Earnings visibility is equal, if not firmer than 2008. YTD, Hyflux and SGL have secured S$982m and RMB982m of new orders respectively. As at 1H11, Hyflux’s EPC backlog of S$1.6bn covers up to 1.4x FY12 sales. SGL’s record orderbook of RMB2.4bn covers up to 0.5x FY12 sales, though lower but remains healthy in view of its robust enquiry pipeline pointing to strong order wins in 2H11.

Low risk of cancellation; orders slowing only if further tightening in China chokes off green capex too. Risks of deferment or cancellation are low since 65% of Hyflux's orderbook is PUB-backed Tuaspring while SGL's are all municipal including a showcase project for China’s rural development. As for new wins, our industry checks indicated slowdown in industrial segment but not municipal contracts.

Both companies have some industrial exposure but their orderbooks are totally municipal. Hence, we have kept our base case orders intact for FY11 and FY12. In a recession scenario, however, we assumed a 20% reduction in order win assumptions for FY12.

Water stocks close to –1SD; valuations and growth to limit downside. Except for O&M related SCI, Hyflux and SGL have fallen c.12% m-o-m, in line with STI. As we are optimistic that the sector’s earnings would be resilient over the next 6-9 months and historically, stocks had held up well at –1SD in normal economic cycle, we see limited downside for Hyflux at current level (–1SD: 17x FY12 PE).

SGL, on the other hand, could see just a bit more pressure to –1SD of 9.5x (S$0.55) if market sentiment remains poor. If pricing in recession i.e. –1SD PE for all and 20% lower order win, TP for Hyflux will be S$2.02, SGL S$0.49.