HanKore will buy China Everbright&rsquo s (CEI) pool of 25 WWT and reusable projects of 1.892m tonnes/day design capacity for CNY5.8bn, or SGD1.2bn.

The successful merger removes deal overhang and gives the combined entity gearing headroom to pursue growth via M& As. We ascribe HanKore a 36x FY16F P/E (excluding earnings growth forecast from M& As), a premium to the 30x peer average, given its low 9% gearing. Maintain BUY, with changed SGD1.50 TP.

 

 Purchase price higher than expected but within range of recent M& A transactions. The consideration of CNY5.8bn is higher than the initial expected figure of HKD4.0bn (or CNY3.3bn), but the price of CNY3,071/tonne of design capacity falls within typical M& A transactions prices of CNY2,500-3,000/tonne. As the merger will give HanKore distinctive state-backing advantages, we find the transaction price fairly decent.

The CNY5.8bn will be funded through the issuance of 1.94bn HanKore shares at SGD0.703 each (with adj. factor 0.889). CEI will own 78.0% of HanKore post share issuance, making the latter its subsidiary. The transaction represents a 1.56x NAV of CNY3.7bn. 

OSK-DMG: " We value HanKore at a 36x FY16F P/E, higher than its state-backed peers&rsquo average 30x, as its low gearing of 9% post consolidation places it in a prime position to acquire earnings-accretive WWT assets for longer-term growth." Photo: Company
 

 Merger lifts overhang combined company to reap advantages and seek M& A-driven growth ahead. The transaction will boost HanKore&rsquo s waste water treatment (WWT) design capacity to 3.6m tonnes/day while the share issuance will lower the combined entity&rsquo s gearing to less than 9%. This may effectively give the group room to gear up for c. CNY2.6bn of funds (assume 40% gearing) for M& As that the company has intently expressed as its growth strategy in a consolidating WWT environment. 
 

This could potentially add 1.0m tonnes/day design capacity to its portfolio, assuming transaction prices of c. CNY2,500/tonne.
 

 Maintain BUY, TP changed to SGD1.50. Based on our proforma estimates, we forecast the combined entity to make CNY0.205 EPS in FY16F (FYE June) based on its existing assets, without taking into account any M& A, owing to the lack of information. We value HanKore at a 36x FY16F P/E, higher than its state-backed peers&rsquo average 30x, as its low gearing of 9% post consolidation places it in a prime position to acquire earnings-accretive WWT assets for longer-term growth.