Epure: Buy: Guiding for Steady Growth in 2009

New target price at S$0.3 — Our 12-month forward base year is rolled overto March 2010, with the target P/E kept at 6x. FY08 revenue jumped 47% to Rmb1,025bn while NP jumped 41% to Rmb232m, in line with CIRA’s Rmb230m. Epure had net cash of Rmb751m at end-2008, representing ~50% of market cap. He 2008 payout was 22% (FY07 27%), translating into 3.4% yield. We expect FY09 NP growth at 15%. In view of its undemanding valuation, more than 3% yield, steady 14% EPS 3-year CAGR (FY09E-11E), and exposure to the relatively resilient China environmental sector, we have a Buy rating on Epure. It has risen 19% in the past three months, outperforming HSCEI and FTSE Straits Times by more than 30ppt.

EPC orders likely to slow in 1H09 — EPC revenue growth reduced 41% q/q to Rmb190m (34% q/q decline in 4Q07, 36% q/q decline in 4Q06). Management attributed this to the capex slowdown by many industrial enterprises which prefer to conserve cash. Epure made an Rmb11m provision in 2H08. Management expects this trend will continue at least in 1H09 and sees growing demand from municipal governments. While waste water operators are busy at project bidding, Epure believes the stimulus package benefits will be enjoyed by EPC players like itself from mid-2009. It estimates a ~Rmb800m order book at end-2008, and expects revenue momentum to resume strength from late-2Q09.

Margin pressure eased — 4Q08 GM dropped 6.3ppt y/y, or 5.5ppt q/q, due to industrial segment price pressure. In view of decreasing raw material costs, and reduced exposure to industrial segment, management expects the EPC GM to stabilize at c.30% (FY06-08 32%). It sees no pressure for the environmental equipment manufacture division, thanks to high customization requirement.

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