China Everbright (formerly: HanKore Environmental Tech Group)

[opmi]

RTO at the wrong exchange? HKSE seems better in terms of liquidity and coverage. probably will dual list back in HK.

Maybe listed shells are getting too expensive in HK. Some reports said listed shells selling at hk500m.

Hankore just shifted its headquarter to Singapore from Hong Kong. I doubt it will seek dual listing in SEHK.

The impending major shareholder, China Everbright Water Investments Limited, is listed in SEHK, stock code 0257

It is a bit different from other RTOs, IMO. It is more like a M&A of two companies with similar businesses.

make business sense to dual list in HK, higher valuation and better coverage. easier to raise $ for acq.

the HK listed shareholder coming in is China Everbright Intl. Major business is waste to energy business & waste mgt.

the water investment is a subsi. Not listed.

[CY09]

My personal feel is that Water recycling as well as O & G companies like to list in Singapore because of our country's reputation in these 2 industries. Its not just valuation

[CityFarmer]

My personal feel is that Water recycling as well as O & G companies like to list in Singapore because of our country's reputation in these 2 industries. Its not just valuation

It seems that those seeking fund by equity, will stay or come to Singapore, while those funding by debts, will move to SEHK. May be due to different emphasis, one for fund, the other for valuation.

Sound Global is moving to SEHK, while UEL/Hankore seems staying.

Any "tikam" opportunity?

(not vested)

[CityFarmer]

make business sense to dual list in HK, higher valuation and better coverage. easier to raise $ for acq.

the HK listed shareholder coming in is China Everbright Intl. Major business is waste to energy business & waste mgt.

the water investment is a subsi. Not listed.

You are right on the coming shareholder. I had confused. Thanks

[yawnyawn]

Number of Consideration Shares. The Consideration Shares will be allotted and issued to the Vendor at S$0.0703 per Consideration Share

NAV from 2013 AR is RMB0.38 (SGD0.0795). So China Everbright will be buying in at ~0.88 P/B.

Extracts from Page 17-18 of China Everbright 2013 AR

As at 30 June 2013, the Group had a total of 20 waste water treatment projects and 4 reusable water projects with a total investment of RMB3.2 billion. The projects are designed with an annual waste water treatment capacity of approximately 667,950,000 m3, as well as to provide reusable water of 22,334,000 m3 annually. There are 2 water BT projects that have completed construction, commanding a total investment of RMB447 million.

During the period under review, environmental water projects contributed an EBITDA of HK$281,402,000 (Hankore's EBITDA in 2013 is RMB 106m or HKD 136m), 40% more than that in the last corresponding period. The increase in profit was mainly due to the commencement of construction of Shandong Jinan Licheng Waste Water Treatment Project (Plant 3) (“Licheng Project”) Phase II, which contributed the construction service revenue, as well as cost savings recognised on completed projects.

Assuming China Everbright Water Investments successfully injects all the environmental water assets it owns to Hankore, the valuation may be ~RMB 3.65B. Outstanding shares as of 23 Sep 2013 is 4.82b. At the price of SGD0.0703, 10.8b of new shares have to be issued.

So shares will be diluted by 2.2x (10.8b/4.82b)
earnings will be increased by 2.1x (281.4b/136b)
Closing price as of 02 Jan 2014 is 0.117 (1.7x higher than potential RTO's price)

I note that the majority of water treatment projects of CEI are located in the Shandong province. HanKore currently has investments in 11 large-scale BOT and TOT municipal water treatment projects in several of China‟s most-populated regions including Beijing and the provinces of Jiangsu, Shandong, Shaanxi and Henan. Possible for further cost savings and synergy from the RTO?

Picked up some shares of Hankore today. I'm guessing a possible re-rating in terms of the P/E and P/B multiples if Hankore successfully becomes the subsidiary of China Everbright International. Being a subsidiary of a SOE, i am pretty sure they will have more opportunities in future to expand their business.

What do fellow members here think?

[yawnyawn]

29 Dec 2013 - Everbright International Signs Investment Cooperation Framework Agreement with Zhuhai Government

Everbright International plans to invest RMB 3 billion in Zhuhai during the period of “the 12th Five-year Plan”. The two parties have initially confirmed an industrial solid waste treatment project and an industrial waste water intensive treatment project as the first two areas of cooperation, and are considering further extending the cooperation to sludge treatment, household waste treatment, food waste treatment, photovoltaic energy and an environmental protection technology R&D centre etc.. The construction of the integrated environmental protection industrial park covering the cities at the west coast of the Pearl River Estuary to support the rapid industrial development in the western district of Zhuhai.

Possible for Hankore to acquire this industrial waste water treatment project?

[CityFarmer]

Number of Consideration Shares. The Consideration Shares will be allotted and issued to the Vendor at S$0.0703 per Consideration Share

NAV from 2013 AR is RMB0.38 (SGD0.0795). So China Everbright will be buying in at ~0.88 P/B.

Extracts from Page 17-18 of China Everbright 2013 AR

As at 30 June 2013, the Group had a total of 20 waste water treatment projects and 4 reusable water projects with a total investment of RMB3.2 billion. The projects are designed with an annual waste water treatment capacity of approximately 667,950,000 m3, as well as to provide reusable water of 22,334,000 m3 annually. There are 2 water BT projects that have completed construction, commanding a total investment of RMB447 million.

