- Puncak Niaga announced yesterday that it is divesting its 80% stake in Hebei Sino Panlong Industrial Water Supply Co Ltd (Hebei Sino) for RMB500,000 (RM306,500).

- It told Bursa that its 98.65%-owned subsidiary, Sino Water Pte Ltd, had signed the equity transfer agreement with Yuanshi County Panlong Water Supply Co Ltd (Yuanshi). Yuanshi owns the remaining 20% stake in Hebei Sino.

- Puncak said the disposal will allow Sino Water to divest its loss-making subsidiary and limit its losses arising from this investment. The original cost of investment in the 80% stake was RM12.9mil in Sept 2009. The disposal is expected to be completed by year-end or 1Q16.

- Hebei Sino’s principal activity is the treatment and distribution of water industrial areas in Yuanshi County. It has a 30-year concession period from 31 Dec 2009.

- Apart from Hebei Sino, Puncak has two remaining water concessions in Lushan County (50,000m3 per day treatment plant; 30-year concession from May 2008) and in Yangxin County (30,000m3 per day plant; 28-year concession from Nov 2007).

- We view the proposed disposal positively as Puncak’s operations in China have been making losses. In 1QFY15, its water and wastewater division reported an operating loss of RM2.1mil (FY14F LBIT: RM8.2mil).

- More importantly, we remain hopeful that Puncak can finalise the disposal of its water assets by year-end. Recall that it had extended a two-month extension (until 14 Sept) for the fulfilment of conditions precedent in the sales and purchase agreement. This followed a supplementary agreement signed between the Federal and state governments on 10 July.

- It was also reported in the press yesterday that Puncak has prepared a five-year (2015-2019) master plan to increase treated water supply capacity by 25% (1,600MLD). It intends to present this proposal to the Federal and state governments. The plan involves a capex of RM4.3bil.

- Recall that Puncak intends to utilise RM1bil from the proceeds for expansion in either the oil & gas or plantation businesses. Another RM534.3mil (or RM1/share on a fully-diluted basis) from the proceeds will be distributed as dividends. We maintain HOLD as prospects remain cloudy beyond the disposals.

Source: AmeSecurities Research - 13 Aug 2015