Stock Sniper's Portfolio For November 2017

Read about Stock Sniper's Portfolio HERE

 

Transactions For Nov 17:

There was no new transaction done in Nov 17.

News of Portfolio companies during the month:

1. Singtel:

Singtel announced its Q2 result with profit increased by 197% to S$2.9b on NetLink Trust divestment. It also decided to pay a special dividend of 3 cts.

Summary of operating results (source: The Business Times)
- Operating revenue for the quarter rose 6.9 per cent to S$4.37 billion from S$4.09 billion a year ago.
- Earnings before interest, tax, depreciation and amortisation up 5 per cent
- Underlying net profit for the quarter fell 4 per cent, impacted by Airtel, which continued to face intense price competition in India. This mainly led to a 10.6 per cent fall in associates' pre-tax earnings to S$648 million.

Apparently, the market wasn't too impressed by the results, and particularly the low amount of special dividend declared, being less than a quarter of the total proceeds of S$2.3b from Netlink Trust IPO. Singtel had stated that it would like to retain remaining the proceeds for investments. The share price initially dropped from almost the high of S$3.78 prior to results announcements to a low of S$3.66, before closing the month at S$3.76.

2. Goldpac:

There is no new announcement from the Exchange during Nov. However, Goldpac did announce its Smart Card shipments for the first Three Quarters in Oct which I had inadvertently missed:

- Smart Card Shipments: year-to-date growth of 8.6% to 135.59m
- Credit Card business: growth of 30%

Based on my own estimations and tabulations above, the growth of Goldpac's quarterly IC card shipments has continued into Q3, albeit at a slower pace compared to Q2. 


3. Hopefluent:

While there is no corporate news from Hopefluent, but there were quite abit of insiders' activities announced in Nov 17.

Non-executive Director, Mo Tian Quan had recorded his first sales of shares in Oct 17 since his last purchase through China-Net Holding (Soufun) of 700K shares at average price of HK$2.183 in 1st Dec 2016. Strangely, while these sales transactions were done in Oct 17, they were only recorded with the HKEx on 13th Nov 17. In total, Mr Mo sold 812K shares at an average price of HK$3.7252.

Is this share sales is a cause of concern?

In my opinion, it's a matter of time that Mr Mo would have to decide what to do with his investments in Hopefluent. As mentioned in my initial posting HERE, there have not been any apparent progress in the cooperation between Hopefluent and Soufun since its strategic investment in 2014. Mr Mo also had not been attending Hopefluent Board Meetings for the past two years according to the annual reports.

On the other hand, the Founders and Executive Directors recorded a total purchases of 2,496K shares at an average price of HK$3.5496 in Nov17.


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Stock Sniper's Portfolio For October 2017

 

Read about Stock Sniper's Portfolio HERE

 

Transactions For Oct 17:

1. Singtel: Added into the portfolio in line with the objective of generative passive income from investments. Uninvested cash balance reduced to near 60% of the portfolio.

Reasons for purchase:
- From the desktop review HERE, it appears that Singtel has the best financial ability among the three Singapore telcos to ride out the rough patches from the increasing local competitions. Also, based on the financial ratios, Singtel has the best ability to sustain its current dividend payout. At this price, the dividend yield is expected to be 4.5%.

Review of other investments:

1. Goldpac:

- There is no new announcement from the Exchange during the period.

- However, on the corporate side, Goldpac did announce that it provided to the China Merchants Bank, an exclusive "Blockbuster " King of Glory co-branded credit card which looks quite cool.

- Still Trading at around 2x ex-cash PE. Valuation HERE



2. Hopefluent:

- Executive Chairman, Mr Fu bought a further 500,000 shares at an average price of HK$3.7195 during the month.

- Property related stocks took some beating during the month as there were news that property sales in China dropped for the first time in more than two-and-half years in September and housing starts slowed sharply.

- The PRC leadership also announced during the 19th Party Congress in October that it would be curbing speculative demands in the property market with tightening measures to cool down the housing prices further and so that housing can be within the reach of the masses.

- Are these developments a cause of concern for Hopefluent?

When the investment decision was first made with this analysis, it had already been expected that the property cooling measures would impact the number of transactions in the short term. Hence, these developments should not come as a surprise. In fact, having a stable property price and enhancing affordability to the masses would improve the demand over long term. The new land releases by the government would also increase the supply of new properties that the property companies and its agents can sell. Hopefluent does not take the risk of property, it just earns from broking property transactions.

- With a strong balance sheet, Hopefluent should have no problem to tide it through. There is still high MOS with net cash/share. See valuation HERE

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Opportunities in China's Waste Water Sector

In the previous article HERE, we provided an overview of the China's Water and Waste Water situation. In this article, we will look at the potential opportunities in the WWT and WWT related segments.

