Memstar Technology

[CityFarmer]

Let me share my opinion on Memstar

Memstar stock price taken on a hike after the company secured 4 TOT (Transfer-Operate-Transfer) service concession plants in Sept 2010 and another 2 TOT plants in Feb 2011, all 6 plants are in China. The TOT projects do give a stable income for a long duration of 20-30 years.

The service concession of initial 4 plants contributes approx 60 RMB Mils in revenue annually, after the initial upgrading service charge of 48 RMB Mils on 6 plants. The remaining 2 plants will contribute estimated another 36 RMB Mils in revenue annually.

The membrane application biz remains as strong. The biz contributes approx 90 RMB Mils in revenue annually.

The net profit attributable to owner is 44 RMB Mils in FY2011, with its 2.656 Billions common shares; the EPS is 1.66 RMB cts. One point to caution, the FY2011 profit include a one-time paper gain of 35.5 RMB Mils.

At the latest share price of 6.6 S$ cts, PE is 20. With such a high PE, it needs high growth to justify.

The EPS (ttm) is RMB 2.49 cts (9 months FY2012 EPS = 1.3 cts + Q4 of FY2011 EPS = 1.19 cts). It gives PE (ttm) of 14. The PE still high considering its dividend yield is barely 1% and negative operating CF in FY2010, FY2011 and likely remains negative in FY2012.

Forward looking, no new service concession projects been secured so far. Substantial growth in service concession is unlikely in FY2013.

I will give it a miss this time, and remain in my watch list

YMMV

[hkl]

Let me share my opinion on Memstar

Memstar stock price taken on a hike after the company secured 4 TOT (Transfer-Operate-Transfer) service concession plants in Sept 2010 and another 2 TOT plants in Feb 2011, all 6 plants are in China. The TOT projects do give a stable income for a long duration of 20-30 years.

The service concession of initial 4 plants contributes approx 60 RMB Mils in revenue annually, after the initial upgrading service charge of 48 RMB Mils on 6 plants. The remaining 2 plants will contribute estimated another 36 RMB Mils in revenue annually.

The membrane application biz remains as strong. The biz contributes approx 90 RMB Mils in revenue annually.

The net profit attributable to owner is 44 RMB Mils in FY2011, with its 2.656 Billions common shares; the EPS is 1.66 RMB cts. One point to caution, the FY2011 profit include a one-time paper gain of 35.5 RMB Mils.

At the latest share price of 6.6 S$ cts, PE is 20. With such a high PE, it needs high growth to justify.

The EPS (ttm) is RMB 2.49 cts (9 months FY2012 EPS = 1.3 cts + Q4 of FY2011 EPS = 1.19 cts). It gives PE (ttm) of 14. The PE still high considering its dividend yield is barely 1% and negative operating CF in FY2010, FY2011 and likely remains negative in FY2012.

Forward looking, no new service concession projects been secured so far. Substantial growth in service concession is unlikely in FY2013.

I will give it a miss this time, and remain in my watch list

YMMV

The membrane business looks okay but I'm not a big fan of the TOT business. because I don't really understand how the accounting for service concession works. memstar has 239mil of service concession receivables in its balance sheet, of which 188mil only mature after 5 years. (see note 14 in AR2011). This amount accounts for half of its equity. So can I assume that if memstar intends to rapidly increase its revenue through taking more TOTs, it will have to make up for the funds that are locked up in the service concession receivables either through debt or placements? It is for this reason that I divested United Envirotech a few years ago.

Can any buddies share how this system works?

---

Here's an announcement from Advanced Holdings. So I guess these companies recognize revenue according to the percentage of completion method, but what about the timing of when the cash will be actually coming in?

SGX-ST’s query:

We note that “Service concession receivables” increased by 93% from S$3.6 million to S$7 million. In respect of the above, please provide further details on the nature of the service concession, and explain the reasons for the increase in “Service concession receivables.

Company’s response:

The Group entered into service concession arrangements with various governing bodies or agencies of the government of the People’s Republic of China (the “Grantors”) to operate waste water treatment plants. Under these concession arrangements, the Group will construct and then operate the plants for certain concession periods, which range between 20 to 30 years. At the end of a concession period, the Group will transfer the relevant plant to the relevant Grantor.

The Company notes that the abovementioned concession arrangements fall within the scope of Interpretations of Financial Reporting Standards (“INT FRS”) 112 - Service Concession Arrangements.

