UEL gets another ShanDong Project

Fair value S$0.50


• 4th industrial project in Shandong
• Long-term outlook remains upbeat
• Room for upward revisions to estimates

Another treatment project in Shandong
United Envirotech Limited (UEL) has recently announced that its 70%- owned subsidiary has signed a deal to acquire, upgrade and expand an existing industrial waste-water treatment plant in Weifang City, Shandong Province, China; this would make it the company’s fourth acquisition in the industrial treatment space in Shandong (please refer to our 6 Sep 2012 report for more information on its earlier Shandong projects). The deal also comes with a 30-year concession to operate the plant once the upgrading works are completed in Jan 2013.

Adequate funding available
For Phase I, UEL will invest RMB120m (or S$24m) to upgrade the design capacity of 10k m3/day, which it would fund using proceeds from the KKR convertible bond issue and project financing in the usual 40/60 equity-debt split. Based on its cash balance as of 30 Jun, we estimate that UEL can finance up to
S$245m worth of projects. Separately, we understand that KKR has also been helping the company to get access to more financing on improved terms. Meanwhile, UEL has also managed to refinance some of its existing projects on more favourable terms.

More opportunities in China
As before, management intends to pursue more such industrial wastewater projects in China, especially in Shandong, Jiangsu and Liaoning. Just last year, the Chinese government committed to invest some RMB4t on water resources by 2020. For its 12th Five-Year Plan (2011- 2015), Beijing will invest RMB1.8t on water conservation projects, with the central government contributing RMB800b and the rest from the local governments. And with China facing a severe water crisis, we believe that the spending goes beyond the traditional “pump priming” for the country’s slowing economy.

Maintain BUY with S$0.50 fair value
As such, we maintain our BUY call on UEL. Although we are maintaining our estimates and S$0.50 fair value for now, we see room for upward revisions on more contract wins.