HWT – DBS

DPU secured by sponsor commitment

At a Glance
• Distributable cash generation of 1.15Scts per unit was in line with our projections
• Treatment volumes continue to be affected by slump in industrial output in China, utilisation rate down to 43%
• Sponsor’s commitment should ensure HWT delivers on its FY09 DPU projection of 5.42Scts
• Maintain BUY with TP S$0.56, FY09 DPU yield of 14.2%

Comment on Results

Distributable cash increased 15% q-o-q to S$3.4m, translating to a DPU (payable in 2Q09) of 1.15Scts for 1Q09. This came on the back of a 63% increase in tariff receipts from S$4.1m in 4Q08 to S$6.7m in 1Q09. Operating margin of 55% was again better than our expectations. Net profit of S$6.3m was buoyed by a non-cash foreign exchange gain of S$4m.

Operation wise – average utilised volume increased 34% from 169,000 cu m/day in 4Q08 to 226,000 cu m/day in 1Q09, as design capacity increased from 380,000 cu m/ day at end’08 to 520,000 cu m/day at end-March’09. Average utilisation rate, however, fell from 53% to 43% in the same period, as the newer plants did not ramp up fast enough, owing to the industrial slowdown in China.

Recommendation

With the Zunhua WTP coming online in 2Q09 and enhancement works in Changshu leading to higher tariffs, we are fairly confident of HWT generating at least 1.26Scts in DPU for 2Q09. Any shortfall from projected DPU targets of 2.56Scts in 1H09 and 2.86Scts in 2H09 can be met with sponsor’s waiver of distributions, as the subordination clause will come into effect. Hence, given the secure yields, we maintain BUY on HWT with an unchanged TP of S$0.56.

Management indicated that they are more likely to focus on enhancements/ expansions of existing plants than acquisitions, until the macro situation improves. They also remain confident that the slowdown in industrial park activity is a temporary phenomenon and will not lead to a significant structural change.