In accordance with INT FRS 112, the Group recognises revenue from the construction services provided under the service concession arrangement based on percentage of completion method during the construction phase.

As such, the Group’s service concession receivables increased from S$3.6 million to S$7 million with the recognition of revenue from the construction services provided by the two existing plants which are currently under construction.

[CityFarmer]

The membrane business looks okay but I'm not a big fan of the TOT business. because I don't really understand how the accounting for service concession works. memstar has 239mil of service concession receivables in its balance sheet, of which 188mil only mature after 5 years. (see note 14 in AR2011). This amount accounts for half of its equity. So can I assume that if memstar intends to rapidly increase its revenue through taking more TOTs, it will have to make up for the funds that are locked up in the service concession receivables either through debt or placements? It is for this reason that I divested United Envirotech a few years ago.

Can any buddies share how this system works?

I had learned the full picture of TOT biz recently. In TOT project, the grantor will award service contract with a fee for upgrading/expansion of plants, then will promise a minimum operating service fee for operating the plants for concession period of 20-30 years.

Most of the total value of the TOT projects will be recorded as non-current receivable. Only the payment due within a year will be recorded as current receivable. This is what you saw in Memstar B/S.

Since the receivable is secured (debt from PRC gov), part of it is used to pledged as security for loan. I refer to page 58 part c of Memstar AR 2011 below. RMB 9.3 Mils loan been secured by receivable of 12.6 RMB Mils.

"As at 30 June 2011, service concession receivables totalling RMB12,631,000 (2010: Nil) are pledged as security for the Group’s bank loans (Note 26)"

My most concern on Memstar is operating CF still remain negative after a strong growth in revenue and net profit reported. By looking into their CF statement, all operating CF remain trapped in working capital, even in FY2012's Q3 report.

YMMV

[hkl]

The membrane business looks okay but I'm not a big fan of the TOT business. because I don't really understand how the accounting for service concession works. memstar has 239mil of service concession receivables in its balance sheet, of which 188mil only mature after 5 years. (see note 14 in AR2011). This amount accounts for half of its equity. So can I assume that if memstar intends to rapidly increase its revenue through taking more TOTs, it will have to make up for the funds that are locked up in the service concession receivables either through debt or placements? It is for this reason that I divested United Envirotech a few years ago.

Can any buddies share how this system works?

I had learned the full picture of TOT biz recently. In TOT project, the grantor will award service contract with a fee for upgrading/expansion of plants, then will promise a minimum operating service fee for operating the plants for concession period of 20-30 years.

Most of the total value of the TOT projects will be recorded as non-current receivable. Only the payment due within a year will be recorded as current receivable. This is what you saw in Memstar B/S.

Since the receivable is secured (debt from PRC gov), part of it is used to pledged as security for loan. I refer to page 58 part c of Memstar AR 2011 below. RMB 9.3 Mils loan been secured by receivable of 12.6 RMB Mils.

"As at 30 June 2011, service concession receivables totalling RMB12,631,000 (2010: Nil) are pledged as security for the Group’s bank loans (Note 26)"

My most concern on Memstar is operating CF still remain negative after a strong growth in revenue and net profit reported. By looking into their CF statement, all operating CF remain trapped in working capital, even in FY2012's Q3 report.

YMMV

Hi CityFarmer,

Thx for the clarification! I see that memstar recorded the present value of the TOT. Do you know when the actual payment will start coming in for a typical TOT? Because from note 14 of the AR2011, it says:

"Under the terms of the arrangements, the Group will receive a yearly minimum amount of RMB39,785,000 (2010: Nil) from the contracted parties (grantors) in exchange for services performed by the Group."

But total service concession receivables between 2 and 5 years are only at 5.836mil. Also, memstar reported 39mil of service concession revenue, but removed 47mil in the reconciliation of net income to operating cash flow.

It seems that although memstar says that it will recognize 39mil of service concession revenue every year, the actual cash coming in is going to take more than a few years. Or did I misread something somewhere?

[CityFarmer]

Hi CityFarmer,

Thx for the clarification! I see that memstar recorded the present value of the TOT. Do you know when the actual payment will start coming in for a typical TOT? Because from note 14 of the AR2011, it says:

"Under the terms of the arrangements, the Group will receive a yearly minimum amount of RMB39,785,000 (2010: Nil) from the contracted parties (grantors) in exchange for services performed by the Group."

But total service concession receivables between 2 and 5 years are only at 5.836mil. Also, memstar reported 39mil of service concession revenue, but removed 47mil in the reconciliation of net income to operating cash flow.

