Leader Env solid track record gains Industrial recognition

DMG - TP S$0.30

Leader Environmental Technologies LET

LET posted a decent set of 3Q11 results with RMB30.3m in PATMI (+15.3% YoY) on the back of RMB83.8m in revenue (-12.4% YoY). Despite falling revenue, bottom line still improved thanks to the hike in gross margin (+10 ppt) as the group now selectively cherry-picks projects. In view of the credit tightening in China, the group decided to undertake fewer projects and delayed some of the work to be carried out next year. Hence, we slashed our earnings estimates by 26.0% in FY11 and 13.4% in FY12 to S$16.6m and S$23.8m respectively. Nevertheless, we are still confident over the group’s long-term prospects once the credit conditions improve as the Chinese government will still have to meet its aggressive 2015 emission cut target. Reiterate BUY, with a lower TP of S$0.30 based on 8.2x FY12 P/E (-1.5 SD industry P/E).

Taking precautionary measures. Due to credit tightening measures in China, many SOEs such as steel manufactures who are Leader’s key customers have postponed spending and reviewed the credit terms for environmental projects. Consequently, the group undertook fewer EPC projects and selectively chose those with higher margins and better credit terms amongst the many opportunities available. In view of the macro conditions, we favour this defensive stance despite resulting in slower growth rate than previously anticipated. Nonetheless, we remain upbeat over the group’s long-term prospects as there are already signs that the government will loosen up credit as the inflation problem eases.

Solid track record gains Industrial recognition. Leader has recently been awarded the 200 “Best Under A Billion” by Forbes Asia and “Technology Fast 500” by Deloitte, joining the ranks of established companies such as Google (2007), Yahoo(2007), Apple (2007), Baidu(2011). The accolades demonstrate that the group has shown strong sales and earnings growth as well as a sound balance sheet.