China Jinjiang Environement Holding Company Limited ("China Jinjiang") or ("the Company") is offering 92,419,300 shares at $0.90 each for a listing on SGX where 87,798,300 shares will be via placement and 4,621,000 shares via public offering. The IPO will close on 1 August at 12pm.
Assuming over-allotment is not exercised, the market cap will be $1.08 billion.
The Company is the first private Waste-To-Energy ("WTE") operator in the PRC and is the leading WTE operator with the largest waste treatment capacity in operation. Its business primarily focuses on the planning, development, construction, operation and management of WTE facilities in the PRC. A WTE plant basically processed waste to generate electrical energy. See definition here.
The Company operates 16 WTE facilities in 12 provinces, autonomous regions and centrally-administered municipalities in the PRC with 4 under construction. The current total waste treatment capacity is 22,830 tons/day for the WTE facilities in operation and will increase to approximately 44,000 tons/day when fully completed.
According to the prospectus, the Company intends to:
- Maintain market leading position through growth opportunities
- Improve its technical capabilities by adopting advanced technologies from Europe
- Diversify in the WTE value chain
- Expand to South East Asia and other developing countries
Revenue and profits grew strongly over the last 3 years where revenue grew by a CAGR of 11.5% to reach RMB 1.588b or S$320.792m and net profit grew by a CAGR of 32.1% to RMB 404.609m or S$81.73m
Assuming 1 RMB is around $0.202, the EPS for FY2015 is approximately Singapore 8.18 cents. Based on the IPO price of 90 cents, that translate into a historical PER of around 11x.
Based on the enlarged share capital of 1.2b shares, the EPS is around RMB 33.58 cents or Singapore 6.78 cents. That will translate into a historical PER of 13.3x.
Assuming the EPS for FY2016 grow by 25% (i am guessing), the EPS will be 8.475 cents. If it pays out dividend of 50%, the yield is about 4.7%.
Cornerstone investors subscribe for ~9.3% of the post-diluted shares and in connection with the offering, there would also be about 13,862,800 shares available for market stabilisation purposes should the over-allotment be exercised.
Use of Proceeds
The use of proceeds is stipulated in the table below.
This is the competitive landscape done by Frost and Sullivan and China Jinjiang has the biggest market share.
The NAV per share post IPO is $0.66 but the peers listed in HK and China are trading at much higher multiples.
Given the EPS for FY2015 is Singapore 6.78 cents, assume a fair value range of 13-18x (based on the table above), the fair value range is $0.88 to $1.22
Assuming EPS for FY2016 is 8.475 with a fair value range of 10x-14x (assumes it trades closer to the HK listed peers), the fair value will be between $0.85 to $1.18
What I like about the Company
- Leading private market producer with stable business to process waste and generate electricity
- The WTE facilities are well spread out across China with a nice mix of facilities in operation (recurring income) and facilities in the preparatory stage (future growth)
- International Finance Corporation ("IFC"), a member of World Bank, provided the group with funding in 2004 and the presence of known institutional investors like Fortress helped provide some comfort to its corporate governance structure
- Strong revenue and profitability growth over the last 3 years and attractive net margins of more than 20%
- Operationally high cash flow generative but highly capital intensive
- The Company intends to pay out 50% of its net profit after tax for FY2016 and FY2017 as dividends. This is not typical of most S-Chips listed on SGX
- Audited by Deloitte & Touche (big 4)
Some of my concerns
- Although the businesses are in PRC, the holding company is incorporated in the Cayman Islands and that could potentially pose an issue in enforcing civil actions
- Capital intensive model where a new WTE facility would require approximately RMB 400m and the development process takes 24-36 months
- Some of the facilities have been awarded concessions without having carried out a tender process
- Company is highly geared with short term debts. This may cause issues during periods where financing is not readily available. As of last year, current liabilities exceeds current assets by RMB 164m
- Investors in Singapore are generally wary of S-Chips and the weak sentiments on SGX due to the "collapse" of Swiber is not helpful
My Chilli Ratings
I have to say that if not for my "biased" view towards Chinese companies and their accounting fair values, i actually quite like the sector and the market leading position of China Jinjiang. It also has a good mixture of operating assets which provide recurring revenue and assets which provide future growth. It has been priced "attractively" vis-a-vis its other listed peers at $0.90 and the promise to pay a regular dividend for the next two years is quite refreshing for an S-chip (please keep it up).
My own view is that China Jinjiang is as good as it can get for an S-Chip to want to list here. It will be a test case to see if investors here are ready to accept S-Chips again. I would have given it a 2 chilli rating if the IPO sentiments was better.
l give it a one Chilli rating due to reasons mentioned above and with the fair value provided.
(You can see that i have done this at 1.45 am and suffering from a jet lag but i post this nevertheless as i know readers are waiting). Let me sleep through and see if my analysis differs when i wake up tomorrow.