Value Investor, who works in the fund management industry and is vested in the shares of Sound Global, contributed this article to NextInsight. For his previous contributions, see bottom of this page.
Wen Yibo, founder and executive chairman of Sound Global, owns 56.7% of the company.
Photo: http://www.wuxiayeyou.comREMEMBER Sound Global, which was listed on the Singapore Exchange from 2006 to early 2014?
Currently listed on the HKEx, Sound Global (967 HK) constructs and operates waste water treatment and water recycling plants. It was founded in 1993 by Wen Yibo, a former Tsinghua University professor in environmental engineering.
He is also the controlling shareholder of Sound Environmental (826 CH), a China listed entity involved in waste-to-energy and waste-water treatment.
The last 12 months have been a busy time for Chairman Wen, as he unlocked value for shareholders by consolidating the company's listing on HKEx. He now aims to accelerate the company's growth by increasing its market share in small towns to 15 - 20% within five years.
This will be done by harvesting the relationships the firm has established since 2011 when it penetrated over 100 small towns. He also expects Sound Global to enter into another 100 more this year.
With its growth path intact, analysts are watching whether it has the balance sheet strength to execute its lofty plans. Wen Yibo, founder and executive chairman of Sound Global, owns 56.7% of the company.Photo: http://www.wuxiayeyou.comREMEMBER Sound Global, which was listed on the Singapore Exchange from 2006 to early 2014?
Currently listed on the HKEx, Sound Global (967 HK) constructs and operates waste water treatment and water recycling plants. It was founded in 1993 by Wen Yibo, a former Tsinghua University professor in environmental engineering.
He is also the controlling shareholder of Sound Environmental (826 CH), a China listed entity involved in waste-to-energy and waste-water treatment.
The last 12 months have been a busy time for Chairman Wen, as he unlocked value for shareholders by consolidating the company's listing on HKEx. He now aims to accelerate the company's growth by increasing its market share in small towns to 15 - 20% within five years.
This will be done by harvesting the relationships the firm has established since 2011 when it penetrated over 100 small towns. He also expects Sound Global to enter into another 100 more this year.
Despite an increase in finance costs by 64% to RMB 285 million (HK$356.2 million) last year, Sound Global has RMB 3.5 billion in hand and has no financing needs this year.
The hefty rise in financing cost was due to high interest bearing senior notes issued in 3Q2012 at 11.875%.
This is likely to be an abberation as recent borrowing cost was in the low 3% range. Structural optimization in debt will be done this year to reduce finance costs further. Its balance sheet remains robust with net gearing at 7%.
This will underpin its expansion as it seeks to secure more BOT (build operate transfer) projects.
With the Chinese government firmly intent on improving air and water quality across China, Sound Global is likely to benefit from the secular trend.
For example, the government's 12th five-year plan outlines the required standard for water discharge, thus generating opportunities for Sound Global in the area of equipment modification and improvement.
Fees for water treatment in China remain far below international levels, which provides huge room for increases. For example, sewage treatment charges are only RMB 0.7 per cubic meter. Wen has said the Chinese government wants to double the charge and might increase it to RMB 2 to 3 per tonne in three to five years.
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With the Chinese government firmly intent on improving air and water quality across China, Sound Global is likely to benefit from the secular trend. For example, the government's 12th five-year plan outlines the required standard for water discharge, thus generating opportunities for Sound Global in the area of equipment modification and improvement.
Fees for water treatment in China remain far below international levels, which provides huge room for increases. For example, sewage treatment charges are only RMB 0.7 per cubic meter. Wen has said the Chinese government wants to double the charge and might increase it to RMB 2 to 3 per tonne in three to five years.
S-chip that attracted believers Despite its history as a S-chip, the business was validated when Wen offered to buy up all the SGX listed shares in Sep 2013 at S$0.70 a share (around HK$4.34). Underscoring the bargain that the stock stood for, major shareholders like Norges Bank and International Finance Corporation roundly rejected the offer and chose to transfer their shares to HK. Schroders even started accumulating shares above Wen's buy out price!  After being delisted from SGX in Feb 2014, Sound Global traded sharply higher on the HKEx but underwent a correction after that. Chart: BloombergFollowing the transfer to HK in Feb 2014, Sound Global fell to a seven-week low of HK$7.22 last Friday. At the current market price of HK$7.48, Sound Global (market cap: US$1.3 billion) is trading at 15x forecast earnings for this year. This is potentially a bargain with over 30% upside. Major international and Chinese water companies are trading at at least 22x PER. Larger groups such as China Everbright, BJ Water Group are trading at 33x PER. Smaller peers like Hankore (SGX listed) are also changing hands at 25x PER. This weakness in Sound Global stock is likely to be short term and largely the result of the sale of shares by convertible bondholders who recently converted to equity. Over a 12-month horizon, it is no surprise that analysts at JP Morgan, DBS Vickers, Citi and Standard Chartered all have buy recommendations, with price targets of HK$9, HK$9.78, HK$10, HK$10.10 respectively. Standard Chartered has tagged Sound Global a "high conviction buy"! Given Sound Global's fundamentals remain intact, I think we cannot expect it to languish at this level for long. Investors are likely to capitalise on this short-term window to mop up this quality Chinese water treatment stock. |
Previous articles by 'Value Investor':
