• Lianyungang remains delayed but order momentum is robust elsewhere;
  expect RMB1.5bn new wins for FY11
• Operations are healthy with sustainable margins supporting earnings
  growth in years ahead
• Upgrade to Buy with TP of S$0.84

Healthy contract flow.
Our post result update with SGL’s management indicated order momentum is robust. As of end 2010, SGL’s orderbook stood at RMB2.2b. Based on the current bidding pipeline, we estimate that SGL could potentially win RMB500m of contracts in China and is pursuing contracts worth US$100m (RMB657m) and US$51m (RMB335m) in Saudi Arabia and Bangladesh, respectively.

Operations remain strong.
SGL reported FY10 PATMI of RMB289.1m on sales of RMB1765.7m – in line with consensus but higher than our estimates. Key variance was stronger than expected sales, higher margin and lower tax rate. Higher sales were partly due to earlier than expected recognition of its Saudi project, which is 35-40% completed. Gross margins rose to 30.4% from 29% in FY09. Going forward, we expect gross margins to stay within 26-30%. We have thus raised FY11/12F by 4.5% and 1.4% to factor in higher margins, lower tax rate and higher FY12F new win assumption of RMb1.7bn, offset by the withdrawal of RMB1.38bn Lianyungang project, which remains stalled at this point.

Middle East exposure manageable.
SGL’s project in Saudi Arabia was not disrupted. In fact, this project (RMB434m outstanding) is to be completed by October. As payment is based on 80% of completed work for each period, exposure is limited to only 20% of the last portion of work to be done.

Upgrade to Buy, 20% upside to S$0.84 TP.
Notwithstanding hiccups arising from its HK dual-listing exercise, SGL remains one of the strongest water companies with proven track record in business execution. As a result of our earnings upgrade, our TP is now raised to S$0.84, still pegged to
mid-cycle historical PE average of 14.5x.