Singapore Company Focus

Hyflux
Bloomberg: HYF SP | Reuters: HYFL.SI

DBS Group Research . Equity 3 Aug 2010

HOLD S$3.23 STI : 3,025.04 Mitsui JV long term positive

• Mitsui JV is another formidable funding platform after
(Downgrade from BUY)
JGC JV
Price Target : 12-Month S$ 3.40 (Prev S$ 3.50)
Reason for Report : JV, delay of Libyan projects • Lowered FY10/11F earnings by 28%/12% as Libya faces
Potential Catalyst: Contract wins, seal Libyan projects delay
Analyst • Revised TP to S$3.40; Downgrade to Hold given limited
Ai Teng Tan +65 6398 7967
AiTeng@dbsvickers.com
upside
JV fits asset light strategy. Hyflux has formed a 50/50 “Galaxy” JV
with Mitsui & Co to pursue growth in China’s water sector. For a start,
Price Relative Galaxy will 1) take over Hyflux Water Trust (S$234.8m) and 2) acquire
S$ R e la t iv e In d e x four projects from Hyflux (S$74.3m). Other than S$6m divestment
4 .1 0

3 .6 0
207 gain, this deal is almost cashflow neutral to Hyflux. More importantly,
3 .1 0
187
167
this is a partnership with strong financial leverage for Hyflux to capture
2 .6 0 147 larger and more complex water projects in China. Galaxy is also a much
127
2 .1 0
107 stronger platform than Hyflux Water Trust to undertake Hyflux’s
1 .6 0

1 .1 0
87
67
existing and future projects in China.
2006 2007 2008 2009 2010

H y f lu x ( L H S ) R e la t iv e S T I IN D E X ( R H S )
Libya talks proceeding but likely delay. Although Libya
continues to negotiate with Hyflux over Tripoli and Benghazi, officials
are prioritizing a smaller project (capacity: 40MLD) which Hyflux has
Forecasts and Valuation
also joined bid. Given the slower than expected progress in Libya, it
FY Dec (S$ m) 2008A 2009A 2010F 2011F seems unlikely that Hyflux can seal the two key contracts by this year.
Turnover 554 525 408 587 Hence, we have pushed back S$158.6m and S$264m of expected EPC
EBITDA 86 104 98 133 contributions from Libya to FY11 and FY12 respectively.
Pre-tax Profit 70 83 66 87
Net Profit 59 75 60 79
Net Pft (Pre Ex.) 59 75 60 79 TP revised to S$3.40. Notwithstanding a much lower FY10F, our TP
EPS (S cts) 11.0 14.0 11.2 14.7 is marginally affected because we have rolled over valuation peg of
EPS Pre Ex. (S cts) 11.0 14.0 11.2 14.7 Hyflux’s EPC earnings to FY11 and raised Hyflux’s stake in the Trust to
EPS Gth Pre Ex (%) 74 28 (20) 32 50% from 31.4% previously. This is assuming that Galaxy’s acquisition
Diluted EPS (S cts) 11.0 14.0 10.8 14.2 of the Trust is successful.
Net DPS (S cts) 3.4 5.0 5.0 5.0
BV Per Share (S cts) 55.4 68.2 74.4 84.1
PE (X) 29.4 23.1 28.9 21.9
Downgrade to HOLD on valuation. Hyflux has performed well
PE Pre Ex. (X) 29.4 23.1 28.9 21.9 since our upgrade in June. In view of the limited upside to our revised
P/Cash Flow (X) 24.7 19.5 23.5 17.6 SOTP fair value of S$3.37 (23x FY11 PE) now, we are downgrading our
EV/EBITDA (X) 22.4 19.2 21.6 16.0 recommendation to Hold from Buy. We would review our stock call on
Net Div Yield (%) 1.1 1.5 1.5 1.5 positive catalysts such as new contract wins.
P/Book Value (X) 5.8 4.7 4.3 3.8
Net Debt/Equity (X) 0.5 0.6 0.8 0.8
ROAE (%) 22.0 22.6 15.7 18.6
At A Glance
Earnings Rev (%): (27.8) (12.4) Issued Capital (m shrs) 571
Consensus EPS (S cts): 15.0 18.3 Mkt. Cap (S$m/US$m) 1,845 / 1,368
Major Shareholders
ICB Industry : Utilities Ooi Lin Lum (%) 31.2
ICB Sector: Gas; Water & Multiutilities UBS AG (%) 5.6
Principal Business: An integrated water and liquid treatment
Free Float (%) 63.2
company specializing in membrane technologies.
Avg. Daily Vol.(‘000) 1,426
Source of all data: Company, DBS Vickers, Bloomberg

