Epure reported a profit of RMB107mn in 1H09 (up 30% y-y), 2% higher than our expectation and accounting for 40% of our fullyear estimate. Earnings growth was attributable to: 1) the completion of engineering, procurement and construction (EPC) projects in Shanxi, Hubei, and Jingzhou, 2) strong equipment sales, and 3) the tax credits obtained from the government.

Given Epure’s interim revenue and profits contributions are historically 34-36% of the full-year (in FY07-08), we expect stronger growth in 2H09F, implying upside to our FY09 forecast.

Gross profit margin in 2Q09 has declined to 30.3% (1H09: 31.9%), down 5pp q-q and 2pp from the FY08 level, due to recognition of discounted projects. We believe this should not be a surprise, given it is in line with the 30% guided by Epure in March, which is said to be a sustainable level for the long term.

Balance sheet remains healthy at a net cash position, which compliments Epure’s strategy to expand into build-operatetransfer (BOT) operations in wastewater treatment. To date, Epure has seven BOT projects under construction, which would start delivering recurring income starting in FY10F.

We are positive on Epure’s entrance into the Middle East, which compensates its slowing orderbook in China. An EPC contract was recently secured to build a wastewater treatment plant in Saudi Arabia of 72k tonnes, with equipment sales worth of 55k tonnes — we believe more orders should follow longer term.

We are cautious on the EPC providers due to their compromised business model and increasing competition. However, Epure’s successful expansion into the BOT projects should improve its risk profile by avoiding being a sole turnkey player. Trading at 12x FY10F PE, Epure’s valuation is at a discount to Hyflux’s 19x and its historical mean of 15x since its listing in FY06.