Monday, March 31, 2014

Sound Thirst Quencher!

Sound Global (967 HK) is a US$1.3 bil market capitalization company specializing in turnkey water and waste water treatment solutions. Its shares trade on the HK Exchange.

Despite favorable macro trends, the company only trades at c.15x PER (at HK$7.5). We anticipate the following to underpin its re-rating to peer multiples of over 20x earnings:

  • Familiarization of the name as Sound Global's share was only consolidated to Hong Kong in late February 2014 - More investors are likely to compare its valuations against HK listed Chinese peers which are trading at multiples of 25x. Smaller SGX listed peers such as United Envirotech and Hankore are also trading at similarly healthy multiples.
  • Further contract wins as China remains focused on improving the quality of its living environment - In Jan 2014, Sound Global netted two contracts in Xinjiang for the construction of sewage treatment plan in Yiling City and a BOT project in Tacheng City. Since then, it kept its momentum by winning projects in Urumqi, Jiangsu, Guizhou and Fujian. More could be in the pipeline.
  • Re-structuring of its finance cost - There is scope to reduce the interest cost to boost earnings.
  • Complete dissipation of the short term sales arising from the equitisation of convertible bond holders - Sound Global issued a redemption request on its convertible bonds  recently. Given these investors were in the money, they were likely to have converted their bonds and sold off the equity, causing near term weakness in Sound Global's share price. As at late March 2014, there are only c. RMB380 mil worth of convertibles which have not been converted.
We all know water is a vital source for life. Should the above reasons play out, Sound Global could well trade above HK$10 (implying over 35% upside), making it a critical source for financial returns too!