CITIC ENVIROTECH (CEL SP) - UOB Kay Hian 2017-07-26: Expecting A Fantastic 2H17

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CITIC ENVIROTECH LTD. CEE.SI

CITIC ENVIROTECH (CEL SP) - Expecting A Fantastic 2H17

• Citic Envirotech (CEL)’s 2Q17 results were largely in line with our expectations although revenue dipped 4% yoy due to the timing in revenue recognition. 
• CEL guided demand remains healthy and expansion is on track. We expect a fantastic 2H17 as revenue recognition from new projects begin amid sustained orderbook wins. 
• CEL is on track to meeting its new-contract wins target of S$1b for 2017. 
• Maintain BUY and DCF-based target price of S$1.10.

RESULTS

2Q17 results in line, flat revenue due to timing in revenue recognition. 

• CITIC Envirotech’s (CEL) earnings were largely in line with expectations although revenue dipped 4% yoy, attributed to a delay in project revenue recognition. 
• We expect revenue to pick up in 2H17. 2Q17 membrane sales came in at US$9m (2Q16: US$16.9m due to the completion of a major project resulting in a high base). 
• Treatment revenue was up 4.9% yoy to US$46.8m while engineering revenue was flat at US$78.6m.

STOCK IMPACT

Chinese SOE reform could spell more predictable dividends. 

• Management clarified its intention to follow Chinese state-owned enterprise (SOE) reforms on dividend payouts. The Chinese government now requires SOEs to return 30% of their earnings to the state in order to lower capital misallocation, unless the SOE can justify the use of the capital for other purposes. As such, we increase our dividend payout assumption for CEL to 30%.

CEL guided demand remains strong and expansion is on track. 

• Driven by the Chinese government’s commitment towards environmental conservation, demand for industrial wastewater treatment remains strong. We expect CEL to even possibly exceed its target of S$1b in new-contract wins for 2017.

EARNINGS REVISION/RISK

• No change to earnings forecasts. 
• As CEL’s 2Q17 results were in line with our expectations, we maintain our earnings forecasts for 2017 and 2018.

VALUATION/RECOMMENDATION

• Maintain BUY and S$1.10 DCF-based target price on the back of: 
  1. CEL’s advanced membrane technology, 
  2. China’s continued focus and efforts towards combating environmental pollution, and 
  3. CEL’s new order wins.

Edison Chen UOB Kay Hian | Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-26

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.100 Same 1.100