ISDN Holdings has announced that two of its mini hydropower plants in Indonesia have finally commenced commercial operations.

However, with a darker manufacturing outlook in China, where the company is more heavily exposed, CGS-CIMB analyst William Tng has downgraded his call from “add” to “reduce”, along with a lower target price of 37 cents, down from 61 cents previously.

On June 16, ISDN announced that the two plants, with a capacity of 10mw and 4.6mw respectively, can make “meaningful” contributions to its earnings.

However, in his June 27 note, Tng points out that China, which accounts for 65% of ISDN’s revenue for FY2022, will likely remain weak.

For one, China’s purchasing managers’ index for manufacturing, a key indicator of activity in this sector, has stayed below 50 points for Jan to May. According to this index, an expansion in activities will be indicated by more than 50 points. If the index is below 50 points, it indicates contraction instead.

As such, Tng estimates that ISDN’s coming report of its 1HFY2023 will be weaker versus the same period last year.

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Meanwhile, ISDN, led by managing director Teo Cher Koon, intends to further expand the mini-hydropower business in Indonesia.

Tng believes that current levels, the market has priced in the commercialisation of three of ISDN’s hydro plants. However, earnings outlook is weakening due to slowing GDP growth in China, the analyst says.

Tng has cut his FY2023 to FY2025 earnings forecast by 41.5-44.9%. His new target price of 37 cents is based on 9.5x P/E (10-year average), versus 8.9x P/E previously, which is a 5-year average.

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“Upside risks include higher-than-expected net profit contribution from its hydropower business segment and a faster pace of economic growth as China tries to re-stimulate its economy,” says Tng.

“De-rating catalysts include the emergence of new Covid-19 strains which could bring back lockdowns, weak customer demand as the global economy slows, and the possibility of bad debts as economic conditions worsen,” he adds.

ISDN shares closed at 52 cents on June 27, up 0.98% for the day.

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