 

RHB (Apr, 2017) has categorized the waste water segment into:

WWT: Waste Water Treatment
HWT: Hazardous Waste Treatment
Sludge Treatment (by product of WWT)
WTE: Waste to energy (by product of WWT is used to generate electricity)

According to Uob Kayhian (Jan, 2017), the WWT market is quite mature in bigger cities. The WWT industry in counties has developed faster than expected in the 12th FYP period, with the treatment ratio reaching 85%, exceeded its target of 70% in 2015. However, the ratio is still low in towns. The 12th FYP targeted a 30% treatment ratio and the 13th FYP targets to aggressively raise the ratio to 70%. In less developed regions, such as the central and west regions, the ratio should reach 50%. Therefore, going forward, Uob Kayhian thinks that the WWT will focus on towns and villages, which are now lagging behind in terms of treatment ratio.

Further, Uob Kayhian reported that the treatment of sludge, which is mainly the byproduct from WWT, has been largely overlooked in the past five years. So far, most of the sludge is buried after dewatering. However, this is not a good solution as all the pollutant content still exists, suggesting high possibility of a second round of pollution to soil and rivers. Over the next few years, the government would focus on the conversion of sludge into other useful materials, depending on the type of sludge. Hence, there are opportunities in the sludge treatment area.

Overview of Hazardous Waste Situation

The Hazardous Waste Management industry in China is engaged in the collection, storage, utilization, and disposal of hazardous waste. According to ResearchInChina, China is a big producer of industrial hazardous waste, which arise from electronic circuit board production, oil & gas and chemical production processes. It was estimated that China produced 40 million tons of industrial hazardous waste in 2013, representing an increase of 15.4 % over the previous year. By 2016, China will create 70 million tons of hazardous waste. However, as of 2013, Chinese licensed companies could only treat 50 %-60% of hazardous waste. With the country attaches more importance to environmental issues, laws and regulations are enforced more and more stringently, the utilization and disposal rates of hazardous waste will be to some extent raised, and the hazardous waste treatment industry will embrace huge potentials.

The Ministry of Environmental Protection (MEP), National Development and Reform Commission (NDRC), and Ministry of Public Security (MPS) jointly released the National List of Hazardous Waste (2016 edition), effective 1 August 2016.

The updated List reclassifies hazardous waste into 46 categories. Out of the 479 items on the List, 117 are newly added.

While there are hundreds of enterprises in Beijing, Jiangsu, Zhejiang, Guangdong, Henan, and Tianjin that engage in the front line of hazardous waste treatment, most of the capacities are idle due to scarce policy support of the local government and low efficiency of garbage collection (ReportsmReports, 2014). Companies with government support in the collection of the hazardous waste will have huge growth opportunity in this area.

Technology Barrier

Compared to municipal waste water, it is more difficult to treat industrial wastewater as its chemical composition is more complex. As industrial wastewater is often toxic, the wastewater treatment system must be designed to largely remove or substantially reduce the concentration of these effluents to an acceptable level as required under environmental protection and public health laws and regulations.

Sludge is the by-product resulting from wastewater treatment and contains a large amount of nitrogen, phosphorus, potassium and organic ingredients as well as toxic and harmful components such as dioxins. Sludge treatment is a complicated process. Only less than 30% of wastewater treatment plants in cities in China can properly compress, stabilize and dehydrate sludge. According to the data collected by Ernst & Young in 2013, over 56% of wastewater treatment plants do not have stabilization treatment and nearly 49% do not have a dehydration process. Only operators with industrial solid waste certificates under the operation certificate of environmental pollution treatment facility are allowed to conduct sludge treatment business.

Hazardous waste treatment requires the most advanced technology and specified treatment process is required for each type of waste.

Overall Assessment of Waste Water & Hazardous Waste Sector:

Source: Stock Sniper

Competition

The Water & WWT industry is a highly competitive and fragmented market in China. The main players are the State-Owned- Enterprises (e.g. Beijing Enterprises Water, Beijing Capital, Shanghai Industrial, Tianjin Capital Environment) and local private companies (China Water, Kangda, Sound Group) as well as a number of international environmental services companies (Suez Environement, Veolia Environment).

However, foreign companies are increasingly finding it difficult to compete with the local companies in the WWT, except for segments that requires more advanced technology.

The WWT companies compete on financial strengths, project execution capability, research and development capability, understanding of the local governmental landscape, quality and price of wastewater treatment and industrial water supply services, brand reputation, marketing and customer services.