It seems that although memstar says that it will recognize 39mil of service concession revenue every year, the actual cash coming in is going to take more than a few years. Or did I misread something somewhere?

The detail of the TOT contract is not publically available, we can use "detective" approach to decipher clue from the annual report. All figures below are in RMB unless stated otherwise.

In AR 2011, total reported revenue for concession service is 65.9 Mils (39.8 Mils + 26.1 Mils) as reported in pg. 50 of AR. In the Balance sheet, current concession service receivable is negligible (0.9 Mils). If the accounting is right and credit term is less than One (1) year, then almost all invoices was collected.

The next question, Where is all the RMB? Let's look into the CF statement.

In AR 2011, excluded the one-time paper gain of 35.5 Mils, the operating cash flow before WC changes is ~20% more than last FY. So the changes in WC is the culprit.

Inventory and payable increase are two (2) of the factors. These may due to upgrading/expansion work of the plants, and expectation of higher demand from those new plants.

You have mentioned the mysterious out-flow of 48.0 Mils cash, and there is another in-flow of 31.1 Mils cash. I re-look into the balance sheet, i found other receivable which is TOT related, mainly tender deposit and deposit for the projects. My best guess is the 48.0 Mils out-flow and 31.1 in-flow of cash flow are related to that. Those CF should be one-time, instead of regular one.

Feel free to comment if any

[CityFarmer]

MEMSTAR AWARDED RMB 50 MILLION CONTRACT TO SUPPLY MEMBRANE PRODUCTS AND ASSOCIATED EQUIPMENT FOR DUAL MEMBRANE DRINKING WATER TREATMENT PLANT

http://info.sgx.com/webcoranncatth.nsf/V...E003A685A/$file/Memstar-RMB50millionContract.pdf?openelement

I am expecting a bigger TOT project. In Q32012 FR, 100 RMB Mils paid as tender deposit. The project should be much bigger than this.

[CityFarmer]

Memstar Awarded RMB 60 Million (SGD 12 Million) Contract to Supply Membrane
Products for Wastewater Treatment Plants
http://info.sgx.com/webcoranncatth.nsf/V...800333465/$file/MS-RMB60Mcontract.pdf?openelement

Memstar is doing well in securing contract to enhance its membrane application biz. Another 60 Mils, on top of the previous 50 Mils, it had secured 110 Mils RMB (SGD 22 Mils) sales for membrane application products.

In 12th 5-year plan of Chinese government, approx 60 Bils dollars was committed for wastewater treatment upgrade projects in China. Memstar seem at the right place, right time, and with the right capability

[KopiKat]

That explains the rise in share price...

PROPOSED S$35 MILLION INVESTMENT IN MEMSTAR TECHNOLOGY LTD. BY UNITED ENVIROTECH LTD., A SINGAPORE MAINBOARD-LISTED AND A LEADING MEMBRANE-BASED WATER SOLUTION PROVIDER

THE PROPOSED INVESTMENT WILL BE BY WAY OF PURCHASE OF AN AGGREGRATE OF 350,000,000 SHARES AT S$0.10 PER SHARE FROM MS. PAN SHUHONG AND DR. GE HAILIN, REPRESENTING APPROXIMATELY 13.18% OF THE EXISTING ISSUED AND PAID-UP CAPITAL OF MEMSTAR TECHNOLOGY LTD.

[CityFarmer]

That explains the rise in share price...

PROPOSED S$35 MILLION INVESTMENT IN MEMSTAR TECHNOLOGY LTD. BY UNITED ENVIROTECH LTD., A SINGAPORE MAINBOARD-LISTED AND A LEADING MEMBRANE-BASED WATER SOLUTION PROVIDER

THE PROPOSED INVESTMENT WILL BE BY WAY OF PURCHASE OF AN AGGREGRATE OF 350,000,000 SHARES AT S$0.10 PER SHARE FROM MS. PAN SHUHONG AND DR. GE HAILIN, REPRESENTING APPROXIMATELY 13.18% OF THE EXISTING ISSUED AND PAID-UP CAPITAL OF MEMSTAR TECHNOLOGY LTD.

WWT starting to catch large PE attention. MemstarT is indirectly bought by KKR with its new fund into UE. The whole industrial will be re-rated IMO

Should be a good news to me too with my holding on Sound Global

[KopiKat]

Both Memstar & Envirotech halted. More shares placement or merger / takeover?