This is an excerpt from NRA Capital’s research report on Sanli Environmental Limited.

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S$26m of contracts boost order book to S$125.1m

Sanli Environmental Limited announced on 4 July 2017 four new contracts with a combined value of S$26.0m. Sanli’s order book is now equivalent to close to two years of revenue.

We estimate that approximately S$60m of its existing order book will be recognised in FY18 ending March 2018, with future contracts contributing another S$5m of revenue also in FY18.

What’s notable is that the four contracts included at least one private sector project of S$3m to S$4m in value. We traced from GeBiz three PUB projects awarded in June 2017 with total estimated value of S$22.4m.

Focus on high technical content projects

We noted that Sanli’s historical gross margins have been around 18% to 20%. Coupled with cost control at the corporate level, net margin has ranged from 9% to 11%.

Public sector water projects often include civil engineering works, e.g. sewerage construction and pipe-laying.

In Sanli’s case, it has been securing contracts with higher engineering and technical content, such as the supply membrane and ozone filtration systems, which may explain for its margins.

Top of its class – highest tender win rate

Tracking PUB tenders on GeBiz over the last four months, we noted that Sanli has achieved a relatively high win rate of 30.8% or four out of 13 participated tenders.

Among competing bidders with the same BCA registered work heads as Sanli, Sanli’s track record is impressive as most other bidders have won at most one or two contracts during the same period.

In terms of total value of contracts secured, Sanli also stands out as the winner. To further improve its competitiveness, Sanli is expanding its workshop to raise the proportion of internally produced content in its products and services.

Thus far, PUB has provided a list of upcoming tenders that we estimate to be potentially worth S$100m or more.

Strong pipeline of water projects to provide longer term opportunities

Spending on water infrastructure is expected to nearly double to S$800m per annum during 2017 to 2021.

Pipeline projects include a new water reclamation cum NEWater plant in Tuas as part of the Deep Tunnel Sewerage System Phase 2 (construction to commence in 2H 2018), the redevelopment of the Kranji Water Reclamation Plant (from 2030 onwards) and the construction of the fourth and fifth water desalination plants in Singapore, to be ready by 2020.

To better capitalise on these opportunities, Sanli can aim to take on larger projects with its stronger balance sheet today.

Competition poses key risk

One potential risk is that competitors may slash prices, leading to either margin compression or lost contracts for Sanli, especially when Sanli’s margin is now more transparent. FY18 profitability may also be affected by IPO expenses.

As this is a preliminary look at Sanli, we do not provide a rating and valuation at this juncture, but note that Sanli’s peers trade at P/E multiples of up to more than 20 times.

NRA Capital is the first independent equity research company licensed by the Monetary Authority of Singapore, offering independent institutional-quality equity research written for sophisticated investors.

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