Interest in HanKore’s portfolio of Chinese water and wastewater assets is hotting up. GWI’s Asia editor Olivia Jensen assesses the potential suitors.
Shares in Singapore-listed project developer HanKore Environment rose to a 52-week high of S$0.045 in the days following the December announcement that it had appointed Bank of America Merrill Lynch to advise on the sale of the company’s BOT assets.
A company representative confirmed to GWI that BAML is screening interested parties including both private equity investors and trade buyers, but emphasised that the process is still at an early stage, and that a sale is not certain. As well as the possibility of divesting its entire water treatment portfolio, the company is also considering the sale of individual assets.
HanKore has built up a 1.4 million m3/d pool of wastewater, water treatment and reuse assets in China, which offers scope for organic growth through tariff increases, technology upgrades to meet China’s Grade A discharge standard, and capacity expansions as utilisation rates on some of the older projects reach 100% (see table, above).
Unlike most water BOT investors in China, which engage in joint ventures with the local municipality, HanKore has full ownership of all its projects, magnifying the impact of tariff increases and efficiency improvements in profitability.
Since 2010, chairman David Chen has tidied up the portfolio, writing off some non-performing assets and rescuing one troubled project at Xianyang in Shaanxi Province, leading to a write-back of RMB10 million (US$1.6 million) in early 2011.
The company has undergone a thorough financial restructuring over the last three years, and since 2011 has been taking on new loans from Chinese banks. At the end of 2012, its debt to equity ratio stood at 48:52, while at the end of the first quarter of fiscal 2013, the group had total assets of RMB2.3 billion (US$364 million).
HanKore returned to profit in fiscal 2012, achieving net profit of RMB103 million (US$16.5 million) after incurring losses of RMB407 million (US$65 million) in fiscal 2011. First quarter 2013 revenues were up 19% year-on-year, at RMB89.33 million (US$14.3 million).
Possible bidders for the HanKore portfolio include Malaysia-based project developer Salcon Bhd. Salcon already has stakes in Chinese BOT projects with a design capacity of 1.3 million m3/d, and last year the company announced that it was in discussions to acquire a portfolio of operating assets of a similar size (see GWI June 2012, p31).
Other contenders could include Singapore- listed United Envirotech (UEL), which has been boosted by US$150 million in financing from private equity giant KKR over the last fifteen months. UEL itself has a portfolio with a capacity of over 1.4 million m3/d and is looking to scale up rapidly in China.
Engineering major Boustead Singapore may also be a candidate. The company is cash-rich and has been looking for ways to fire up the performance of its water division, Boustead Salcon, after the unit barely scraped a profit from S$40 million (US$32.6 million) in revenues in fiscal 2012.
The relationship between United Water China president Phillip Yu and HanKore chairman David Chen, meanwhile, could set United up as another possible suitor. The companies already have a JV with Hankore for a water supply project, and United recently received an infusion of debt funding from the IFC (see GWI August 2012, p28).
The HanKore transaction looks set to be the highest-value deal in the Chinese BOT secondary market for some time, even if the eventual acquirer only takes a 50% share in the portfolio. The battle may prove to be a fierce one.
