Singapore Company Focus

United Envirotech
Bloomberg: UENV SP | Reuters: UNIT.SI

DBS Group Research . Equity

2 Jan 2013

BUY S$0.50 STI : 3,167.08

(Initiating Coverage) Price Target: 12-Month S$ 0.69* (S$0.92**) Reason for Report : Initiate coverage Potential Catalyst: Higher plant utilizations, expansion, acquisitions * based on fully dilution of convertible bonds into 302m shares ** based on existing share cap Analyst TAN Ai Teng +65 6398 7967 AiTeng@dbsvickers.com

Stable flow of recurring income

Initiate coverage with BUY, +41% to fully diluted TP of S$0.69 Expect earnings breakthrough as recurring income streams gather momentum Attractive at 8x/7xPE for 75%/21% PATMI growth in FY14F/15F, industry averages 13x

Price Relative
S$ 0.6 300 0.5 0.4 0.3 0.2 0.1 Jan-09 250 200 150 100 50 Jan-13 Relative Index

Jan-10

Jan-11

Jan-12

Potential upside from acquisitions & expansion; CB dilution can be potential overhang >60% of profits coming from long-term recurring treatment income. United Envirotech (UENV), a membrane-based wastewater treatment company, has been shifting to a stable, recurring and more profitable earnings profile with the acquisition of operating water plants in China. By FY14Mar, UENV would have a total processing capacity of 1.18b m3/day to generate S$25m or 60% of group PATMI. This treatment income is recurring for the life of the water concessions (30 yrs). Key beneficiary of Chinas rapid growth in environmental protection. Besides treatment services, UENV should continue to win engineering and construction (EPC) contracts given the growing demand for membrane-based water treatment plants in China to meet stricter discharge limits, which old plants are not equipped to process. We believe UENV can maintain ~Rmb400m of new EPC orders over the next two years. Earnings CAGR of 46% from FY13F-FY15F. UENV has potential upside from higher utilisation rates. Besides, we have not incorporated the Phase 2 expansion or acquisitions. BUY, TP S$0.69. Our sum-of-parts TP is based on 10x PE for EPC and DCF valuation (8.6% WACC) for treatment. We have also assumed full dilution of the S$136.2m convertible bond to Kholberg Kravis Roberts & Co (KKR).
At A Glance Issued Capital / Fully Diluted (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders Yu Cheng Lin (%) Ching Wah Goh (%) Oei Hong Leong Peter (%) Free Float (%) Avg. Daily Vol.(000) 479 / 793.1 239 / 196 18.1 17.8 17.6 46.5 1,637

United Envirotech (LHS)

Relative STI INDEX (RHS)

Forecasts and Valuation

FY Mar (S$ m) 2012A 2013F *2014F *2015F

Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Consensus EPS (S cts): Other Broker Recs:

85 21 14 10 10 2.2 2.2 (35) (35) 2.2 0.3 37.3 22.8 22.8 49.3 15.4 0.6 1.3 0.5 6.6

150 49 36 27 27 5.5 5.5 149 149 5.5 0.7 41.1 9.1 9.1 7.5 8.5 1.5 1.2 0.9 14.1 4.8 B: 1

164 68 63 47 47 5.9 5.9 8 8 5.9 0.8 45.3 8.4 8.4 9.3 6.9 1.6 1.1 0.2 16.8 5.9 S: 0

209 81 76 57 57 7.2 7.2 21 21 7.2 1.0 51.4 7.0 7.0 7.3 5.3 2.0 1.0 0.1 14.8 H: 0

ICB Industry : Utilities ICB Sector: Gas; Water & Multiutilities Principal Business: Key membrane bio-reactor supplier inAsia. Also owns a growing portfolio of water assets in China.

Source of all data: Company, DBS Vickers, Bloomberg *Per share estimates based on full CB dilution of 793.1m shares

www.dbsvickers.com Refer to important disclosures at the end of this report ed: OY / sa: JC

Company Focus United Envirotech

Valuations
Sum-of-the-Parts valuation and full dilution assumed for convertible bond. We use sum-ofthe-parts analysis to value UENV so as to capture the different valuation characteristics of the two businesses. At the same time, we have assumed full dilution impact from the S$136.32m Convertible Bond issued to KKR. Based on the conversion price of S$0.45 a share, a total of 302.9m new shares would be issued upon conversion anytime up to 28 Sep, 2016. PE valuation for earnings-driven EPC. Here, we apply 10x PE to FY14F earnings. Our assumed PE multiple is lower than the sector average of 13-14x forward earnings, to factor in UENVs smaller scale of operation.

