Cheapest water play (DBS)

• 4Q12 results were below expectations

•

supports growthBut record high orderbook provides visibility and

• Maintain BUY, TP S$0.89

Highlights

4Q12 hurt by slower sales and higher interest costs.

Rmb82.4m (-23% y-o-y, -46% q-o-q) and sales of Rmb689.5m (15%y-o-y,-

11% q-o-q) were 44% and 19% below our forecast. All segments

underperformed with the biggest shortfall coming from the Product segment.

Apart from lower sales, finance costs skyrocketed to Rmb173m from

Rmb108m mainly due to interest expense for the US$ senior notes. Taxes

were also higher at 21% vs our assumed rate of 13%. FY gross margins

however, were stable at 30%.

Maintained net cash position but scrapped dividend. SGL exited 2012 with

Rmb1.6b, mostly due to proceeds from the senior notes. However,

management did not declare any dividend.Net profit of

Our View

Rmb3.5b orderbook will support growth, O& M is a potential

outperformer

~Rmb3.5b, anchored by rural sewage development projects and

Phase 1 of the Rmb2b water supply project in Changchun. We

believe 70% of this orderbook can be completed this year. The

Product segment could flat-line due to limited capacity but O& M is a

bright spot for potential upsides as management expects all 20+

water subsidiaries to start operation by end 2013.. We estimate that SGL year-end orderbook would be

New win momentum still robust

vs our Rmb1.7b forecast. This year, new wins should continue but

big contracts such as the Changchun BT project are not common.

Hence, we maintain FY13 new wins at Rmb1500m. We understand

SGL is tracking as much as Rmb2b of BOT contracts.. SGL secured Rmb2.5b in 2012

Recommendation

Earnings cut but no big impact on TP

FY13/14F by 10%/17% EPS to factor in higher interest costs and

muted Product sales. However, the impact on TP is offset by lower

share count following CB redemption. Our TP of S$0.89 is pegged to

a historical mean of 14x PE.

Maintain BUY for > 30% upside to our TP of S$0.89. Depending on

market sentiment and SGL’s execution, there is scope for the stock

to re-rate closer to the industry average of 16x 1 year forward PE.. We have lowered