During the period under review, environmental water projects contributed an EBITDA of HK$281,402,000 (Hankore's EBITDA in 2013 is RMB 106m or HKD 136m), 40% more than that in the last corresponding period. The increase in profit was mainly due to the commencement of construction of Shandong Jinan Licheng Waste Water Treatment Project (Plant 3) (“Licheng Project”) Phase II, which contributed the construction service revenue, as well as cost savings recognised on completed projects.

Assuming China Everbright Water Investments successfully injects all the environmental water assets it owns to Hankore, the valuation may be ~RMB 3.65B. Outstanding shares as of 23 Sep 2013 is 4.82b. At the price of SGD0.0703, 10.8b of new shares have to be issued.

So shares will be diluted by 2.2x (10.8b/4.82b)
earnings will be increased by 2.1x (281.4b/136b)
Closing price as of 02 Jan 2014 is 0.117 (1.7x higher than potential RTO's price)

I note that the majority of water treatment projects of CEI are located in the Shandong province. HanKore currently has investments in 11 large-scale BOT and TOT municipal water treatment projects in several of China‟s most-populated regions including Beijing and the provinces of Jiangsu, Shandong, Shaanxi and Henan. Possible for further cost savings and synergy from the RTO?

Picked up some shares of Hankore today. I'm guessing a possible re-rating in terms of the P/E and P/B multiples if Hankore successfully becomes the subsidiary of China Everbright International. Being a subsidiary of a SOE, i am pretty sure they will have more opportunities in future to expand their business.

What do fellow members here think?

I am yet to go thru the numbers, but one key info is the debt owned by the Vendor, not only just the assets. It depends on the debt "allocated" by the parent, the CEI. It is illogical to assume debt-free on Vendor, due to its business model.

Before further detail, it is difficult to derive a reliable valuation at the moment, IMO

(not vested)

[CityFarmer]

Let's work from another perspective. In the framework agreement, the Vendor will hold more than 50.0% of the enlarged
share capital of the Company. The info indicated the minimum price of the Vendor.

With issue price of S$0.0703 per share, with existing share base of 4.86 billion share (the latest update on 24 Dec 2013), the minimum valuation on the Vendor is S$342 million, or RMB 1.6 billion, which is much lower than your valuation of RMB 3.65 billion.

[yawnyawn]

Let's work from another perspective. In the framework agreement, the Vendor will hold more than 50.0% of the enlarged
share capital of the Company. The info indicated the minimum price of the Vendor.

With issue price of S$0.0703 per share, with existing share base of 4.86 billion share (the latest update on 24 Dec 2013), the minimum valuation on the Vendor is S$342 million, or RMB 1.6 billion, which is much lower than your valuation of RMB 3.65 billion.

If that is the case i am assuming that the Vendor has the option to load up to RMB 2.05B of debt onto Hankore or the Vendor may inject the assets into Hankore at a discount.

Either way, we need more information of the RTO in the coming 120 days.

[greengiraffe]

OSK-DMG initiated coverage:

HanKore Environment: Initiate: Paving The Road To a Bright Future
(BUY, SGD0.11, TP: SGD0.16)
Sarah Wong, +65 6232 3883 ([email protected])
Terence Wong, CFA, +65 6232 3896 ([email protected])
In a game-changing deal, HanKore is set to acquire all of China
Everbright International Ltd’s water assets. Assuming the acquisition
takes place successfully, we expect a 21% fully diluted EPS CAGR in
earnings until FY16. Trading at 17x FY15F P/E, HanKore is
undervalued against a peer average of 30x. We initiate coverage with
a BUY, based on 25x FY15F earnings.
Game-changing catalyst. In a reverse takeover (RTO) deal, HanKore will
acquire all water assets of HK-listed China Everbright International Ltd
(CEI), which turns the former into CEI’s subsidiary. With an SOE backing, it
now possesses a strong differentiator in parentage.
Strong surge in recurrent waste water treatment income from
organic/inorganic capacity expansion and tariff rate hikes. We expect
a strong, systematic ramp-up of running capacity on organic plants to
1.14m tonnes/day by 2QFY16 from the existing 590,000 tonnes/day, as
well as a lift in tariff rates on completion of HanKore’s upgrading and plant
expansion initiatives. In addition, contribution from CEI’s portfolio of 1.84m
tonnes/day capacity will greatly boost revenues from FY15F onwards.
Water treatment revenues will hit CNY258m in FY14F and CNY1.1bn in
FY15F, significantly up from FY13’s CNY201m.
Newly-acquired EPC business to drive the company forward. Recently
acquired EPC arm Jiangsu Tongyong Environment Group (JTEG) will allow
HanKore to recognise CNY456m in revenue in FY14F – a sharp 170.5%
spike from FY13F’s CNY168.6m – and on higher gross margins of around
25% vs 9.1% previously. HanKore’s pipeline of expansion plans, valued at
CNY1.5bn, should further boost JTEG’s EPC orderbook, as well as its own
revenue and earnings visibility.
Undervalued and an under-covered gem; initiate coverage with a BUY
and SGD0.161 TP. Trading at 17x FY15F EPS, HanKore is undervalued
against a peer average of 30x. We believe its strong growth profile and the
top-tier SOE parentage backing does not warrant such a low valuation. We
initiate coverage with a BUY and SGD0.161 TP pegged at 25x FY15F EPS.
Key risks and future catalysts. Risks include lumpy recognition from its
EPC arm, while future catalysts include potential M&As of transfer-operatetransfer
(TOT) projects as well as tariff rate hikes.