Peers valuations
Mkt Curry Cap (US$m) Price ($) 12/28/2012 EPS CAGR 11-13 (%) EV/EBITDA (x) 12F 13F Price / BV (x) 12F Net Net Debt/ Debt/ Div Yld (%) Equity Equity PEG 12F 13F 11A (x) 12F (x) 13F

FYE Company

12F

PE (x) 13F

14F

ROE 11A

Hyflux Sound Global Beijing Ent Water China Everbright Intl Tianjin Cap. Environ. Average

Dec Dec Dec Dec Dec

S$ S$ HK$ HK$ HK$

870 606 1,774 1,821 88

1.29 0.58 1.99 3.84 2.00

7 12 26 8 (8)

29.6x 23.9x 20.5x 14.4x 14.0x 9.2x 8.7x 9.1x 5.3x 5.2x

2.1x 1.7x 1.6x 1.9x 0.6x 1.6

2.1% 2.1% 2.2% 2.3% 1.7% 2.1% 1.7% 2.0% 2.1% 2.0% 2% 2%

0.18 cash 0.70 0.54 0.91 0.6

0.22 cash 0.93 0.35 0.87 0.6

3.5 0.7 0.5 1.9 (1.2) 1.1

8% 20% 11% 14% 8% 12%

17.9x 14.1x 11.8x 18.2x 15.3x 17.7x 15.0x 13.1x 12.7x 12.1x 9.8x 16.8 9.8x 14.3 8.7x 12.7 7.0x 11.5 6.7x 10.7

United Envirotech

Mar

S$

190

0.49

28

22.1x 8.9x

8.2x 11.9x 8.5x

1.3x

0.6% 1.5%

0.05

0.49

0.3

13%

Source: DBSV estimates, Company, Bloomberg

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Company Focus United Envirotech

Discounted Cash Flow valuation for the treatment business. Here, we apply a) risk free rate of 1.8% based on DBS Banks forecast yield on a 10-year Singapore government bond b) expected market return of 10% based on Bloombergs 10-year average return of the Singapore market c) the companys adjusted beta of 1.0. Based on these assumptions, we arrive at a weighted average cost of DCF valuation of Treatment business
Risk Free Rate (Rf) Market Return (Rm) Equity risk premium Beta Cost of Equity (Ke) Proportion of financing that is debt After-tax cost of debt (Kd) WACC 1.75% 10.00% 8.25% 1.00 10.0% 40.0% 6.4% 8.6% 1 FY13F 14.9 4.1 (3.7) 0.0 0.0 15.3 14.1

capital of 8.6%. This discount rate applied to the concessions free cash flow forecast yielded an equity value of S$0.50/share for the treatment business. No terminal value is included given that most projects are on a TOT or BOT basis, implying that these would be transferred to the government at the end of the concession period.

DBS forecast of 10 yr T-bond - S'pore Obtained from Bloomberg Market return - risk free rate Obtained from Bloomberg Beta x Equity risk premium Ke = Rf + Debt / (Debt + Equity) Cost of debt * (1-corporate tax rate) WACC = (D/D+E) * Kd + (1 - D/D+E) * Ke 3 FY15F 47.8 9.0 (4.4) 0.0 0.0 52.4 41.0 4 FY16F 47.8 9.0 (9.3) 0.0 0.0 47.6 34.2 5 FY17F 50.0 9.1 (9.6) 0.0 0.0 49.5 32.9 6 FY18F 50.0 9.1 (10.2) 0.0 0.0 48.9 29.9 7 FY19F 50.0 9.1 (15.0) 0.0 0.0 44.1 24.8 8 FY20F 50.0 9.1 (15.0) 0.0 0.0 44.1 22.9 9 FY21F 50.0 9.1 (15.0) 0.0 0.0 44.1 21.1 10 FY22F 50.0 9.1 (15.0) 0.0 0.0 44.1 19.4 11 FY23F 50.0 9.1 (15.0) 0.0 0.0 44.1 17.9 12 FY24F 50.0 9.1 (15.0) 0.0 0.0 44.1 16.5

FYE Mar (S$m) EBIT Add Depreciation & Amortisation Less Tax Provision Less Capex Add changes to working capital Total FCF to the Firm Discounted FCF

2 FY14F 42.2 8.6 (2.8) 0.0 0.0 48.0 40.7

Full conversion of CB : +302.9m shares No of shares Terminal Growth (assumed) Total PV of FCF PV of Terminal Value Add Net Cash (Debt) Equity Value (S$m) Value Per Share (S$) 793.1 0% 464.1 0.0 (74.4) 389.7 0.49

Existing share cap 490.1 0% 464.1 0.0 (172.6) 292 0.59

Source: DBSV estimates

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Company Focus United Envirotech

