Initial assessment
Epure?s IPO of 100m new shares at S$0.65 per share translate into a mkt capitalisation of S$260m, which makes it the 4th largest water stock after Hyflux (S$1.1bil), Bio-Treat (S$615m), & Sinomem (S$425m). A decent size & strong endorsement from d WB (IFC), as 10% shareholder at S$0.394/share.) is likely to attract institutional interest as an alternative water stock to Bio-Treat. Like Bio-T, Epure focuses on municipal waste water treatment for discharge into the environment, but unlike Bio-T, it has successfully completed a few big industrial projects (e.g. steel, coking, etc). Bio-T is oso developing new technologies to tap the higher-margin industrial sector. Currently a pure turnkey player, we believe Epure will inevitably follow in the footsteps of SGX-listed players to harness the BOT market for recurring income & has a more established name. Its subsidiary, Beijing Sound, has over 10 years of track record w/an impressive portfolio of projects, included jobs w/mega treatment capacity of 300-400,000 tonnes/day, as well as record completion times of 3 mths. This is a testament to its execution capability that provides comfort for any expansion into BOT projects. In a 2005 survey by H2O-China (an industry website supported by government agencies), Epure was listed as one of the 10 most influential water companies in China, together with foreign and domestic names that included Veolia Environment, Suez, and Beijing Capital Water. Comparatively, Bio-T only commercialised its proprietary BMS technology 5 years ago, its largest project is only up to 240,000 tonnes/day of capacity. Epure with wider suite of technologies has developed 18 proprietary technologies over the years. While there is not much clarity on the competitive edge of these technologies, it appears to have thrived on effective customisation. Outstanding order book at end-Mar 06 already implies revenue growth of 20%. Of d Rmb456.7m order book as at end-Mar 06, Rmb366.7m (80% of it) is expected to be booked in FY06. Together with the Rmb90m revenue recorded in 1Q06, revenue could amount to Rmb456.7m this year, implying 20% yoy growth. IPO proceeds can support doubling of order book. 1/3 of Epure?s Rmb 282m net IPO proceeds (Rmb97m) has been earmarked for turnkey projects. According to mgt, this amount can support Rmb400m-450m of new turnkey orders and underpin its target to increase the number of projects completed from about 300 in FY05 to 600 by FY07/08. Opportunities abound, given China?s political determination to clean up the environment, ahead of the Beijing 2008 Olympics. Epure should trade S$0.83/share on 11x CY07 (forward PE). Epure?s overall margins have been relatively stable, at around 2.5%. Its net margins were 19-21% in the past 3 years, but dropped to 17% in 1Q06 on the expiry of its 50% tax concession. However, economies of scale expected should be able to mitigate this impact. We estimate a CAGR of 39% for revenue and 35% for net profit for FY05-07, but EPS CAGR will be diluted to 17%. Both Bio-T and United Env are trading at steep discounts to the sector & at the lower end of their P/E bands due to disappointing earnings delivery. Applying 11x CY07 multiple to Epure, which is a 5% discount to our target valuation for Sinomem (the only other China-centric benchmark) in view of its shorter listing track record, translates into valuation of S$0.83/share. Reported by CIMB-GK