United Engineers, Singapore's biggest builder by market value, plans to reduce its dependence on the volatile property and construction industries by investing in the wastewater treatment business in China.
The Singapore construction and engineering firm will likely announce an acquisition -- its first wastewater plant -- by the end of this year, depending on the speed of negotiations, United Engineers Ltd. Chief Executive Jackson Yap told Reuters.
The demand in China is really in wastewater for the next couple of years, Yap said in an interview on Friday, adding that the firm also hopes to expand this business into Indonesia, Vietnam and the Middle East.
This part of the world is growing very fast, probably too fast, at the expense of the environment.
United Engineers, which generates most of its revenues from building apartments, hopes the takeover will help the firm to kickstart its wastewater business as it looks to reduce its dependence on the cyclical property industry.
Yap said it was too early to talk about the amount it plans to invest in China, but added that the firm could spend up to US$50 million in the initial phase of expansion over the next few years.
If we go for a greenfield project and start from scratch, that's for the long haul. It will take at least a year to build it, and your money is tied up. Strategy-wise, we still prefer to buy existing facilities in the short term.
Yap said the wastewater treatment plants, which have a lifespan of about 20 to 25 years, must generate an internal rate of return -- an indicator that measures the viability of a project -- of more than 12 percent, the upper end of the 10-12 percent range that he said companies tend to achieve in China.
Over the last two years, United Engineers has clinched six build-operate-transfer, or BOT, contracts in China to provide medical waste-disposal services in the Chinese provinces of Henan, Hunan, Shandong and Liaoning.
Profit margins in water treatment would be double those in construction, Yap said, adding that profit margins from the construction industry could reach 20-25 percent.
United Engineers, which was founded in 1912 from the merger of two British engineering firms, has a stock market value of US$557 million. Its closest construction rival United Fiber Systems is valued at $456 million.
Asked whether the firm plans to sell its Singapore head office, UE Square, amid a boom in property prices in Singapore, Yap said the firm has no impetus to sell.
We've been approached by many people, but the prices are all the same, nobody has really given us an outstanding number.
The other possible avenue is for us to do our own REIT (real estate investment trust), and put this building as the cornerstone for it, he said. We could also sell to a REIT. It's something we've been studying and looking at for the last couple of years.
Last December, the firm sold an industrial building, UE Tech Park, to MacarthurCook Industrial Real Estate Investment Trust for S$115 million ($76 million).
UE Square, which has 316,344 square feet of office space and 78,737 sq ft of retail space, was worth about US$450 million according to a valuation at the end of last year, Yap said.
Shares of United Engineers have risen about 55 percent this year, outperforming the 19.3 percent gain in Singapore's benchmark Straits Times index.