Sinomem: Sizeable BOT player in China

Plant visit to Xiamen, China. We recently visited Sinomem Technology Limited (STL) at its headquarters in Xiamen, China. STL is a leading wastemanagement solution provider - it develops advanced membrane materials and has recently branched into BOT (Build-Operate-Transfer) waste-water treatment plants in China. We were given a tour of its membrane production facility and visited three of its waste-water treatment projects - two industrial and one municipal.

Sizeable BOT player in China. STL made inroads into the BOT wastewater treatment segment in 2006 and is currently building/operating ~20 such municipal/industrial wastewater treatment/recycling plants across China. Based on the total combined capacity of over 560k m3/day, STL has become a sizeable player in the BOT segment in China. We understand that STL has invested (or will invest) more than RMB500m for these projects initially using internal resources; some of these projects come with expansion clauses and could see STL investing an additional RMB450m.

Focus on North China and India. We note that the bulk of its BOT projects are located in North China and according to management, it is a strategic move given the scarcity of water there. STL believes it will not only be able to treat waste water but can also recycle the water using RO (Reverse Osmosis), thus deriving four revenue streams from these projects - the first from EPC (construction of the plant); the second from waste-water tariffs (with guaranteed minimum uptake and inflation escalation clauses); the third from membrane sales; and finally from sale of recycled water. Meanwhile, STL is also venturing into India to expand its waste-water treatment business. STL is currently working with its Indian partners and will provide the membrane technology and EPC works.

Near-term convertible loan overhang. On the financial front, it faces a potential overhang from the redemption of its convertible loan notes. While STL is sitting on a sizeable cash hoard of S$71.2m (as of end Jun) and generated an impressive S$23.1m cashflow from its operations in 1H09, the redemption may curtail its financial ability and flexibility to go after more BOT projects. As for its 52%-owned listed unit Reyphon Agriceutical, STL has almost fully written down its investment (took a S$13.2m impairment charge in FY08), which dragged its net profit down to just S$3.3m from S$30.6m in FY07; for 1H09, STL posted a net profit of S$10.6m. We do not have a rating on the stock.

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