Hyflux - Positive on water tariff hike in China

Company Overview — Using its own propriety membrane technology, Hyflux provides water and wastewater treatment services. It has expanded to other applications including separation requirement for various industrial manufacturing processes and recycling of used oils and solvents. The market expects its 09 revenue to grow ~20%, on the back of 3 big projects in China and Africa. Based on 9% consensus EPS growth, Hyflux trades at 18x 09 P/E,

Business Strategy — Focus on municipal projects in China and MENA (Middle East and North Africa), particularly water projects. Municipal projects represent >85% of total revenue. China now accounts for >35% of total rev, and MENA represents >55%.

Industry Overview — Amid economic growth and urbanization, mgt sees tremendous potential for water treatment in China and MENA, and sustainable in next few years. Hyflux views increasing commitment from China on environmental control. Hyflux sees good growth in water plant operations as it believes water tariffs in China will rise for years. Mgt targets at 8-10% IRR in China and >10% in MENA.

Competitive Analysis — Competition is keen in waste water treatment. Mgt sees limited threat in other service areas like desalination and recycling, thanks to its membrane technology. While pricing is important in bidding process, track records, brand names and design & engineering are more critical, mgt views.

Recent Results — Despite 1Q rev reducing 2% to S$88, pretax profit grew 23% to S$6.8m, backed by 9ppt GM improvement. Net profit however dropped 11% to S$5m due to tax credit in 1Q08.

Strengths — Propriety membrane technology; in-house production facilities for membrane; good scale of operation; long track records in China; good R&D.

Weaknesses — 82% net gearing; volatile nature of revenue; tariff hike subject to gov’t approval; surge in receivable days.

Sponsored Links

Related Posts by Categories