Stronger 2Q earnings from tax credit. Epure’s revenue was up 26.7% YoY to reach RMB303.4m, on the back of higher contribution from major turnkey projects and sale of customised environmental equipment from Hi-Standard. Gross profit margin was slightly weaker YoY, from 32.2% to 30.3% - this is due to the difference in the timing of recognition for the various projects. Consequently, earnings rose 27.9% YoY to RMB66.7m. We note that this was boosted by confirmation of tax incentive for Epure’s subsidiary, bringing income tax expenses down by 90.2% YoY to RMB1.1m in 2Q09.
Potential contracts ahead. We understand that there are ~RMB900m worth of contracts that Epure is currently negotiating for. In addition, there have been enquiries from other overseas countries such as Philippines, where there is apparently strong construction demand for water infrastructure. We believe that these potential order flows will help maintain, if not boost, order books, which currently stands at RMB1.2b.
Lower effective tax rates a booster to earnings. With the transfer of some existing EPC projects into Epure International Water, the company will enjoy lower tax rates of 0% tax for this year and 7.5% next year. This compares with the higher 15% tax rate without the transfer. Thus, we are lowering our effective tax rate forecast from 16% to 10% in FY09 and to 12% in FY10. This pushes our earnings estimates upwards by 7.2% to RMB270.2m in FY09 and 4.8% to RMB314.2m in FY10.
Maintain BUY, new fair value of S$0.75. With the positive industry outlook, we are expecting continued growth in revenue from Epure’s project wins. Applying a P/E of 14x (in line with its peers) to Epure’s FY10 earnings, we derive a new target price of S$0.75 (S$0.51 previously). We maintain our BUY rating.
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