(22-12-2010, 04:51 PM)Nick Wrote: [ -> ]Hi MW,
I think the latest right issue should shore up Biotreat balance sheet to some extent. But BOT projects are pretty capital intensive so financing is the key. But lets remember that $4 million is pretty small sum compared to Boustead's cash hoard so this could just be an opportunistic bet.
Yes, correct, $4 million is a small sum compared to what Boustead has. So they will account for it under AFS investments in the Balance Sheet under Long-Term Assets.
I would think that the Biotreat investment is related to Salcon rather than looking at direct profit returns.
Judging by Sinomem and United Envirotech results, water treatment seems to generate pretty high margins with safe counter-parties (municipal government) and recurring cash-flow.
Sadly, it is companies with over-leveraged balance sheet that ends up getting clobbered with high interest expense and potential inability to finance new BOT plants. Both UEL and Sinomem are historically in net cash position while steadily capturing new BOT plants. I guess they are better companies for any individual to invest in.
Sinomem, for example, is trading at a pretty low PE with a rapidly growing water treatment division. Its downstream division has been pulling it down for years but with the proposed listing of its subsidiary and recent divestment, its impact on the bottom-line should decline with time. Its water treatment division will grow with time since the bulk of its plants are still under construction. UEL has a better operating history since it has no exposure to downstream businesses.
Hmm, well I generally will not agree that wastewater treatment has high margins, as the competition is very intensive and sometimes the cost overruns can result in margins being depressed or even non-existent. FF Wong himself alluded to this by stating that even with Salcon's expertise in water treatment (and its reputation), it found it hard to secure contracts with decent margins amid fierce competition. It seems barriers to entry are also low for this industry as everyone wants a piece of the (profitable?) pie.
Companies like Sinomem do have proprietary technology which enables them to have high gross margins, and to a certain extent Salcon can replicate this with their own technology, though FF Wong did mention in FY 2008's audiocast that their attempts to discover a new revolutionary method of purification did not yield very successful results which could be used on an industrial scale (refer: experiment conducted in a China Textile Company). Unless Salcon invests more heavily in R&D, I doubt they can hold and sustain a competitive edge over their rivals.
From what I'd heard from FF Wong during the last AGM of Boustead, Bio-Treat does have many BOT projects all over China and their water treatment capacity is impressive, so by purchasing a stake in Bio-Treat, Boustead immediately have access to these projects. At least, that was the original plan. Apparently, Boustead is happy to just take a minor stake in these BOT projects now by purchasing 100 million shares in Bio-Treat at 4 cents/share.
I am hoping to get an update from the CEO himself on future plans for growing Boustead at the next results release (3Q 2011) due in Feb 2011.
I agree that to be successful in the waste water treatment sector, you will need technology on your side. Both United Envirotech and Sinomem has invested heavily in the past on their MBR technology to treat waste water. Both of these companies started out in the membrane manufacturing sector before deciding to apply their technology in the BOT plant (which started to boom since mid 2000s) as EPC projects and investments. The competition isn't very high once a plant has been secured as you can't build an opposing plant to compete with another. I guess you are right to point out that the main competition is during the bidding process. If you lack technology expertise, you may be forced to lower potential tariff rates (and margins) to compensate for the inherent weakness.
Sinomem started their waste water treatment operations in 2007. I have examined its segmental results for FY 2008 and 2009.
Waste Water Treatment Operating Margin
2008: 48.4%
2009: 45.2%
United Envirotech also started their waste water treatment plant operations recently.
Waste Water Treatment Operating Margin
2009: 46.1%
2010: 61.3%
Hyflux Water Trust main business is through operating its BOT plants and distributing the cash to their unit-holders.
Waste Water Treatment Operating Margin
2008: 55.7%
2009: 46.2%
Based on this figures, I wouldn't consider waste water treatment to be a low margin job (at least not yet). But it is certainly turning to a 'hot industry' with all kind of companies trying to take a slice of the pie. Lets see how this industry will fare in the coming years.
(Not vested in any water companies)
Business Times - 23 Dec 2010
Boustead to reduce Bio-Treat investment to $4 million
By TEH SHI NING
BOUSTEAD Singapore has decided to scale down its investment in Bio-Treat Technology from a proposed $42.7 million to $4 million, as the latter will have less need for investment after its rights issue.
The announcement from both listed companies yesterday came two days after the mutual termination of Boustead's separate $150 million deal with debt-ridden TT International.
In June, Boustead struck a deal with Giant Delight Holdings via wholly-owned unit Boustead Knowledge to buy $42.7 million worth of redeemable convertible notes of Bio-Treat.
These notes, when converted to shares, would have translated to a 20 per cent stake in Bio-Treat on a fully diluted basis and made Bio-Treat an associate company of Boustead.
Yesterday, Boustead said it would terminate that notes deal with Giant Delight and enter into a fresh one under which Boustead Knowledge will buy from Giant Delight 100 million Bio-Treat shares at 4 cents each, or $4 million in total. The share acquisition will be financed from Boustead's internal cash resources.
Bio-Treat yesterday explained that the proposed issue of its convertible notes to Giant Delight was 'delayed due to regulatory concerns' and that both parties 'decided that the rights issue should proceed first to recapitalise Bio-Treat'.
This, along with the fact that Bio-Treat would require less capital if its rights issue announced in November were sufficiently taken up by shareholders, led Boustead to scale down its investment, Boustead said.
The rights issue was 55.3 per cent oversubscribed, Bio-Treat said in a separate announcement yesterday. It expects to issue the 948 million rights shares today and list them at 9am tomorrow.
Bio-Treat, a Chinese wastewater firm, has been looking to raise funds after uncertainty over its going- concern status arose due to debts incurred under a convertible bonds programme and a HK$360 million (S$61 million) loan from former substantial shareholder Precious Wise.
News of the notes deal between Boustead and Giant Delight back in June sparked buying and lifted Bio-Treat's share price 6 per cent to 8.5 cents on the day of the announcement.
Yesterday, Bio-Treat shares closed unchanged at 5 cents after slipping to 4.5 cents during the day. Boustead's shares rose one cent to $1.08.
MW, do you think the yesterday announcement incorporation of new subsidary with principal activity is deriving income from owned or leased properties kind of interesting after the white knight deal fallout? hehe
(28-12-2010, 09:22 AM)mrEngineer Wrote: [ -> ]MW, do you think the yesterday announcement incorporation of new subsidary with principal activity is deriving income from owned or leased properties kind of interesting after the white knight deal fallout? hehe
Haha, ok lah, I am quite neutral about it. Companies form new companies quite often for a variety of reasons, so this move may be pre-emptive I agree; or it may also be nothing much. I won't read too much into it for now, let's wait and see if there is other news on the horizon.
Latest KE report on Boustead is quite chunky, with about 20 pages of analysis (the rest are disclaimers and tables).
Please see attached. And as usual, kindly ignore the target price.
I have never fully understood why high oil prices would lead to increase in demand for oil related projects. Anyone care to share this understanding?