SOTP target price of S$0.70. Summing up both valuations, we derived a target price of S$0.70 for UENV. Our TP implies 12x FY14F and 10xFY15F, which is still lower than the sector average of 13-14x although UENV features stronger than peers EPS CAGR of 28%. >40% potential return even on conservative assumptions, recommend BUY. Note that our TP is on a fully diluted basis to account for a CB conversion. As the new shares issued will form 38% of the enlarged share capital, a full conversion would trigger a General Offer (based on >30%

threshold). While we have assumed full dilution to be conservative, we believe that conversion would likely be phased out and not all at once. Hence, for comparison purposes, we have also presented a fair value scenario based on the existing share capital. In view of the attractive potential returns of 43% even on a fully diluted TP, and as much as 80% upside if based on existing share cap, we initiate coverage on UENV with a BUY rating.

SOTP fair value of S$0.70 is on fully diluted basis Valuation methodology PER DCF Value per share based on full conversion of CB (S$) 0.20 0.49 Value per share based on existing share cap (S$) 0.33 0.59

Core earnings EPC income DCF of Treatment income

FY14 PATMI 16

Multiple (x) 10 8.6% WACC; 0% LT growth; no terminal value

Value (S$m) 160.1 389.7

Fair value Implied upside Implied PER (FY14) Implied PER (FY15)
Source: DBSV estimates

549.8

0.69 41% 11.7 9.7

0.92 90% 11.1 8.5

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Company Focus United Envirotech

Kingpin of membrane-based water and wastewater treatment

Founded by current Chairman and CEO Dr Lin Yucheng in 2003, United Envirotech is a leading membrane-based water and wastewater treatment and reclamation company in Asia (ex-Japan), with a strong niche in Membrane Bioreactor (MBR) and Continuous Membrane Filtration (CMF) technologies. Leading supplier in the MBR industry. UENVs membranebased water treatment systems have gained recognition as one of the most cost-effective and efficient ones around. In fact, UENV has established a track record in MBR, especially in the chemical, petrochemical and industrial park sectors. Its competitive edge is in treating wastewater of a greater complexity to meet stringent standards, and also to reclaim treated wastewater for reuse. A notable testament of UENVs superior technologies and engineering competence is the firms construction of the first and largest underground MBR plant in Asia at Jingxi, Guangzhou for the Municipal Government of Guangzhou City. This MBR plant has a treatment capacity of100,000 m3/day and a contract value of Rmb240m. In Singapore, UENV supplied CMF and RO systems for NEWater (Singapores large-scale water reclamation programme) plants, especially in the area of industrial wastewater recycling. So far, the company has undertaken two projects for Sembcorp Utilities on Jurong Island at 5,000 m3/day each to purify and treat industrial effluence from different sources, to various degrees of purity. Many repeat customers amongst its blue chip clientele. As an EPC contractor, UENV serves petrochemical giants like Sinopec, CNPC and CNOOC, as well as large industrial parks like Huizhou Daya Bay Petrochemical Hub, Guangzhou Nansha Chemical Industrial Park and Jiangsu Taixing Chemical Industrial Park. Today, the bulk of its revenue (>85%) is from China, with the remaining from Singapore and Malaysia.

Sales Trend
S$ m S$ m

Profitability Trend
90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
60 50 40 30 20 10 2011A 2012A 2013F
Pre tax Profit

300 250 200 150 100 50 0 2011A 2012A 2013F 2014F 2015F
Total Revenue Revenue Growth (%) (YoY)

70

2014F

2015F
Net Profit

Operating EBIT

Source: Company, DBS Vickers

UENVs principal activities include providing engineering services, turnkey projects, operation and maintenance (O&M) services for water and wastewater facilities. Over the years, UENV has also invested in wastewater treatment plants in China under Build-Operate-Transfer (BOT), Transfer-OperateTransfer (TOT) and/or Build-Operate-Own (BOO) agreements. EPC is the main revenue contributor. For EPC, UENV provides design, fabrication, installation and commissioning of membrane-based water and wastewater treatment systems using advanced membrane technology (e.g. MBR, CMF) processes in micro filtration, ultra filtration, and reverse

osmosis. For the past three years, such services contributed >70% of the companys revenue, with the balance coming from the water and wastewater treatment segment. Investments and O&M provide a steady stream of treatment income. UENVs invested projects are mainly municipal plants from the Chinese government, which generate a steady stream of wastewater treatment tariff receipts for the company. In addition to its own plants, UENV also provides O&M services of water and wastewater treatment facilities to clients on a contractual basis to generate sustainable recurring income.

