, which works as typical construction projects.

The profitability depends on the agreed premium and execution, otherwise it might become a left-pocket to right-pocket stunt, or worse money drops along with each move.

Well-executed construction work will bring in 20-25% of profit margin. It will be billed and collected in due course, along with capital invested.

Well-executed O&P work will bring-in sustainable revenue and profit. It will be billed and collected in due course, along with capital invested.

So what are the likely moats of a good WWT company?

First of all, the premium is highest at the bidding. Those bid first-hand get the highest premium. Those bought projects from bidder are lower ones.

Next, those with track record for well-executed construction work, will sustain better than those with poorer record. Hankore has a poor record of construction work with the old management, and the new management is yet to be proven, IMO

Last and not least, those with membrane tech, will ensure the profitability of the O&P, like UEL with Memstar. Hankore doesn't has similar internal capability.

Funding is also critical, since it is a capital intensive business after-all.

Valuation-wise, SOTP seems a good approach. A simple PE approach for EPC, and simple DCF for BOT/TOT projects base on estimate future "real cash flow", IMO.

Please feel free to comment, if any mistake.

(not vested)

[CityFarmer]

The exercise price is 4 cents, and market price is more than 14 cents. It is a multi-bagger investment...

----------
The Board of Directors (the “Board”) of HanKore Environment Tech Group Limited (the
“Company”) wishes to announce that a warrantholder has on 19 March 2014, exercised
their rights to convert 47,692,402 warrants into 47,692,402 new shares of the Company
(the “New Shares”), at the exercise price of S$0.04 for each New Share

Ref: http://infopub.sgx.com/FileOpen/HanKore_...eID=288370

[greengiraffe]

Revaluation premium? A well-worded term. Base on my understanding on the article, it is just an arbitrary modifier to "adjust" the calculated value to market price of the company.

In a nutshell, WasteWater Treatment (WWT) business model is
- invests a sum of money, either self-funded or by debt
- adds an agreed premium in term of profit margins of construction and operation and maintenance (O&P) services. It is billed and became receivable once services rendered. This apply for BOT and TOT projects
- gets cash flow from the receivable plus interest, which basically is to offset inflation or the discount for present value

Some might take EPC projects, which works as typical construction projects.

The profitability depends on the agreed premium and execution, otherwise it might become a left-pocket to right-pocket stunt, or worse money drops along with each move.

Well-executed construction work will bring in 20-25% of profit margin. It will be billed and collected in due course, along with capital invested.

Well-executed O&P work will bring-in sustainable revenue and profit. It will be billed and collected in due course, along with capital invested.

So what are the likely moats of a good WWT company?

First of all, the premium is highest at the bidding. Those bid first-hand get the highest premium. Those bought projects from bidder are lower ones.

Next, those with track record for well-executed construction work, will sustain better than those with poorer record. Hankore has a poor record of construction work with the old management, and the new management is yet to be proven, IMO

Last and not least, those with membrane tech, will ensure the profitability of the O&P, like UEL with Memstar. Hankore doesn't has similar internal capability.

Funding is also critical, since it is a capital intensive business after-all.

Valuation-wise, SOTP seems a good approach. A simple PE approach for EPC, and simple DCF for BOT/TOT projects base on estimate future "real cash flow", IMO.

Please feel free to comment, if any mistake.

(not vested)

Thanks for highlighting the new way of valuations to justify a bubbly sector.

IMO and based on historical experience, the China water play is probably a replay of another bubble.

If we rewind 10 years, Hyflux was then the darling and look at where Hyflux is now even though Newwater technology has strongly sealed its place in Singapore's water needs.

Hankore used to be a darling pre the S chips meltdown and even at recent highs, it remains a minute fraction of its hey day valuations. Only the vultures that participated in the post S chip meltdown benefited from the recent surge.

How different is it this time - China has became more polluted and there is increasing social pressure to clean up the filthy environment. So in the name of the big clean up evolves the revival of the forever green environmental play. Frankly, whether is there a iron will to execute the cleanup for China remains to be seen let alone the clearing up of different tariffs and restrictions in all sorts of different locations under different local laws and orders.

Anyway, in any bubbly situations, valuation methodologies will evolve since analysts are paid to be creative. It is my firm believe - when they cannot convince you, they will confuse you.

Time heals all wounds and history will repeat itself. There are all sorts of different themes in the stock market hence there is a need for discipline to stay sober and rational as irrational exuberance will last for a long time.

Vested
(Odd Lots Shrunk By Restructuring)