Poor set of 3Q11 results. Hyflux Ltd reported a pretty poor set of 3Q11 results last evening, with revenue slipping 36.2% YoY and 21.0% QoQ to S$87.7m; management explained the fall was mainly due to a "switching over effect", where its two mega desalination projects in Algeria have entered into the tail end of construction, while it has just embarked on its Tuaspring Desalination project. And because of higher preparation costs for Tuaspring, net profit also declined 33.6%
YoY and 13.2% QoQ to S$12.6m.

However, we also note that reported net profit was boosted by several one-off items, including S$5.1m forex gain and S$13.2m equipment sale gain. For 9M11, revenue fell 25% to S$285.6m, meeting 48% of our FY11 estimate, while net profit slid 32% to S$33.9m, or 43% of full-year forecast.

Slow recognition of orders in China. Based on its last revealed order book of S$2.1b (as of end-Jun) and assuming that it did not add any new orders (it typically does not announce small-order wins), we estimate that the group should be sitting on an order book of just over S$2.0b. The bulk of it will be dominated by Tuaspring (S$750m), which it will effectively recognize over six quarters; O&M orders (S$940m at end-Jun), which extend out to 25 years; and the rest
probably from projects in China (S$310m).

However, management notes of likely slower recognition of revenue from China; this as it intends to proceed cautiously with its BOT projects in light of the more uncertain demand there now. While Hyflux still sees prospects in China, it concedes that growth will not be as robust.

Main focus now on Tuaspring. Coupled with the uncertain MENA situation, and the slow progress in India, the group will focus most of its energy on Tuaspring over the next few quarters and rightly so. Assuming that 90% of the project will be recognized over the next six quarters, Hyflux should be able to book EPC revenue of some S$112m per quarter; and based on a conservative 10% net margin, quarterly earnings should be around S$12m. Hence at the very minimum, Tuaspring should account for S$448m of revenue and S$48m of net profit next year.

Downgrade to HOLD. Given the poorer-than-expected 3Q results, we are slashing our FY11 estimates for revenue by 27% and earnings by 38%; we are also paring our FY12 estimates by 17% and 21% respectively, mainly to reflect the more muted prospects in China. Our fair value correspondingly drops to S$1.28 from S$1.81, now based on 15x FY12 PER.