To acquire a 25.3% stake in Longjiang Environmental

To acquire a 25.3% stake in Longjiang Environmental SIIC will pay CNY405m cash, pricing the asset at 23-27x normalised FY13 P/E. The transaction will be funded by internal sources, comprising proceeds from share placement in 2013 and loans from its parent Shanghai Industrial Holdings. We are positive on the deal given its reasonable valuation and at the same time allowing SIIC to penetrate into the northeast China market.

Positive on the deal
Longjiang engages in wastewater treatment, sludge treatment and tap water supply in the northern region of China, with total water treatment and supply design capacity of 2.2m ton/day and sludge treatment capacity of 1,000 ton/day. We note that SIIC’s parent Shanghai Industrial Holdings also has an effective interest of 16.8% in Longjiang. We will not be surprised if SIIC absorbs it parent’s stake in Longjiang in the future and uses it as a platform for expansion into northeast China.

This acquisition is in line with our full-year acquisition forecast of 1m ton/day of effective capacity. We continue to like SIIC for its strong government connections and lowly-geared balance sheet, which serve as powerful acquisition tool. We leave our earnings forecasts unchanged and reiterate our BUY call on the stock. Our TP is maintained at SGD0.22, pegged to 30x FY15E P/E.