The wastewater treatment industry is capital intensive. It is generally easier for medium to large players with good financial strength to win bids for wastewater treatment projects, as they are able to afford the start-up cost and can obtain financing from banks or the government more easily.

In municipal wastewater projects, relationships with the local government play a vital role in winning the tender as well as in subsequent operations. A good relationship with the local government often enables a player to better understand the government’s requirements, and hence a higher chance to win the contract.

In 2017, up to May, there are two new IPOs, namely Luzhou Xinlu Water Group and Kunming Dianchi Water Treat which were listed in HKSE.

Summary of Business Scope of Listed Companies Operating in Water and WWT

   Source: Stock Sniper

¹Engineering, Procurement and Construction (EPC) service provision to 3^rd party as part of its core business)

Comparison of WWT Companies Listed in SGX, SSE & HKEx

Data Source: Morningstar, Annual reports

Coming soon... Next, we will be looking at a few of the listed companies above operating in the China's Waste Water Sector.. Click HERE To Subscribe For New Updates by Email

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Dividend: Romance Of The Three Telcos – Singtel, Starhub & M1

Telcos have been the traditional favourite investment choice for many dividend investors.

Since the news of the 4^th Telco entry and the potential heighten competition from Netflix on the pay-TV segment, share prices of the existing 3 listed telcos in Singapore have not been doing well, particularly from September 2016.

From January 2016 to October 2017, the share price of M1 & Starhub have retreated by more than 30% and 24% respectively while Singtel is relatively resilient, edging up by 6.2%

Investing in Singapore Telcos

Without delving into their operational performances and speculating about the future, let’s run some quick trailing twelve month (TTM) numbers to see how each Telco stacks up against one another.

Company	Share Price	Dividend (cts)	Dividend yield	EPS (cts)	PE	ROE	P/B	Debt/ Equity	*Dividend payout ratio	*Free cashflow/ share cts)
Singtel	3.76	17	4.5%	23	16.3	14%	2.1	0.34	74.8%	11.93
Starhub	2.68	19	7.1%	17	15.8	96%	11.7	2.48	110%	5.19
M1	1.785	11	6.2%	14	12.8	35%	4.3	1.15	77.6%	10.76

Reference: MorningStar dated 19 Oct 17                       
* Indicates calendar year-end data information

In terms of financial matrices, it seems that Starhub scored the worst among the three due to its highest debt ratio and dividend payout ratio exceeding both EPS and free cashflow. This implies that the current rate of dividend payment might not be sustainable for Starhub.

Conversely, Singtel has the strongest balance sheet (lowest debt ratio) and while its PE seems to be the highest, its Price-over-Book ratio is the lowest among the three telcos. So it would mean the price that the investors are paying for Singtel are backed by more assets. Also, Singtel has the headroom capacity to gear up its balance sheet further should it need to and still could maintain its dividend payment (note that Singtel’s free cashflow/share for FY17 was 17.36cts and in the current period, it has received S$1.1bil in proceeds from Netlink IPO)

In conclusion, it seems that the financials of Singtel is rather strong and it has probably the best ability to sustain its current dividend among the three telcos.

On another side note, all three companies have engaged in share buy-backs as their share prices declined over 2016 - 2017. Let’s us take the hindsight view of the outcome:

Interestingly, despite larger amounts spent on buy-backs, the share prices of M1 and Starhub continued to decline further. M1 which utilized the highest amount of S$28M on share purchases, saw its share price still decline 26% below its average price paid. For this year, Starhub seems to have “thrown in the towel” and stopped buying back its shares to-date 2017 while Singtel actually increases its share buyback this year, but spending a modest amount of only S$4.7M vis-à-vis its market capitalization (probably main purpose of Singtel's buy backs is for its employee stock option scheme?).  

An Overview of China’s Water and Waste Water Situation

According to ABD, China is home to about 20% of the world’s population, but endowed with only 7% of global water resources. Water resources in the PRC are remarkably unevenly distributed. Southern China encompasses 69% of the country’s available water supply and has four times the groundwater resources of northern China; whereas, the north only has one-fifth of the China’s total water resources, yet it covers roughly 60% of arable land for agriculture and is home to some of the country’s largest cities.

Both regions register seriously low per capita water availability ratios. The south, with water availability at 1,100 cubic meters (m³) per capita, is within a hairline of the international water scarcity threshold of 1,000 m3 per capita, while the north is operating at only 424 m³ per capita or nearly 50% below the threshold.

 

 According to a Goldman Sachs report in 2015, the China’s Market for environment potential is tremendous due to under-investment as a percentage of GDP and as unprecedented growth in the past has led to record levels of pollution in China’s air, water and soil. The pollution issues must be addressed as there will be growing national and social concerns on food & water safety and sufficiency.

