Xiangyu Dredging (00871 HK) announced FY11 results, net profits up 219%YoY to RMB 303 million, 6.5% below expectation. Gross margin declinedfrom 45.3% to 37.7%. Trade and other receivables rose 1.2x to RMB 608million, turnover days declined from 249 days to 173 days. Net cash was RMB100 million as at FY11.
We expect the capital and reclamation dredging business would post5-10% CAGR during FY12-14. Yandu Project would be a significantgrowth driver in the next 3 years, however, due to the project’s BT nature,would post high financial burden to the Company. In addition, we expectthe environmental protection business would be another growth driverafter FY12. Overall gross margin should decline in FY12 but shouldrecover starting FY13. Moreover, we expect the acquisition of JiangsuJiaolung in February 2012 had synergy effect and could contribute as muchas 6% of the total net profits to the Company during FY12. We expectcapex to remain high in the next 3 years, however, the amount ismanageable and would not push up gearing significantly.
At HKD2.13, the Company is trading at 3.9x FY12 PER only. Currentvaluation is attractive. Given a lower than expected result, lower EPSestimates of FY12-13 by 13.0% and 21.5% to RMB0.435 and RMB0.460respectively, and initiate that of FY14 at RMB0.501. TP set at HKD2.99,representing 1.0x FY12 NAV and 5.4x FY12 PER, maintain “Buy”.