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Company Focus United Envirotech

UENVs significant projects

Sinopec Hainan Refinery WW treatment and reuse

Source: Company

Creating stable, recurring and long-term income streams

EPC offers quicker payback, is less capital intensive but can be lumpy and volatile. Although EPC has always been the bread and butter of UENVs business, this market will inevitably become competitive, and less profitable, when most cities have installed treatment plants to meet their required processing capacities. The EPC model, while less capital intensive and quicker in generating upfront profits, depends on continual efforts to secure new projects and timely revenue recognition. Most times, revenues are lumpy and earnings, volatile. Expand BOT/TOT/BOO portfolio to build recurring income streams. Determined to build a stable and recurring source of revenue and income, management is committed to aggressively building its plant portfolio under BOT/TOT/BOO, in terms of wastewater treatment, drinking water supply and industrial water supply plants and not just continuing to run after EPC projects. KKRs convertible bond investment provided additional capital for rapid expansion. In August 2011, UENV entered into a definitive agreement with KKR for a US$113.8m convertible bond investment with a five-year tenure, at a coupon of 2.5%, which could be converted into equity shares at a conversion price of S$0.45 per share. When fully converted, KKR will own about 38% of the groups total share capital. KKRs investment provided growth capital for UENV to quickly seize valued opportunities as they emerge. Indeed, management has been actively acquiring water plants in the last 18 months to boost treatment sales, which is stable, recurring and higher margin than the original mainstay EPC business. Today, UENV has 12 operational plants with a total processing capacity of 550,000 m3/day. By FY14, UENV would have 25 plants with total processing capacities of 1.18b m3/day based on Phase 1s designed capacity. As most of these plants are operating above 70-80% and some close to full utilisation, management has considered Phase 2 expansion by FY15. Based on current planning, Phase 2 expansion of existing plants alone would raise capacity by 18% to 1.39b m3/day. We like that growth is visible for this part of the business and believe that it would be stronger with acquisitions as UENV is still seeking investment opportunities in municipal and industrial plants requiring upgrading and industrial wastewater plants where the firm would have a technological advantage.

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Company Focus United Envirotech

CompanyFocus United Envirotech

UENV has made excellent stride in building up its portfolio of water assets
Phase 1 Investment Investment Design value value capacity RMB m S$ m (m3 / day) 180 100 85 72 200 100 0 69 36 20 17 14 40 20 0 14 161 200,000 80,000 10,000 15,000 80,000 90,000 25,000 50,000 550,000 Phase 2 Design capacity (m3 / day) 200,000 80,000 10,000 40,000 160,000 90,000 50,000 50,000 680,000 Phase 3 Design capacity (m3 / day) 200,000 80,000 10,000 40,000 160,000 90,000 50,000 50,000 680,000

1 2 3 4 5 6 7 8

Date Secured Projects Plant in operation 28-Oct-2004 Liaoyang 14-Sep-2005 Xintai 02-Aug-2006 Nansha 16-Dec-2008 Dafeng 23-Oct-2009 Hegang 31-Aug-2009 Bazhou Mengzhou 29-Sep-2011 Xinmin Total Plant in transition 29-Mar-2012 Changyi 08-Feb-2011 Tangshan 28-Sep-2009 Liaoyang (Hedong) 17-Apr-2012 Shangzhi, Harbin 23-Jul-2012 Changyi 29-Aug-2012 Xintai 20-Sep-2012 Weifang 31-Oct-2012 Qitaihe Total

Province Liaoning Shandong Guangdong Jiangsu Heilongjiang Hebei Henan Liaoning TOT TOT ACQ BOT BOT ACQ ACQ BOT

No. of Source of plants Stake water 1 2 1 2 2 2 1 1 12 100% 100% 100% 100% 100% 40% 40% 100% Municipal Municipal Industrial Industrial Municipal Municipal Industrial Municipal

Tech CMF MBR MBR MBR MBR MBR MBR MBR

Plant utilisation 140,000 70,000 7,000 10,000 80,000 63,000 17,500 35,000 422,500 77% 40,000 60,000 140,000 40,000 70,000 14,000 10,000 80,000 454,000 72%

Start date of End date of operation operation May-05 Nov-05 Jan-07 Apr-08 Oct-11 2008 2010 2009 2035 2035 indefinite 2041 2033 2034 2039

Concession period 30 30 30 30 30 24 30

9 10 11 12 13 14 15 16

Shandong Hebei Liaoning Heilongjiang Shandong Shandong Shandong Heilongjiang

JV TOT BOT TOT ACQ BOT ACQ ACQ

2 2 2 1 2 1 1 2 13

70% 50% 100% 100% 70% 100% 70% 80%

Industrial Industrial Municipal Municipal Industrial Industrial Industrial Municipal