 

Source: Goldman Sachs, July 2015

In 2016, the Chinese government announced various policies under the 13th Five-Year Plan to promote environmental protection, while tightening the laws and regulations to define more clearly the responsibilities of environmental protection bodies. According to Uob Kayhian (Jan, 2017), the 13^th Five Year Plan (FYP) from 2016-20 estimates total investment of Rmb564b, up 31% from the amount in 12^th FYP, which will mainly be used as capex for WWT facilities. For the river clean-up in main cities, the total budget is around Rmb170b in the 13^th FYP. The 13^th FYP guided that local governments are responsible for these projects by means of:

 

a) Raise funding through Waste Water Treatment (WWT) tariff to attract investment;

b) Invite more social and private capital (PPP: Public-Private-Partnership); and

c) Offer more support to less developed regions.

 

Other than driven by policies, the demand for water and water treatment is also expected to increase due to the continuing urbanization and industrialization in China.

 

Urbanization is one of the factors that contribute to the increased discharge volume of domestic sewage. According to Frost & Sullivan, China’s urban population grew from 669.8 million in 2010 to 793.0 million in 2016. In the same period, China’s urbanization rate saw an increase of 7.4% from 49.9% to 57.3%. Frost & Sullivan estimates that by 2020, and Chinese urbanization rate to reach 63%. This urbanization trend is likely to lead to an increase in demand for clean water and wastewater treatment in urban areas, which in turn would increase the growth potential of the municipal wastewater treatment industry.

 

Between 2010 and 2015, the water consumption volume in China increased from 602.2 billion ton to 634.2 billion ton. During the same period, per capita water consumption has also increased from 450.2 ton to 461.2 ton. Frost & Sullivan expects China’s water demand will keep growing and has estimated that by 2020, total and per capita water consumption will increase to 666.9 billion ton and 464.3 ton respectively.

While official industrial wastewater discharge reported a declining trend since 2008, ChinaWaterRisk points that it could be under-reported as it does not synch with the economic growth in China.
 

 

Water tariffs have experienced growth in the past decade. Wastewater treatment fee for residential users rose from RMB0.76 per m³ in 2010 to RMB0.85 per m³ in 2015 and running water tariffs increased from RMB1.84 per m3 in 2010 to RMB2.11 per m³ in 2015. Industrial water tariffs and waste water treatment fee are higher than residential users and Frost & Sullivan believes wastewater treatment tariff will continue to grow and this bodes well for the WWT operators.

 

  

Furthermore, the tariffs rate in China are still very low compared to those in developed countries. According to Goldman Sachs (2015), one key reason for China’s chronic and deteriorating environmental system is due to its low pricing of utilities & water treatment. Cleaning up pollution across the ecosystem will require a rationalization of utilities prices, meaning users and polluters will need to pay more realistic costs so that suppliers of pollution reduction services are appropriately incentivized to provide good environmental protection and improvement services.

Coupled with the continued economic growth, government measures and demographic trends, it is expected that there would be an increased demand for clean drinking water, industrial water and wastewater treatment, sludge and hazardous waste treatment services in China and these investments would be supported by the expected tariff increases.

(Source: Stock Snipers)

Wastewater Treatment Operating Modes

Wastewater treatment is usually conducted by means of either a BOO or BOT project. In addition, there is also the O&M project model, in which an enterprise is retained to operate and maintain wastewater treatment facilities in return for a fee. Generally, for BOO & BOT, the project company is exposed to financing risks as a large sum of capital is required at the start up of the project and only gets paid back after a long period of time.
 

 

BOT

Municipal projects are using build-operate-transfer (BOT) model, where local governments are responsible for tariff collection and payment. BOT projects involve the design, construction and operation of wastewater treatment plants where concession is granted (usually for 25-30 years) by the local government according to the relevant concession agreement. At end of the concession period, the plant is transferred to the local government at zero consideration.

 

BOO — A B2B business model with higher returns as well as risks

The build-operate-operation (BOO) method is widely used for developing industrial WWT projects. BOO projects are built, owned and operated by the operator. Local governments may act in an initiator/coordinator role in industrial projects. Generally, operators of industrial WWT projects need to sign contracts with customers one by one, with no guaranteed treatment volumes.

Given that BOO projects generally bear greater risk from potential uncertainty in utilization and tariff collection and the operator is able to get higher margin by directly negotiate the tariffs with the industrial users.

 

 

Coming soon... Next, we will be looking at the potential opportunities in the China's Waste Water Sector.. Click HERE To Subscribe For New Updates by Email