China Everbright Water Limited - Phillip Securities 2017-08-10: Ongoing Turnaround

China Everbright Water Limited - Phillip Securities 2017-08-10: Ongoing Turnaround CHINA EVERBRIGHT WATER LIMITED U9E.SI

China Everbright Water Limited - Ongoing Turnaround

  • Revenue and net profit were in line with our expectations.
  • CEWL currently operates 66 water project with another 8 more in the pipeline.
  • We revised up our FY17 EPS forecast from 3.4 SG cents to 3.6 SG cents since CEWL is expected to commence more projects. 
  • We upgrade our call from ACCUMULATE to BUY with a higher TP of S$0.61 (previous S$0.57), based on a higher average 12-month forward PER of 17.1x (previous 16.7x), implying a potential return of 25.8% from the closing price.



The Positives 


+ Expanding designed waste water treatment (WWT) capacity with water tariff hike: 

  • There were seven projects which commenced operation in 1H17. It increased daily designed WWT capacity to c.5.0mn m 3 . The increment was due mainly to upgrading and expansion of some existing projects. 
  • There were 5 projects which received tariff hike ranging from 19% to 86%. Besides, upon the completion of another four upgrading projects, the percentage of projects complying with national 1GA discharge standard will rise from current 78% to 88% moving forward. The water tariffs for 1GA standard average from Rmb1.1 to 1.6/tonne (1GB standard: Rmb0.8 to Rmb1.0/tonne).

+ Abundant funding support from various sources: 

  • In Jul-17, the Group raised Rmb1bn through the issuance of RMB-denominated corporate bonds (“Panda bonds”) with 4.55% coupon and 5 years maturity, of which Rmb600mn of which was to repay existing debts, and the remaining would be funded ongoing upgrading and expansion of projects. 
  • The Group’s average borrowing rose modestly from 4.04% to 4.2%. 
  • Previously, management mentioned it was setting up a water affair fund targeting to raise Rmb10bn to invest in water-related businesses. The process is still ongoing.


The Negatives 


- Still facing pressures from collecting receivables: 

  • As of Jun-17, financial receivables was HK$1bn. The 12.5% YoY growth of receivables was due to new projects as well as slow progress in collecting water tariff, especially from Dongda’s projects. 
  • CEWL has 14 projects in Liaoning Province. The situation could remain challenging as Liaoning economy remained weak (1H17 GDP: -19.6% YoY). Thus, CEWL could continue to face deferred payback of receivables in the near term due to the local weak macro environment.


Outlook 

  • We believe CEWL to register a stable growth on the back of water tariff hikes and capacity expansion. CEWL currently operates 66 water project with another 8 more in the pipeline.
  • There are ongoing R&D efforts on WWT new processes such as AAO-MBR (Anaerobic Anoxic-Oxic-Membrane Bio-Reactor). It is meant to be a more cost effective solution in the future.


Investment Action

  • We revise up our FY17 EPS forecast from 3.4 SG cents to 3.6 SG cents since CEWL is expected to commence more projects. 
  • We upgrade our call from ACCUMULATE to BUY with a higher TP of S$0.61 (previous S$0.57), based on a higher average 12-month forward PER of 17.1x (previous 16.7x), implying a potential return of 25.8% from the closing price.




Chen Guangzhi Phillip Securities | http://www.poems.com.sg/ 2017-08-10
Phillip Securities SGX Stock Analyst Report BUY Upgrade ACCUMULATE 0.61 Up 0.570



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