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Thursday, December 01, 2005

United Envirotech @ 51 cts ( Water / China ) 8 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.High valuation

2.Limited scale, access to capital, intellectual property

I have to admit that sometimes I look at a stock and my gut instinct on looking at key valuation metrics is that the stock is overvalued or at best fully-valued. It is only subsequent to getting this instinctive feeling that I back it up with some research. But ultimately the call (not to buy) emanates from this initial instinct.

A screen of United Envirotech's key valuation and financial figures suggests in my mind that there is little margin of safety ie. more downside risk than upside potential in its share price. For 20 times trailing PE and probably 15 times forward PE (based on estimated S$8M FY05 profit, projecting from its 9M05 results) and 4 times NTA it is rather expensive for an engineering stock, albeit one in the highly rated water sector. And I'm still waiting to see what's its dividend policy; the stock IPOed in April 2004 but did not pay a dividend that year. My view is that for China-based companies it is better to see the cash change hands to your account through dividends than for the company to keep in its balance sheet; the shareholders should get a piece of the profits.

My view of engineering stocks is that it is all about scale, scale, scale. It is very rare that the company owns intellectual property via patents to some proprietary technology; rather, their value-add lies in their ability to integrate the technologies available on the market to provide solutions for the customer. That's why I don't think much of United Envirotech's claims that they have competitive strengths in membrane bioreactor, microfiltration, PVDF membranes; they just have the know-how to install and integrate them, but these technologies are available on the market, not proprietary to the firm. Under such a business model, company capital (to provide working capital for undertaking larger and more projects) and significant revenue, order book and customer base (strong reputation) becomes important. A long history also suggests a strong installed base and access to recurring revenue through maintenance. United Envirotech probably does not have much protectable intellectual property, else its margins wouldn't have dropped so drastically from 50% to 30% from FY04 to FY05. In terms of scale of operations, it hardly belongs to the big league, with about S$20M revenue expected this year; my idea of significant revenue base would be at least S$50M or above, in the scale of Sinomem, for example.

I can understand why United Envirotech has risen from a stagnant 35 cents (with no liquidity) to over 50 cents today (with strong liquidity). It has recently secured a TOT municipal wasterwater treatment project in China, along with contracts with new blue chip customers CNPC and Sembcorp. But the contracts with CNPC were only worth S$5M, while that with Sembcorp Utilities was presumably too small to mention. The municipal TOT projects in China typically work on a private-sector-builds-municipal-government-offtakes concept. This effectively means the company that builds the plant assumes all the risk of construction, ownership and operation. It is all too well to package it as being a source of recurring income, but it is a less preferable situation to building a plant for a client which is the eventual owner. See the difference? United Envirotech will need access to capital to undertake a few more of this, and capital is not a resource that it has a lot of.

Consider a peer. Asia Water ran up from below 30 cents to 48 cents on a spate of contracts, including an impressive one for a nuclear power station, that brought its order book up to nearly RMB$900M, enough on its plate for the next 3-4 years. It has since corrected to below 40 cents, possibly on market realisation that order book does not necessarily mean profit growth of the same magnitude. Extrapolate that thinking to United Envirotech.




Blogger LuckySingaporean said...

Hi DanielXX,

I've been looking for Singaporeans starting blogs on investing and I found yours.

I'm just starting my investment blog based on my own investment methods.

My blog is found here:

My investment method appear to be different from yours. I intend to post every single trade so that people know how I perform.

I invest only in Nasdaq listed stocks.

My rules for investing are as follows:
1. Invest in stocks that analysts hate and believe are overvalued.
2. Hold only 1 stock at a given point in time - zero diversification.
3. Invest only in stocks that have sky high P/E above 30 or are making losses.
4. Invest only in stocks whose future is uncertain and investors debate endless about its fate.
5. Stock price is volatile and occasionally spike up.
6. Stock price is up from previous week.
7. Invest in stocks where prudent investors consider too risky.
8. Sales growth has to breathtaking.
9. The CEO is young and inexperienced preferably under 45 years old.
10. The company deals with a product that is new something that my parents don't know about.
11. Never invest in a stock that allows you to sleep well at night.
12. Never buy a stock that Warren Buffet devotees would be interested in.

Hope you can visit my blog often and give comments.

12/02/2005 10:54 AM  
Blogger DanielXX said...

Hi luckysingaporean,
I agree with some of your points which make your style seem like that of a growth investor but others just sound like contrarian for the sake of being contrarian eg. points 3, 9, 11 and maybe 12. Based on your criteria you would probably catch a lot of falling knives. Oh well, maybe the US market is different hahaha.

12/02/2005 10:00 PM  
Anonymous Anonymous said...

Thanks for the tip, stock is starting to move up. I'll definitely be buying on Monday.

Thanks. Seems like almost every stock you put on your site has a good chance of moving up fast.

12/04/2005 10:10 PM  
Anonymous millionaires said...

Hey, you have a great blog here! You really are very talented and deserve an honest compliment, congradulations! I'm definitely going to bookmark you!

I have a future business partner site/blog. It pretty much covers future business partner related stuff.

Come and check it out if you get time, Scott :-)

12/06/2005 12:30 AM  
Blogger LuckySingaporean said...

Rule 3: Who said high P/E stocks are falling stocks? I've reading your blog. The 'hot stocks' just get hotter - the higher p/e gets even higher.

Rule 9: Ask yourself what age was Steve Jobs and Bill Gates and Google founders are when their stocks are listed? What about CEO of Amazon? ...has there been a super-fantastic stock whose CEO was an old man? When you're 50 years old your eyes will need bifocals. You expect to grow your company at 100% a yr at that age.

11. The reason why you can't get enough sleep is because the company you buy is so exciting, you stay awake. What is the use of a "safe" investment that doesn't perform.

Let my blog and results speak for themselves.
We can all speculate what is the right way to invest. But the market defy logic.

12/08/2005 11:55 AM  
Blogger DanielXX said...

Rule 3: You mean you wouldn't buy it if the price is 50% lower? ie. you would buy it at 30X PE but not at 15X PE?

Rule 9: No point quoting the success stories. That's the survivorship bias.

Rule 11: Well that depends; I would argue that a few of such "low probability-high return" stocks in your portfolio are good in spicing growth but your portfolio should be balanced with other stocks.

Well I guess you're a high risk-high return type of investor; to each his own.

12/09/2005 8:27 PM  
Anonymous Anonymous said...

Hi DanielXX,

I would like to know your views on two Stocks that have very high volume traded. They are China Sun and Global Voice. How much do you think they are worth?

1/11/2006 11:54 PM  
Blogger DanielXX said...

China Sun is a stock I wouldn't buy because a substantial shareholder had sold off his entire stake (~10% of total) recently, despite all the hulabaloo about its ethanol production licence (currently in progress). Difficult to value because of its short listed history; just wouldn't buy. Probably going to write something on this.

Global Voice- I would probably value it at NTA (10 cents). That is about the price (per share) at which its fiber optic network was purchased; in the absence of positive profits (hardly any deals!) one has to be conservative. Ok since the funds are in it, let's be more generous, 1.5X NTA or 15 cents ok? I have a blog article on it, in the link below:

(As you can see, I don't really have any clear quantitative valuation methodology. I don't believe in setting price targets.

1/12/2006 10:40 PM  

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