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SIIC: On Acquisition Streak To Bolster Leading Position In China Wastewater Industry
Corporate Digest | 01 November 2013
By: Shane Goh
Articles (99) Profile

China’s annual water demand is forecasted to hit 818 billion cubic metres by 2030, resulting in a potential 199 billion cubic metres shortage. To address the issue, its government has set aside Rmb4 trillion for expenditure on water infrastructure. Shares Investment recently had a luncheon with SIIC Environment Holdings’ chairman, Zhou Jun, to gain insights into the wastewater treatment industry and the company.

With a current daily water treatment capacity of 3.9 million tons, SIIC has grown significantly since the acquisition by Shanghai Industrial Holdings (SIH) in FY10, up from 1 million tons per day. The firm’s successful listing transfer from the Catalist to the Mainboard of the Singapore Exchange (SGX) in November 2012 was a positive affirmation of its growth.

SIIC Environment Holdings' chairman: Zhou Jun

Over the past three years, SIIC has been on an acquisition streak, expanding from 10 wastewater treatment plants in FY10 to its present fleet of 42 plants. “SIIC does not adopt a buy-at-all-cost approach. We look for credible companies that can be trusted, before entering the deal,” assured Zhou.

Unique Fund-Raising
As a result of its rapid growth, SIIC’s bank borrowings have ballooned from Rmb578.1 million in FY10 to Rmb2 billion as of 30 June 2013. However, this does not faze Zhou, who shared with us SIIC’s unique fund-raising position.

“Although our parent company, SIH, is a state-owned enterprise in China, being listed on the SGX enables SIIC to raise capital in Singapore. We will be looking to refinance our existing loans in China, where the interest rate is between 7 to 8 percent, into borrowings from Singapore banks, with a more favourable 3 to 4 percent interest rate,” said Zhou. “This would lead to a reduction in interest expense,” added Zhou.

Government Backing
Indeed, clean water demand is set to rise with its growing population, projected to hit 1.4 billion by 2030.  This underpins SIH’s focus on the environmental industry. Zhou said “With the government’s backing, the wastewater treatment industry has strong potential growth and presents a long lasting business in China.”

Not to forget, the industry’s barrier to entry places existing players, like SIIC, in a more favourable position when demand picks up. Zhou noted “The Chinese government is more likely to upgrade existing wastewater treatment plant to accommodate new requirements, as opposed to building a specialised plant to cater to the other industrial needs.”

Outlook
On 14 October 2013, SIIC proposed a 3.1 billion new shares placement exercise to raise $260.2 million (Rmb1.3 billion). With regards to the net proceeds, “Rmb530 million will be utilised for the Shanghai Pucheng Thermal Power Energy acquisition, while approximately Rmb200 million will be set aside for the purchase of the remaining shares in SIIC’s subsidiary, Nanfang Water,” shared Zhou.

Notably, Zhou mentioned “SIIC is contemplating a dual listing on the Shanghai Composite Index, where SIH has a strong reputation. This could lead to a rise in market capitalisation, which would be favourable for existing investors.”

With a sizeable war chest to fund its acquisition pursuits and annual target to increase daily water capacity by 1 million ton, SIIC looks set to build on its market leading position.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

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