Xiangyu Dredging (00871 HK) announced 1H 11 results, with net profits increased by 1.1x YoY to RMB 133 million, exceeding expectation and was 44% higher than the forecast provided in the prospectus, mainly due to the higher than expected gross margin (Actual 39.8% Vs Expected 38.5%) and the Government incentive of RMB 27 million.
We expect the favorable industry development and the substantial backlog would continue to push the revenue to grow fast, revenue CAGR expected to reach 20.2% during FY11-13. In addition, we expect the gross margin would decline to 36.5% in FY13 from 39.0% in FY11 while net margin can stay at above 25% in FY11-13.
We expect capital expenditure would peak at FY12. While the Company have enough capital resources to meet such expenditure, with low gearing, the Company can get additional capital by debt financing. In addition, we expect tightening policies being implemented in the PRC would not have significant impact on the cash flows.
At HKD 2.59, the Company is trading at 4.5x FY11 PER and 4.2x FY11 EV/EBITDA. Current valuation is very attractive. Raise EPS estimates of FY11-13 by 7.4%, 6.8% and 1.4% to RMB 0.463, RMB 0.500 and RMB 0.586 respectively. Maintain “Buy” and raise the TP to HKD 3.86, representing 6.7x FY11 PER and 6.4x FY11 EV/EBITDA.