CIMB Research 2015-07-14: China Everbright Water - Targets 10M Tonnes/Day of Assets. Upgrade to ADD.

CEWL targets 10m tonnes/day of assets 

  • The recent stock market volatility presents a good time to re-look at the environmental stocks. 
  • CEWL (previously HanKore Environment) has transformed into the water treatment flagship of state-owned China Everbright Group after its RTO in Dec’14. 
  • Its advantages of strong political connections, large portfolio and competitive financing costs, coupled with substantial government support for the WWT sector, could provide ample growth opportunities for CEWL, hence our upgrade to Add rating
  • We expect acquisitions and upgrade works to drive 3-year EPS CAGR of 37.1%. 
  • We switch from residual income valuation to DCF for better comparison across the sector. 
  • Our target price is now S$1.15 (WACC: 6.0%). 
  • Potential catalysts are value-accretive M&A activities and strong project wins. 

Favourable govt policies 

  • Recent government initiatives not only call for stricter regulations of wastewater treatment, but also support tariff hikes and higher level of participation from the private sector in infrastructure projects. 
  • More projects released to the private investors by the municipals (50% of the municipal WWT capacities are still held by local governments) and higher demand for WWT services could help CEWL achieve its 10mt/d target from its existing 3.4mt/d designed capacity. 

Stronger, more aggressive 

  • Since the RTO of HanKore, CEWL is better poised to ride China’s water boom, especially with synergies with its parent CEI, SOE backing, and fresh capital injection from IFC. 
  • CEWL could have better access to new wastewater projects and cheaper financing (5.0-5.5% vs. 7.5-8.5% previously). 
  • Cash-rich plus low net gearing (FY14: 17.5%), CEWL is also gunning for a larger market share in a relatively fragmented market through both organic growth and acquisitions. 

Strong growth momentum drives target price upwards 

  • Once CEWL starts to execute and deliver annual capacity addition of 0.2-1mt/d, our FY15/16/17 EPS estimates will rise by 16%/33%/28% respectively. 
  • We upgrade our recommendation to Add, and our DCF-derived target price of S$1.15 implies a CY16 EV/EBITDA of 15.8x, which is comparable to Beijing Enterprises Water Group of 16.5x and reasonable given their robust growth potential. Risks include intensifying competition. 

(NGOH Yi Sin, Roy CHEN, Keith LI)

Source: http://research.itradecimb.com/