- Above; maintain OUTPERFORM. FY10 net profit of Rmb289m (+2.7% yoy) was ahead of Street and our expectations. FY10 EPS beats our forecast by 22%. The variance stemmed from steady gross margins, which we were expecting to dip in 4Q. The results were strong considering that the group had incurred higher expenses during the year relating to its dual listing in Hong Kong. Nonetheless, we cut our FY11-12 EPS estimates by 7-8% as we increase operating and interest-expense assumptions. Consequently, our target price dips to S$0.98 (from S$1.06), still set at 14x CY12 P/E (3-year forward average). We also roll out FY13 forecasts. Other than faster-than-expected contributions from its higher-margin Marafiq contract in Saudi Arabia, BOT contract awards in China and possibly in Taiwan are expected to provide stock catalysts.
- FY10 revenue surged to Rmb1.76bn (+36.5% yoy), attributable to: 1) contributions from its Saudi Arabia project of Rmb168m; 2) increased contributions from Hi-Standard of Rmb124m from the sale of customised environmental equipment; 3) contributions from the O&M segment (Rmb30m); and 4) turnkey EPC amounting to Rmb1.4bn.
- 4Q10 gross margins a nice surprise. With revenue from turnkey projects recognised according to percentage of job completion, gross margins for engineering work tend to fluctuate from quarter to quarter. 4Q GP margins jumped 6% pts to 32.4%, lifting FY10 margins to 30.4%. In this set of accounts, a higher net-cash balance was the result of a convertible bond issued during the year.
- Speeding up internationalisation. Management reiterated that the outlook for the water sector in China remains positive and demand for water and wastewater treatment is expected to remain robust. The group will also continue to seek expansion outside China and speed up its internationalisation.
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