Why Hengyang's RMB238m EBITDA target is ambitious

"Dream on," says analyst.

According to Phillip Securities, 1Q12-3Q12 results are down in margin as depreciation of Deqiao Phase1 has kicked-in since Nov12. 4Q11, 1Q12, and 2Q12 revenues ranged RMB29-31m but 3Q12 dipped below RMB25m.

Here's more from Phillip Securities:

EBITDA margin was 38% in FY11 but improved to 41% 9M12. Interest rates varied between prime and 8.54% p.a.; and, non-interest-bearing loans from former shareholder, ultimate shareholder and related party made the expense erratic.

Depreciation has settled at RMB5.1m in 3Q12 and averaged RMB5.4m/Q over last 3Qs. Effective tax rate settled at 30% for last 2Qs.

It announced the IPT of the 40% disposal of its Wuhan & Chongqing developments, respectively at US$4.8m each.

It is still waiting approval to operate 12 tanks at Foreversun. We note, at peer Vopak, that it is experiencing permit delay for its Dongguan terminal. As we factor in such business risk, we changed our valuation to RIV instead of marking to market’s relative P/NBV.

As the SGX market is now obsessed with debt leverage, we also artificially dilute its share base (strictly for target price) by its unsecured debt.

Over the long term horizon, we look at peer Vopak’s building of its business since 1616. It unveiled an outlook of 34m cbm capacity, and €1bn EBITDA by 2016. If Hengyang achieves its planned 1m cbm capacity (up to Wuhan & Chongqing), can we look at RMB238m EBITDA?

At 8xinterest cover, 30% tax, can we look at RMB130m or S$0.12/share distributable earnings? Ha! 60% dividend yield. Dream on!

The execution risks could be port permit delay, construction contractor default, contractor fatality on site, liquidity squeeze; or, prolonged economic slowdown.