Posted by albertlaw > 2013-09-25 09:03 | Report Abuse

Hankore - Cheap exposure to Water recyling Market in China? Hankore at IPO was 80c but fell to all time low of around 2c. Recently, the fresh fund injection by a local banker turned businessman had prompted it to went to recent high of 7.8c. Will Hankore return to 80c IPO price? Do know that it has return to profit since last year and Chinese Government has taken a serious view over environmental issue, have pledge to support water recyling plants at all cost. Perhaps, Hankore could hit 20c range in near term and slowly regain its strength to 80c. Definitely worth looking at when BB take profit (aka a selldown it does look good! Since a change at the helm of Hankore Environment Tech Group in 2011, the firm has posted two consecutive years of profit and clinched numerous awards, including recognition as one of the Top Ten Fastest Growing Water Companies in China. Will the management be able to ride on their success wave to new heights? Back in 2000, before China commercialised its water treatment industry, the nation possessed 360 plants. Fast forward to present day and we are faced with over 4,000 water stations serving the country while 2,000 more are being constructed as well as 5,000 additional plants targeted in five to 10 years? time. With an array of wastewater treatment businesses within the industry to venture into, it is easy to lose focus and attempt to expand into other areas which may seem profitable. However, Hankore has decided to stick with what it knows best ? sludge handling, residential and industrial water treatment. Earnings Visibility In our recent interview with Hankore?s chief financial officer, Felix Yau, it was highlighted that the high gross profit margin enjoyed from wastewater treatment is the reason for the decision to drive growth in the segment. ?Hankore is able to secure higher water tariff rate and daily contracted treatment capacity as it progresses along each phase for each project,? added Yau. In the case of the recently upgraded plant in Nanjing Liuhe, its capacity was doubled to 200,000 tons per day and the tariff rate increased from Rmb0.92 per ton to Rmb1.45 per ton. As each water plant only serves one client, the firm is able to sign agreements with their customers guaranteeing the minimum tariff rate and daily capacity. ?Hankore has a strict policy of only dealing with clients that we trust and possess sufficient funds to facilitate the capital expenditure required for the development of the water plants,? shared Yau. This translates to a high water charges collection rate experienced by the firm. In turn, this provides investors? with a clear picture of the potential income Hankore is able to derive from their wastewater operations during the concession period, which usually lasts for 25 to 30 years. Sustainable Improved Margins As evident in their latest financial performance, the construction segment?s turnover improved to Rmb167.5 million from Rmb72.8 million in FY12, contributing 45.4 percent of the full year?s result compared to 29.7 percent in the preceding year, while its gross profit margin rose 6.3 percentage points to 15.1 percent. Although the management expects to maintain the improved construction business margin moving forward, it recognises the fact that construction income tends to occur only once for each project. This foresight has led them to focus on expanding and upgrading their water plants instead, as they chase higher water tariffs and contracted capacity which offers a recurring effect absent from the construction business. In FY13, the wastewater treatment unit pulled its own weight as revenue increased Rmb29.3 million to Rmb201.5 million year-on-year while its gross profit margin gained 4.5 percentage points to 69.8 percent. Wave Of Expansions And Upgrades Presently, Hankore has identified six out of its existing 11 water plants prime for expansion and upgrading works, estimated to cost Rmb750 million. Out of the total cost, approximately 65 percent, or Rmb487.5 million, will be financed through bank loans, while the balance fulfilled by issuance of placement shares and its multicurrency medium-term note programme. Recently, the firm made a private placement to Wang Yu Huei, a notable investor in the Singapore scene with stakes in Dukang Distillers Holdings and Sarin Technologies, and will be looking to make more placement shares available in the next annual general meeting. Yau acknowledged the need for external funds, ?The management has a debt to capitalisation threshold of 50 percent which currently sits at 27.3 percent, in line with other industry players. This presents the firm with plenty of headroom to take on more debt to support our expansion and upgrading plans.? Yau stressed that the funds obtained will be used solely for expansion and upgrading purposes and intends to release future tranches of its note programme only on a need-be basis. Business Outlook Although expansion promises higher i