What Sembcorp Industries’ Latest Expansion in China Means For the Company

Sembcorp Industries (SGX: U96) announced yesterday that it has acquired an existing wastewater treatment plant in China’s Jiangsu Province. As one of the largest conglomerates in Singapore, Sembcorp Industries’ business is split into three main segments: Utilities; Urban Development; and Marine, which is represented by its listed subsidiary, Sembcorp Marine (SGX: S51).

The new deal

Sembcorp has been active in China for more than 20 years now and has business interests in 15 provincial regions in the country. In particular, Jiangsu has been one of the company’s most active regions. Sembcorp is now able to reinforce its presence in the region with the newly-announced deal. The agreement is for Sembcorp Industries and the Lianyugang Lingang Industrial Area Administration Committee to set up an 80:20 joint venture to take over and upgrade an existing wastewater treatment plant located in the Lianyugang Lingang Chemical Industrial Park

Sembcorp Industries plans to finish the upgrading by 2015 and the completed wastewater treatment plant will be able to process 20,000 cubic metres of water a day.

Why it’s important for Sembcorp Industries and its investors

This is a mark of achievement on Sembcorp Industries’ part as it had been specifically selected by the Jiangsu Environment Protection Department to aid in the upgrading of the old plant. But, at first glance, the project also seems to be only a small piece of the whole pie.

For instance, the upgrading work on the plant might cost the joint venture only RMB130 million (around S$27 million) or so and that’s a really small investment for a company of Sembcorp Industries’ size (the company has total assets of more than S$14 billion). In addition, the project is also not expected to have a major impact on the company’s financial performance for this year.

However, what’s important here is that the work done for the new deal can be a useful model for Sembcorp Industries to replicate in other chemical industrial parks in the Jiangsu province of China. Currently, the company has other industrial wastewater treatment plants in Jiangsu such as the ones located in the Zhangjiagang Free Trade Port Zone and the Nanjing Chemical Industrial Park. The knowledge that the company acquires in this new project “will enable [the company] to extend [its] solutions across the province and further cement [its] position as a market leader in industrial wastewater treatment in China.”

Foolish Summary

At its current price of S$5.39, Sembcorp Industries is valued at around 12 times trailing earnings and has a dividend yield of 2.75%. The stock has lost roughly 1% year to date while the Straits Times Index (SGX: ^STI) has advanced about 4% for the year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.