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Tuesday, 13 July 2010

Leader Environmental Technologies Limited

Leader Environmental Technologies Limited ("LET" or the "Company") is offering 116.5m shares (2 m public shares, 114.5m placement shares) at $0.21 each. The Company is an environmental protection solutions provider in China and is engaged in the R&D, manufacturing, assembly, installation and support services of environmental protection systems. It services include dust elimination, desulphurization.

Revenue grew from RMB 100.7m in FY2007 to RMB 181.7 in FY2009. Net profit grew from RMB 39.7m to 64.3m during the same period. Net margin is hovering above a healthy 28% for the 3 years. The IPO will close on 14 July 2010 and 12 pm.

The company is listing at a historical FY2009 PER of 7x based on enlarged share cap and assuming service level agreements were already in place and based on the IPO price, the market cap will be $92.74 million.

While i do like this industry, this company actually bring up old memories of a former S-chip that was a market favourite but has since come under judicial management - Sino Environment. Sino used to be a market darling, rising to more than $3.50 at its peak but is now languishing at 13.5 cents. Many people lost their fortune in that company.

There is always a huge risk investing in Chinese companies, especially with regards to the quality (or even existence) of the earnings in the accounts. The fact that this is a S-Chip audited by Ernst & Young, one of the remaining big 4 accounting firms, may bring a little more comfort than usual. The company will also declare at least 10% of its FY2010 earnings as dividends.

As mentioned in my earlier part, i like this industry. China will have to focus more on enviromental protection in the coming years. The only concern i have is more management specific, i.e, can the management be trusted. Will the company go bust a few years after listing?

Assuming EPS grow by 25% in FY2010 and EPS will be 3.75 Singapore cents. Based on the 21 cents IPO price, company is listing at prospective PE of 5.60x. A fair value of 8-10x will imply a price of 30c to 37.5c. The low public float will mean that it will be quite difficult to get it from the public tranche.


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Cheers Ernest

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