Epure International - Upward earnings revisions, maintain NEUTRAL

Along the water value chain in China, we remain cautious on the EPC and equipment providers. Their exposure to industrial/private customers, their compromised business models, increasing competition and higher funding costs all cloud earnings visibility.

There were no major surprises from Epure’s 1Q09 results. The company reported a profit of RMB40.7mn (+32.4% y-y), accounting for 15% of our FY09F forecast. While project completion is generally slowest in the first quarter due to the Lunar New Year holiday, we expect a strong up-tick over the remainder of the year. Gross margin widened to 35.4% in 1Q09, from 29.5% in 4Q08. But we are sceptical that this level is sustainable since we don’t think the first quarter is representative of the company’s strength and weakness. While Epure still intends to enter the BOT (build-operate-transfer) segment, it has yet to make any concrete progress.

Although management has not revealed the latest status of the EPC orderbook (RMB1bn as of end-FY08), the company said it is negotiating a few large EPC orders. Securing some of these orders would likely mean upside to our estimates.

We upgrade our FY09-10F earnings forecasts by 4-5% on a wider gross margin assumption of 32% (previously 30%), versus 33% in FY08 and 35% in 1Q09. We also roll forward our valuation base to FY10F and lift our target P/E to 10x, from 8x, to capture near-term growth. All in, our P/E-based price target rises to S$0.51, from S$0.35.

Our target P/E multiple (10x) is 1.5 sd (previously 2.0 sd) below the stock’s historical average since listing in 2006. We believe this factors in potential risks from the BOT operation, plus limited visibility on growth owing to the company’s small market cap. We apply a higher P/E multiple given improved market sentiment on small-cap water stocks, and we believe that Epure will trade at a small discount going forward.

Sponsored Links