Sunday, March 11, 2007

Review: Sino-Env

Sino-Env recently released their FY06 results, showing an astonishing FY06 results. EPS for FY06 grew 37.2% over FY05 on the back of a 70+% of FY06 profits. Dispite the large difference between EPS and Profits, I'm still not worried as a 37.2% EPS annual growth is already a very healthy growth.

Sino-Env's revenue increased 76.2% in FY 06, and in line with that, Gross profit was up 72.5%. Though gross profit margin was down from 61% to 59% due to lower "gross profit margins on the industrial water treatment contracts secured by Fuda Desai", a 2% drop in profit margin is not a worrying trend on the back of the healthy profit growth.

Asset/liability ratio in FY05 was 18.7 vs FY 06 of 24.8. The asset liability ratio is in fact improved dispite the quick expansion in operations into industrial waste water treatment.

On top of that, the average contract value increased by RMB0.9 Million with an increase in contracts. Not only does this be a proof of Sino-Env's ability to secure more contracts, it shows that the status of Sino-Env over its competitors has improved.

Looking forward, I favour Sino-Env's prospects. The Chinese Government has stated its intention to improve its enviromental efforts, although they did mention they are unwilling to convert coal powerplants to oil powerplants due to cost. This could lead to more contracts for Sino-Env for desulphurization in China's dirty coal powerplants. On top of that, in 3Q2007, we are looking at a 309% increase in capacity for its industrial waste water treatment business. I look favourably to the management to fill up that extra capacity in a short time.

With the recent global sell off, Sino-Env's shares are below the $3 level. In addition, there has been increased in volume in recent times, probably a sign of increased investor interest in Sino-Env once again. Its time for investors to accumulate in their holdings in Sino-Env.

Maintain BUY, with a target price of $4.00, with 70% certainty target to be reached in 6 months.


musicwhiz said...


Thanks for your Sino-Env review. Maybe I can address the following issues with you ?

1) How much of a market leader is Sino-Env with respect to its competitors ? Is it commanding a market leadership position ?

2) What is the industry average P/E for companies in the same biz ? Does Sino-Env deserve to trade higher/lower than this average with respect to its capabilities and market position ?

3) With greater revenues also comes greater costs. How has management communicated to shareholders about keeping costs down ? After all profit margin dropped by 2% even though profit was up. Did Management offer reasons for this ?

4) What do you mean by average contract value increasing by RMB 0.9 million ? Does it mean they are securing larger contracts now as compared to before ? Did they reiterate if these new projects will bring in better margins ?

5) What is the ROE for the company for FY 2005 and FY 2006 ? I think ROE is a good benchmark in addition to EPS growth which you have used.

6) How is their Balance Sheet and Cash Flow Statement ? Perhaps your review can cover a little on that as it is equally important as well.

7) You ended off your review with a TP of $4.00 and a 70% certainty of reaching it. How did you arrive at $4.00 (based on what kind of valuation ?) and how did you arrive at a 70% chance ?

Thanks ! Have a great week !

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