On 17 Oct, I mentioned a downside target of 48c for Sound Global's share price. This might or might not materialise. Personally, I am not averse to buying a few bids higher if the technicals tell me that it could be a good idea.
As Sound Global's share price declined, volume has also declined. This picture of a low volume pull back suggests that the selling is weak. Indeed, looking at the MACD, we see a higher low possibly forming. Looking at Chaikin Money Flow, we see how money flow has turned positive even as its share price weakened lately.
Immediate resistance is at 51c while immediate support is at 49.5c.
This is another stock I am accumulating on weakness.
Water treatment investments are set to double in the 12th Five Year Plan Period (2011-2015) to CNY430b in an effort to improve China’s wastewater treatment rate to 85% by 2015, from 77% currently. Commercialisation and privatisation of the Chinese water treatment market is also a long-term trend. With over 20 years of experience, Sound Global has become one of the leading one-stop integrated wastewater treatment solution providers in China, with a respectable market share.
In our view, Sound Global’s revenue will be supported by: 1) continuous order wins thanks to a long-term relationship with the government, and 2) more BOT projects entering their collection period. A hike in water tariffs in China will also have positive effect on revenue.
Although we are positive on Sound Global’s revenue outlook, its high net margin of the past few years would be very hard to maintain, in our view. Recent high-cost borrowing will weigh on the company’s net margin for the next few years, assuming it does not redeem the senior notes before maturity.
Sound Global is trading at a large discount to its peers (6.7x FY12PE based on consensus vs average of 12.8x for HK-listed peers and Hyflux’s 16.7x). We currently do not have a rating and target price on Sound Global. However, we think the deep discount may not be justified given Sound Global’s comparable net margin and higher-than-peers ROE. Sound Global is worth considering if investors are looking for cheaper alternatives.
(Maybank Kim Eng, 8 Oct 12)
Related post:
Sound Global: Accumulate on weakness.
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