www.dbsvickers.com
Refer to important disclosures at the end of this report
ed: MY / sa: JC
 Company Focus
Hyflux
JV fits asset light strategy. Hyflux has signed a joint
venture agreement with Mitsui & company to develop water
projects in China. The partners have formed a 50/50 JV
company called Galaxy NewSpring to serve as their vehicle for
investing, developing and managing projects in the fast
expanding water sector in China. For a start, Galaxy will 1)
acquire all shares of Hyflux Water Trust for S$234.8m and 2)
buy over four projects from Hyflux for S$74.3m.
As Hyflux already owns 31.37% of the Trust, it will fund its
portion of the remaining 19% stake (S$43.7m) of the Trust
with the sale of 50% interest (worth S$37.2m) in the other 4
completed plants to Galaxy. Hence, the deal is almost
cashflow neutral to Hyflux. In fact, Hyflux will be booking
S$6m divestment gain for its sales of the four plants namely
Jiangxi Leping Water Treatment Plant, Anhui Mingguang
Water Treatment Plant, Hunan Taoyuan Water Treatment
Plant and Liaoyang Gongchangling Water Treatment Plant.
More importantly, this is a partnership with strong financial
leverage for Hyflux to capture market share in China, where
opportunities for larger and more complex water projects are
appearing in the horizon.
Industry data given by Global Water Intelligence showed that
the Chinese government would pump some US$450 billion
into environmental protection and water resource
developments between 2011 and 2015. This is up from the
US$$219 billion for the period 2006 to 2010.
Page 2
PRC is pumping resources in environmental protection and
water resource development
Over 100% increase in
budget for USD787 bn
environmental protection
and water resource
development
USD224 bn
2006-2010 2011-2015
Source: GWI, Jan 2010
Moreover, Galaxy is also a much stronger platform to
undertake Hyflux’s existing and future projects in China.
Libya faces delays. It is over a year now since Hyflux first
signed the MOA with Libya to develop two desalination
plants in Tripoli and Benghazi totaling 900,000m3/day in
desalination capacity. We have estimated these contracts
could add S$1b to Hyflux’s EPC orderbook and extend the
firm’s earnings visibility to 2013. Hyflux continues to discuss
technical specifications with its clients but negotiations are
progressing a tad too slowly. Based on our experience with
other corporates operating out of Libya, we believe it is
unlikely that Hyflux can seal the two key contracts by this
year since the government is obviously more interested in
tackling a much smaller project with a capacity of 40MLD at
the moment. Hyflux has bidded for the smaller projects but
barring further update from the company on the Tripoli and
Benghazi projects, we have pushed back S$158.6m and
S$264m of expected EPC contributions from Libya to FY11
and FY12 respectively.
 Company Focus
Hyflux

Estimated value and earnings contribution of Hyflux’s Libyan projects

V alue of Es t. EP C
Capacity c ontr ac t v alue Re v is e d e x pe cte d EP C c ontr ibutions P r e vious e xpe c te d EP C contr ibutions
Date L oc ation (m 3/ day ) (US $m ) (S $m ) (S $m ) (S $m )
F Y10 FY11 FY12 F Y13 F Y14 F Y10 F Y11 F Y12 FY13
25-J un-09 Tripoli 500,000 450 587.3 - 88.1 146.8 234.9 117.5 88.1 146.8 234.9 117.5
25-J un-09 Benghazi 400,000 360 469.8 - 70.5 117.5 187.9 94.0 70.5 117.5 187.9 94.0
Source: Company, DBS Vickers

Sum-of-Parts Valuation
Value per
Valuation Multiple Value share
Core earning streams FY11 PATMI methodology (x) (S$m) (S$)
Engineering, procurement & construction 71.92 PER 16.0 1150.7 2.07
lndustrial 7 PER 13 89.4 0.16
O&M/ Trustee Management fees/Others 0.46 PER 8 3.7 0.01

