NRA Capital: Sembcorp Industries - 3 Apr 2008

Competence in water treatment further strengthened

· SCI has just announced a new joint venture agreement with Zhangbao Industries to build, own and operate (BOO) an industrial water recycling facility in the Zhangjiagang Free Trade Zone in Jiangsu Province, China. SCI will hold an 80% stake in Zhangjiagang Free Trade Zone Sembcorp Water Recycling Co, with the remaining 20% under Zhangbao, an investment arm of the Zhangjiagang city government.

· The agreement plans for a 40,000 cubic metres per day industrial water recycling facility in the first phase. The plant will recycle industrial effluent from the used water treatment facility into recycled water and demineralised water.

· Investment cost is estimated at $22.4m (RMB 112.2m) and the j-v will have exclusive rights to supply recycled water including demineralised water to industries in the Zhangjiagang Free Trade Zone. It will complete in 1H:09.

· SCI currently has some 4m cubic metres per day of water under management worldwide. The group is also building and operating Singapore’s newest and largest NEWater plant (capacity of 228,000 cubic metres per day) and this is expected to come onstream only in 2010.

· We reiterate that it is the increasing percentage of recurrent income that makes us more comfortable with SCI’s business model in these volatile times, and maintain our Buy recommendation.

· Our forecast for this year and FY09 remain unchanged, fair value is $5.82. At yesterday’s closing price of $4.10, there is a 42 per cent upside to our fair value. Stock is also trading cum dividend, which is 3.7 per cent for FY07 and projected to rise to 3.9 per cent for the current year.

SCI’s water capabilities – in China

· The new plant just announced was chosen as a showcase project by the Governments of China and Singapore. It will be the group’s third water management project in Zhangjiagang, and will be expanded later as demand increases. It will be the first water sector project to be deemed as having “zero-discharge”, as part of continued efforts to fight increasing pollution of the water resources in the Yangtze River Delta.

· The first project in the free trade zone is a 20,000 cubic metres per day wastewater treatment facility serving industrial customers in the free trade zone and surrounding industrial parks. The 2nd 15,000 cubic metres per day high concentration industrial wastewater facility currently being built, will be able to treat high concentration wastewater with an average 4,000 mg per litre influent chemical oxygen demand.

· Both the high concentration industrial wastewater treatment facility and the third new industrial water recycling project will be part of the demonstration project under the MOU between China’s Ministry of Construction and Singapore’s Ministry of the Environment and Water Resources to showcase Singapore’s expertise in water management.

· The group also has other projects in Shanghai, Nanjing, Tianjin and Shenyang.

SCI’s water capabilities – in the Middle East

· SCI also recently signed an MOU with the Higher Corporation For Specialised Zones (ZonesCorp) of Abu Dhabi to jointly establish a worldclass utility services company. The new Company is expected to provide efficient utility services to ZonesCorp's specialised economic zones.

· The model appears to be based on what SCI is already doing on Jurong Island ie provide efficient, centralized utility services, facilities management and one-stop customer relationship management to all of ZonesCorp's industrial and commercial tenants, including those in the Industrial City of Abu Dhabi (ICAD), the Al Ain Industrial City and the numerous Worker Residential Cities currently under development.

· Amongst services proposed include the integrated supply of district cooling chilled water, electricity, wastewater treatment & recycling, high grade industrial water, natural gas, industrial gases and solid waste management.