MBR MBR MBR MBR MBR MBR MBR MBR

165 280 245 70 220 100 120 92

33 56 49 14 44 20 24 18 258 420

80,000 120,000 200,000 40,000 70,000 20,000 10,000 90,000 630,000 1,180,000

80,000 120,000 200,000 40,000 120,000 40,000 20,000 90,000 710,000 1,390,000 18%

80,000 120,000 200,000 40,000 120,000 40,000 50,000 90,000 740,000 1,420,000 2%

3Q12 Jan-13 2014 2013 Mar-14 Dec-13 Dec-13 3Q12

2042 2043 2044 2043 2044 2044 2043 2043

30 30 30 30 30 30 30 30

Total treatment capacity owned Capacity increase over phases O&M 1 06-Jun-12

Liaoyang

Liaoning

O&M

100%

2098

200,000

200,000

200,000

200,000

Jul-14

2033

20

Source: Company, DBS Vickers

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Company Focus United Envirotech

Treatment income would grow at 77% CAGR from FY13FY15 to become a steady 60-70% earnings base. Based on processing capacities of 550k m3/day for FY13 and an average utilisation rate of 70-80%, we estimated that Treatment EBIT would hit S$15m in FY13 and S$42m in FY14 as processing capacity increases to 1.18b m3/year next year. This treatment income is expected to be recurring for the 30 year term of the water concession or for as long as the plants .

process wastewater discharged from either the municipalities or industrial parks served. In other words, approximately 6070% of the groups earnings base is stable and recurring. Any upward revision in tariffs, higher utilisation rate, plant expansions and/or acquisitions would result in an upside surprise. Based on S$70m cash on hand, we believe the company can add another 100k m3/day to existing capacity.

Operating environment turning increasingly favourable for membrane-based players

Environmental protection: amongst largest investments within Chinas 12th Five-Year Plan (FYP). The 12th FYP (20112015) by the Chinese government has incorporated clear directives to increase investment in environment and water related projects. According to Global Water Intelligence, the Chinese government plans to spend Rmb380bn on urban The 12th Five Year Plan targets water
Water treatment rate Prefecture level cities County level cities Town Sludge treatment and disposal rate Municipalities, provincial c ities and planned city areas Other cities County level cities and main towns Rate of waste water reclam ation Cities and town Capacity utilisation of the water treatment plants Been operating for more than a year Been operating for more than 3 years Planned projects of 12th FYP New water treatment pipeline network Capacity of new water treatment plant Capacity of upgraded water treatment plant Capacity of new sludge treatment plant Capacity of new wastewater reclamation plant Reduction of COD Reduction of ammonia nitrogen 159,000 km 45.7m cu. m/day 26.1m cu. m/day 5.2m ton/ year 26.8m cu. m/day ~2.8m ton/year ~0.3m ton/year >60% >75% >15% 85% 70% 30%

wastewater infrastructure from 2011-15. This investment is meant to support the water industry in meeting various targets set in the FYP, through developing more treatment assets and acquiring assets and technology.

80% 70% 30%

Source: China Statistical Yearbook on Environment

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Company Focus United Envirotech

Improving water quality. The 12th FYP also tightens targets to improve water quality throughout the country. Stricter discharge limits and national drinking water standards have been imposed by the Chinese government of late. The new drinking water standards stipulate 106 regulated items adopted from the World Health Organisation guidelines, up from 35 in the old standards. This has been implemented on 1 July, 2012, affecting both rural and urban areas. Rising demand for plant upgrades to meet higher water discharge standards. Currently, many treatment plants in China lack the capabilities to meet the new water standards. Upgrades and improvements are required to give these plants Water resources per capita
m3 per person 2,500 2,000 1,500 1,000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

a new lease on life, and this drives the growing demand for membrane-based water and wastewater treatment services. A shortage of clean water supply in parts of China also supports this growing demand. UENV should be well placed to benefit from these trends. The increased focus and investment from the Chinese government in the water industry, the stricter water standards driving demand for MBR technology, and the shortage of clean water supply all these factors put UENV in a favourable position to ride the growth path.

Estimated sewage treatment capacity and plant utilization

bn tons 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F

70% 65% 60% 55% 50% 45% 40% 35% 30%

Estimated processing capacity (LHS) Sewage plant utilization rate (RHS)

Volume of municipal sewage and treatment rate

bn tons 60 50 40 30 20 10 0 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F 2015F

Volume of municipal recycled water and recycled rate

bn tons 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2006

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Treated water (LHS) Untreated water sewage (LHS) Sewage rate (RHS)

Recycled waste water (LHS) Recycled rate (RHS)

Source: China Statistical Yearbook on Environment

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Company Focus United Envirotech

Treatment rate in China

Source: China Statistical Yearbook on Environment

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Company Focus United Envirotech

UENV has competitive advantage in treating complex wastewater with MBR. With its advanced membrane technology (namely MBR and CMF), UENV is capable of treating wastewater of a greater complexity to meet the stringent standards set, and also to reclaim treated wastewater for reuse more effectively and efficiently. UENVs flagship MBR plant project at Jingxi, Guangzhou, touted as Asias first and largest underground plant of its type generated much hype for the company. The underground design, the membrane technology and its small footprint (only a tenth of a traditional wastewater treatment plant) has attracted a lot of interest from various parts of China and overseas. As such, we are confident that there are many opportunities for UENV in both municipal and industrial sectors.