Equity value of China BOT projects 59.87 DCF 8% WACC; 0% 398.1 0.72
LT growth

Equity value of Algeria BOT projects DCF 10% WACC; 0% 109.1 0.20
LT growth
Add
Book value of 50% stake in HWT Book value 117.00 0.21

Fair value 1868.0 3.37

Implied PER (FY11) 22.8

Note: Equity value of BOT projects is derived after stripping out the 5 assets to be divested to Hyflux Water Trust
Source: Company, DBS Vickers

Page 3
 Company Focus
Hyflux

Income Statement (S$ m) Balance Sheet (S$ m)

FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011F
Turnover 554 525 408 587 Net Fixed Assets 57 135 118 97
Cost of Goods Sold (384) (308) (195) (331) Invts in Associates & JVs 95 103 105 108
Gross Profit 170 217 213 256 Other LT Assets 311 286 406 526
Other Opng (Exp)/Inc (93) (144) (141) (148) Cash & ST Invts 91 167 102 134
Operating Profit 77 73 72 108 Inventory 34 32 20 34
Other Non Opg (Exp)/Inc 0 12 6 0 Debtors 41 222 173 248
Associates & JV Inc (1) 3 3 3 Other Current Assets 219 128 128 128
Net Interest (Exp)/Inc (5) (4) (15) (24) Total Assets 847 1,073 1,052 1,275
Exceptional Gain/(Loss) 0 0 0 0
Pre-tax Profit 70 83 66 87 ST Debt 50 45 45 45
Tax (8) (9) (7) (9) Other Current Liab 274 273 170 291
Minority Interest (3) 1 1 1 LT Debt 208 355 405 455
Preference Dividend 0 0 0 0 Other LT Liabilities 6 6 6 6
Net Profit 59 75 60 79 Shareholder’s Equity 298 365 398 451
Net Profit before Except. 59 75 60 79 Minority Interests 10 28 27 27
EBITDA 86 104 98 133 Total Cap. & Liab. 847 1,073 1,052 1,275

