Water sector remains buoyant

Wins more water projects
United Envirotech Ltd (UEL) recently announced that it has secured two more water treatment projects in China. The first contract is to provide total water solution to a textile industrial park in Guangan, Sichuan Province, via a 90-10 JV with the park owner. The first phase of the BOT project – worth RMB160m (S$33m) – will commence immediately and be completed by end Aug 2014. The second is a RMB250m (S$52m) EPC contract to build a 60k m3/day underground membrane bioreactor to treat wastewater from a textile industrial park in Gaoyang, Hebei Province. UEL expects to commence construction immediately and complete the project by end 2014. However, UEL notes that these two projects will not have any material impact to FY14 (ending Mar) bottom-line.

Gets SGX nod for Memstar acquisition
Separately, UEL has gotten the in-principle approval from SGX for the proposed acquisition of the business, assets and principal subsidiaries of Memstar Technology (unrated). As a recap, UEL intends to pay
S$293.4m to Memstar via a mix of S$73.354m cash and new 200.055m UEL shares (at S$1.10 each). While the deal is still subject to shareholders’ approval of both companies, management is confident that the deal is likely to go through.

HOLD with new S$1.00 FV 
As the ability to manufacture membranes in-house would lead to sizable cost savings (Memstar made S$14.7m net profit in FY13), we bump up our FY14F earnings forecast by 27%. However, the issue of new shares would lead to a huge dilution for existing shareholders (even before conversion of CBs). Hence even at a higher 15x FY15F EPS (versus 13x blended previously) to account for the still buoyant outlook for the water sector in China, which raises our fair value from S$0.83 to S$1.00, upside looks limited. Hence we maintain our HOLD rating.