CITIC Envirotech (CEL SP) - UOB Kay Hian 2017-07-06: Share Price At Attractive Levels; On Track To Delivering Record Results

CITIC Envirotech (CEL SP) - UOB Kay Hian 2017-07-06: Share Price At Attractive Levels; On Track To Delivering Record Results CITIC ENVIROTECH LTD. CEE.SI

CITIC Envirotech (CEL SP) - Share Price At Attractive Levels; On Track To Delivering Record Results

  • CITIC Envirotech’s share price has dipped to attractive levels, opening up an opportunity for investors to acquire shares close to the strategic shareholder’s entry levels. The company is on track to delivering its ambitious internal target of securing S$1b in new project wins. 
  • Also, with shareholders approving a share purchase mandate in May 17, share buybacks could support share price. 
  • Maintain BUY and DCF-based target price of S$1.10.



WHAT’S NEW


Share-price dip presents a buying opportunity. 

  • With CITIC Envirotech’s (CEL) recent share price approaching the lowest this year, this presents an opportunity for investors looking to position in an industry that is projected to account for more than Rmb900b in major water project investments by end-17 with a 9% annual growth between 2017 and 2021, according to BMI Research. 
  • Furthermore, with its special membrane bioreactor (MBR) technology which is capable of: 
    1. shorter retention times, 
    2. lower land requirements, and 
    3. higher water quality output, 
  • investors will be buying into the best in class with superior technology know-how protected by a suite of intellectual property rights. 
  • CEL’s current share price allows investors to acquire shares below the CITIC Group’s acquisition price of S$0.825 (adjusted) and close to China Reform Fund’s (CRF) entry level of S$0.725. 
  • CITIC Group and the CRF are both Chinese state-owned investment companies and collectively own more than 78% of CEL.

On track to hit S$1b new project wins target and deliver excellent results. 

  • Looking at its current progress, we are confident that CEL will meet or even exceed the internal target of securing S$1b in new project wins for 2018 as the Chinese government aims to meet targets set under the Water Pollution Prevention and Control Action Plan. The plan states that by 2020, 70% of water in China’s seven major watersheds and 93% of the drinking water sources in prefecture-level cities are to meet acceptable standards, which should translate to an abundance of business opportunities for CEL. 
  • With S$1b in new project wins, we believe CEL is on track for a record year.

Share buyback mandate approved at the most recent EGM. 

  • CEL’s shareholders have recently approved a share purchase mandate in May 17. The last time CEL held an EGM to approve a share purchase mandate was in Dec 16, and subsequently from 23 Jan 17 to 31 Jan 17, it bought back in excess of 4m outstanding shares at S$0.76-0.80. 
  • Given the recent approval of the share purchase mandate, it would not surprise us if CEL were to buy back shares in the near future.

Possible cheaper financing options. 

  • Having the CITIC Group as a major shareholder could translate into more favourable financing terms in the future. We estimate CEL’s current blended cost of financing to be 4-5%.


EARNINGS REVISION/RISK

  • No change to our core earnings estimates.
  • Key risks include a delay in project construction and a weakening of the renminbi.


VALUATION/RECOMMENDATION

  • Maintain BUY and DCF-based target price of S$1.10.


SHARE PRICE CATALYST

  • Further contract wins.
  • Share buybacks from CEL.




Edison Chen UOB Kay Hian | Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-06
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.100 Same 1.100



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