Some highlights of MBR applications are: Key advantages of MBR Good treated water quality, able to meet more stringent discharge limits, treated water is fit for direct reuse Small space, approximately 20-30% of the traditional treatment plant Generate much less sludge, saves sludge treatment and disposal cost Easy conversion for existing plant upgrading and expansion Application of MBR Biological wastewater treatment Wastewater recycling Wastewater treatment plant upgrade: expand capacity, upgrade facilities within existing plant area to meet more stringent discharge limits

Membrane Technology is cited as Best Available Technology by China Membrane Technology

Source:

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Company Focus United Envirotech

Process of MBR Technology

Source:

UENV has been scoring project after project. Less than halfway through FY13, UENV has already announced several successive project clinches in China, proving its commitment to quench the dragons thirst for water. Some of these projects require a higher discharge standard, standing testimony to the companys technical capability and established track record. Of the six projects announced so far, two are EPC projects, while the remaining four are investment in water and wastewater treatment portfolio. For the latest EPC project, it has also signed a 20-year O&M services contract to the same plant.
Table 1: Projects Clinched in FY13 so far
Date 29 Mar 02 Apr 17 Apr 18 Apr 06 Jun 23 Jul Location Shandong, China Fujian, China Heilongjiang, China Shandong, China Liaoning, China Shandong, China Capacity (m3/day) 80,000 150,000 40,000 100,000 200,000 120,000 Value (S$ mn) 33.0 23.2 14.0 43.0 21.0 44.0 Project/Plant Type 1 water supply plant & 1 wastewater treatment plant 2 wastewater treatment plants 1 wastewater treatment plant EPC of drinking water supply plant EPC & O&M to upgrade wastewater treatment plant 2 wastewater treatment plants

Expect to maintain Rmb400m of EPC new win for each of the next two years. We understand UENV is actively pursuing several MBR projects with investment values ranging Rmb300-600m. Based on this strong enquiry pipeline, we estimate that UENV would be able to maintain EPC new order wins of around Rmb400m over the next two years. Orders secured beyond this quantum implies upside surprises to our forecast.

Source: Company, DBS Vickers

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Company Focus United Envirotech

Management is a team of experienced veterans

Helmed by experienced founder. Dr Lin Yucheng, the current Chairman, CEO and founder of the company has 20 years of experience in the environmental research and consultancy business. Since its founding in 2003, the company has achieved a CAGR of 32% in revenue and Key Management Team Name
Dr Lin Yucheng Mr Wang Ning Mr Li Li

8% in income under Dr Lins leadership. He is supported by a strong management team of directors with wide business networks and a wealth of experience.

Designation
Chairman and Chief Executive Officer. Executive Director, Chief Operating Officer Technical Director, Deputy CEO

Background and Responsibilities

Founder of UENV. 20 years of experience in the environmental research and consultancy business. Responsible for operations of UENV. Previously the Deputy General Manager of Sinopec Guangzhou Branch. Oversees research and development initiatives. Involved in various wastewater treatment projects and was awarded many prestigious awards.

Mr Tan Huchuan

Engineering Director, Deputy CEO

Oversees the execution of the integrated systems for environmental engineering solutions. Previously a design supervisor at a design institute for the petrochemical industry in Heilongjiang province.

Mr Ngoo Lin Fong

Chief Financial Officer

Responsible for the planning and management of the groups financial and accounting operations. Previously an audit manager at Deloitte & Touche Singapore.