Sales Gth (%) 187.5 (5.3) (22.2) 43.8 Non-Cash Wkg. Capital 19 110 151 120
EBITDA Gth (%) 63.8 21.6 (6.1) 36.0 Net Cash/(Debt) (167) (234) (348) (367)
Opg Profit Gth (%) 113.0 (6.0) (0.5) 49.5
Net Profit Gth (%) 79.2 27.1 (20.2) 31.9
Effective Tax Rate (%) 11.6 10.5 10.5 10.5
Cash Flow Statement (S$ m) Rates & Ratio
FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011F
Pre-Tax Profit 70 83 66 87 Gross Margins (%) 30.7 41.3 52.2 43.6
Dep. & Amort. 10 17 17 22 Opg Profit Margin (%) 14.0 13.9 17.8 18.5
Tax Paid (1) (8) (7) (7) Net Profit Margin (%) 10.7 14.3 14.7 13.5
Assoc. & JV Inc/(loss) 1 (3) (3) (3) ROAE (%) 22.0 22.6 15.7 18.6
Chg in Wkg.Cap. (67) (45) (41) 29 ROA (%) 8.5 7.8 5.6 6.8
Other Operating CF 17 16 0 0 ROCE (%) 13.4 9.5 7.7 10.4
Net Operating CF 30 61 32 129 Div Payout Ratio (%) 31.2 35.7 44.7 33.9
Capital Exp.(net) (19) (9) 0 0 Net Interest Cover (x) 14.2 16.2 4.8 4.6
Other Invts.(net) (75) (42) (120) (120) Asset Turnover (x) 0.8 0.5 0.4 0.5
Invts in Assoc. & JV (6) 0 0 0 Debtors Turn (avg days) 28.7 91.5 176.6 130.9
Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 131.5 300.8 438.1 262.4
Other Investing CF 8 (42) 0 0 Inventory Turn (avg days) 26.6 41.5 53.6 32.1
Net Investing CF (92) (93) (120) (120) Current Ratio (x) 1.2 1.7 2.0 1.6
Div Paid (10) (18) (27) (27) Quick Ratio (x) 0.4 1.2 1.3 1.1
Chg in Gross Debt 51 135 50 50 Net Debt/Equity (X) 0.5 0.6 0.8 0.8
Capital Issues 0 0 0 0 Net Debt/Equity ex MI (X) 0.6 0.6 0.9 0.8
Other Financing CF (9) (8) 0 0 Capex to Debt (%) 7.3 2.1 0.0 0.0
Net Financing CF 32 108 23 23 Z-Score (X) 2.2 2.2 3.0 2.6
Net Cashflow (30) 76 (65) 32 N. Cash/(Debt)PS (S cts) (31.1) (43.6) (65.0) (68.4)
Opg CFPS (S cts) 18.1 19.7 13.7 18.6
Free CFPS (S cts) 2.1 9.7 6.0 24.0
Quarterly / Interim Income Statement (S$ m) Segmental Breakdown / Key Assumptions
FY Dec 2Q2009 3Q2009 4Q2009 1Q2010 FY Dec 2008A 2009A 2010F 2011F
Turnover 134 127 176 101 Revenues (S$ m)
Cost of Goods Sold (71) (81) (97) (60) Municipal 467 470 345 514
Gross Profit 64 45 78 41 Industrial 76 51 59 67
Other Oper. (Exp)/Inc (35) (25) (65) (30) O&M/ Trustee Management 1 4 4 6
Operating Profit 29 20 13 11 Divestment Gains 10
Other Non Opg (Exp)/Inc 0 0 12 0 Others
Associates & JV Inc 2 1 1 (1) Total 554 525 408 587
Net Interest (Exp)/Inc (2) (2) 2 (3) EBIT (S$ m)
Exceptional Gain/(Loss) 0 0 0 0 Municipal 63 69 66 98
Pre-tax Profit 29 19 28 7 Industrial 1 4 6 10
Tax (2) (1) (4) (1) O&M/ Trustee Management 13 0 0 1
Minority Interest (1) 0 1 1 Divestment Gains
Net Profit 26 18 26 6 Others
Net profit bef Except. 26 18 26 6 Total 77 73 72 108
EBITDA 33 24 35 14 EBIT Margins (%)
Municipal 13.6 14.6 19.0 19.0
Sales Gth (%) 52.4 (5.9) 38.8 (42.3) Industrial 1.0 7.5 11.0 15.0
EBITDA Gth (%) 169.0 (27.2) 45.4 (60.5) O&M/ Trustee Management 1,235.2 8.0 10.0 10.0
Opg Profit Gth (%) 170.7 (30.6) (33.9) (16.1) Divestment Gains
Net Profit Gth (%) 403.7 (29.9) 42.9 (75.3) Others
Gross Margins (%) 47.6 35.8 44.5 40.9 Total 14.0 13.9 17.8 18.5
Opg Profit Margins (%) 21.5 15.8 7.5 11.0 Key Assumptions
Net Profit Margins (%) 19.2 14.3 14.7 6.3 New order wins 841.3 1,269.7 124.2 250.0

Source: Company, DBS Vickers

Page 4
 Company Focus
Hyflux

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

DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson
(www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg
(DBSR GO). For access, please contact your DBSV salesperson.

GENERAL DISCLOSURE/DISCLAIMER
This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers
Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH").
[This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any
form by any means or (ii) redistributed without the prior written consent of DBSVR.]

The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as
to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for
general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial
situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken
in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability
whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this
document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-
owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to
time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or
employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform
broking, investment banking and other banking services for these companies.

The assumptions for commodities in this report are for the purpose of forecasting earnings of the companies mentioned herein. They are
not to be construed as recommendations to trade in the physical commodities or in futures contracts relating to the commodities
mentioned in this report.

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.

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
3 Aug 2010, 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).

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the mentioned
company as of 30-Jul-2010
2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered
broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned
company as of 3 Aug 2010.
3. Compensation for investment banking services:
i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may 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 the mentioned company.
ii. 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.

Page 5
 Company Focus
Hyflux

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.

Hong Kong 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.

Singapore This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s 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.

United Kingdom 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.

rd
Dubai/ This report is being distributed in Dubai/United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor,
United Arab Emirates 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.

United States 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.

Other jurisdictions 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 – 8 Cross Street, #02-01 PWC Building, Singapore 048424
Tel. 65-6533 9688
Company Regn. No. 198600295W

Page 6