Source: Company

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Company Focus United Envirotech

Key Risks
Collection/credit risks. UENV typically deals with single offtaker for municipal jobs, which is usually the provinces local government. As a result, it is important to assess the financial condition of the respective governments before investing in the project. So far, UENV has not taken on collection of sewage treatment fees as management has been careful in selecting to operate in only the more matured coastal provinces. Most projects are secured in Shandong, Liaoning and Guangdong where UENV is an established incumbent although it also has plants in Heilongjiang and Fujian. Delays in cost pass-through. In general, sewage treatment operators are allowed to pass on higher operating costs arising from inflation or higher electricity tariff to end-users through higher tariffs. However, the approval and actual implementation usually depends on negotiations with the local governments if it is a municipal project. Typically, such negotiations involves months of delays. Utilisation rates significantly below expectations. Generally, operators would negotiate for a minimum off-take level (i.e. take or pay arrangement regardless of volume) in municipal concessions to ensure required returns on their investments are met. However, such minimum off-take arrangements may not always exist for plants in the industrial parks serving private customers. To mitigate such risks, UENV only acquire operating plants in matured industrial parks or economic zones for example Shandongs old textile industry in Shandong which serves the low-end domestic market. Changes in discharge standards. Wastewater treatment plants are usually constructed according to the discharge requirements of the water feed. As of now, less than 10% of treatment plants are graded 1A status, i.e., the highest discharge standard. Any change in discharge standards to stricter limits may result in higher operating and/or investment costs if existing infrastructure is not equipped to process discharge at the new required standard. Fortunately, such risks should be minimal for UENV, which deals mostly with MBR for treating wastewater to meet the highest standards.

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Company Focus United Envirotech

Key Assumptions
FY Mar 2010A 2011A 2012A 2013F 2014F 2015F

EPC order win

N/A

N/A

280.0

420.0

400.0

400.0

Expect positive environmental protection outlook in China to drive new order wins for UENV

Segmental Breakdown
FY Mar 2010A 2011A 2012A 2013F 2014F 2015F

Revenues (S$ m) EPC Treatment Others 57 12 N/A 62 16 N/A 62 23 N/A 113 37 N/A 80 84 N/A 113 96 N/A

Total EBIT (S$ m) EPC Treatment Others

69 14 8 (4)

78 9 9 (4)

85 8 12 (2)

150 28 15 0

164 20 42 0

209 28 48 0

Revenue split is expected to even out between EPC and Treatment as more water plants start contributing next fiscal year

Total EBIT Margins (%) EPC Treatment Others

18 25.0 61.3 N/A

14 14.0 53.8 N/A

18 13.0 51.2 N/A

43 25.0 40.0 N/A

62 25.0 50.0 N/A

76 25.0 50.0 N/A

Total

25.5

17.5

20.6

28.7

37.8

36.5

Source: Company, DBS Vickers

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Company Focus United Envirotech

Income Statement (S$ m)
FY Mar 2010A 2011A 2012A 2013F 2014F 2015F

Margins Trend
36.0% 31.0% 26.0% 21.0% 16.0% 11.0% 2011A 2012A 2013F 2014F 2015F
Operating Margin % Net Income Margin %

Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

69 (38) 31 (13) 18 2 0 0 0 19 (4) 0 0 15 15 20 61.3 236.6 261.2 305.4 44.4 25.5 21.5 15.0 10.2 11.2 0.0 58.2

78 (49) 29 (16) 14 5 1 0 0 19 (3) 0 0 16 16 20 12.8 (0.3) (22.7) 7.8 37.7 17.5 20.5 12.6 8.2 6.9 13.7 64.3

85 (47) 38 (21) 18 1 1 (5) 0 14 (4) 0 0 10 10 21 9.4 5.4 28.8 (34.6) 44.8 20.6 12.3 6.6 3.4 4.7 13.7 3.2

150 (90) 60 (17) 43 1 3 (11) 0 36 (9) 0 0 27 27 49 75.6 133.0 144.4 155.8 39.7 28.7 17.9 14.1 6.1 8.4 13.7 3.9

164 (81) 83 (21) 62 1 3 (3) 0 63 (16) 0 0 47 47 68 9.8 37.8 44.9 75.2 50.5 37.8 28.6 16.8 9.2 10.6 13.7 19.2

209 (108) 101 (25) 76 1 3 (4) 0 76 (19) 0 0 57 57 81 26.9 19.9 22.3 20.9 48.3 36.5 27.2 14.8 9.7 11.3 13.7 19.3

Source: Company, DBS Vickers

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Company Focus United Envirotech

Balance Sheet (S$ m)

FY Mar 2010A 2011A 2012A 2013F 2014F 2015F

Asset Breakdown 2 9 77 37 1 38 6 169 6 34 14 2 112 0 169 10 16 161.0 133.9 6.9 0.5 2.0 1.9 CASH CASH 16.4 3.3 13 9 116 47 1 26 10 222 13 23 41 4 141 0 222 14 (7) 148.3 143.6 5.0 0.4 2.3 2.0 0.0 0.0 3.4 1.5 19 16 161 89 0 40 75 401 14 42 162 5 178 0 401 73 (87) 140.3 144.9 4.3 0.3 3.7 2.3 0.5 0.5 4.0 0.0 32 19 261 28 1 60 75 476 14 69 187 5 201 0 476 67 (173) 121.4 144.2 2.9 0.3 2.0 1.1 0.9 0.9 7.5 0.0 35 22 311 30 1 66 75 539 14 71 90 5 359 0 539 70 (74) 139.5 200.1 4.0 0.3 2.0 1.1 0.2 0.2 4.8 0.0 39 25 311 91 1 83 75 626 14 89 110 5 408 0 626 71 (33) 130.5 166.2 3.3 0.4 2.4 1.7 0.1 0.1 4.0 NA UENV has not had problematic collection of sewage treatment fees so far. Management has been careful to operate in established coastal provinces
Inventory 0.6% Bank, Cash and Liquid Assets 20.3% Net Fixed Assets 22.7% Debtors 42.7%

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Assocs'/JVs 13.7%

Source: Company, DBS Vickers

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Company Focus United Envirotech

Cash Flow Statement (S$ m)
FY Mar 2010A 2011A 2012A 2013F 2014F 2015F
16

Capital Expenditure

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (S cts) Free CFPS (S cts)

19 1 (2) 0 5 (1) 23 (3) 0 0 0 (15) (19) 0 (3) 16 0 13 0 17 4.0 4.4

19 1 (1) (1) 1 (7) 13 (2) 0 (1) 0 (36) (38) (2) 23 20 (3) 37 (2) 10 2.3 2.3

14 2 (1) (1) (19) 10 5 (7) 0 (20) 0 (75) (102) (1) 5 0 136 139 0 42 5.0 (0.4)

36 2 (4) (3) 1 0 33 (15) 0 0 0 (100) (115) (4) 25 0 0 21 0 (61) 6.4 3.6

63 2 (9) (3) (10) 0 43 (5) 0 0 0 (50) (55) (6) (97) 117 0 14 0 1 6.6 4.7

76 1 (16) (3) (4) 0 55 (5) 0 0 0 0 (5) (8) 20 0 0 12 0 62 7.4 6.3

14 12 10 8 6 4 2 0 2011A 2012A 2013F 2014F 2015F

Capital Expenditure (-)

Source: Company, DBS Vickers

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Company Focus United Envirotech

Quarterly / Interim Income Statement (S$ m)

FY Mar 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013

Margins Trend
35% 30%

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

21 (12) 9 (5) 5 0 0 (1) 0 4 (1) 0 4 4 5

25 (15) 10 (5) 5 0 0 (1) 0 4 (1) 0 4 4 6

20 (12) 8 (5) 3 2 1 (3) 0 3 (1) 0 2 2 6

19 (8) 11 (6) 5 (1) (1) (1) 0 2 (1) 0 1 1 5

32 (18) 14 (6) 9 0 1 (3) 0 7 (1) 0 6 6 10

54 (35) 19 (7) 12 0 1 (3) 0 10 (1) 0 8 8 13

25% 20% 15% 10% 5% 0% -5%

1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013

Operating Margin %

Net Income Margin %

Recurring Treatment income formed almost 40%b of EBIT

4.9 102.9 (1,876.1) 114.7 43.5 21.8 17.0

21.3 6.3 3.8 4.9 38.7 18.6 14.7

(20.1) 3.9 (38.1) (49.2) 40.0 14.5 9.4

(4.9) (22.5) 86.2 (29.0) 59.3 28.3 7.0

67.3 122.5 58.5 339.4 44.5 26.8 18.4

68.2 31.6 36.8 42.2 35.7 21.8 15.5

Topline growth remains largely driven by EPC sales. Expect Treatment to balance up by FY14

Source: Company, DBS Vickers

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Company Focus United Envirotech

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

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Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 2 Jan 2013, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (interest includes direct or indirect ownership of securities, directorships and trustee positions).

Page 20

Company Focus United Envirotech

COMPANY-SPECIFIC / REGULATORY DISCLOSURES DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as 1. of 28 Dec 2012. 2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered brokerdealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of 2 Jan 2013. Compensation for investment banking services: i. ii. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from Hyflux. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [MAS] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for wholesale investors within the meaning of the CA. This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission. This report is being distributed in Singapore by DBSVR, which holds a Financial Advisers licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report produced by a foreign DBS Vickers entity, analyst or affiliate is distributed in Singapore only to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chap. 289 of Singapore. Any distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to Accredited Investors is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA. This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients. This report is being distributed in Dubai/United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for clients who meet the DFSA regulatory criteria to be a Professional Client. It should not be relied upon by or distributed to Retail Clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority. Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations. In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Vickers Research (Singapore) Pte Ltd 12 Marina Boulevard, Level 40, Marina Bay Financial Central Tower 3, Singapore 018982 Tel. 65-6327 2288 Company Regn. No. 198600295W
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