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DBS Vickers 2015-08-03: China Everbright Water - 2Q15 Results. Awaiting M&A. Maintain BUY.

Awaiting M&A 


  • 1HFY15 results in line 
  • Low net debt to equity ratio to fuel growth 
  • Uptrend in operating capacity and water tariff 
  • Maintain BUY with TP of S$1.05 


Highlights 


Results in line. 

  • China Everbright Water (CEW) reported a 12% and 27% growth in 2QFY15 and 1HFY15 net profit to HK$110.4m and HK$211.3m respectively. 
  • Growth was attributable to the higher treatment volume and construction revenue as a result from the expansion and upgrading of several projects. 
  • During the period, CEW completed construction of three waste water treatment projects (total capacity: >80,000 tons per day) and secured one TOT waste water treatment project (40,000 tons per day). 
  • Net debtequity ratio was only 10%. 


Our View 


Steady increase in operating capacity. 

  • Currently, there are two waste water treatment projects (total capacity of 115K tons per day) and one reusable project (capacity of 4,800 tons per day) under construction. These projects will be completed in 2HFY15. 
  • Coupled with the above three newly completed projects, the operating capacity will reach 2.7m tons, up 8%. 

Increase water tariff to offset VAT impact. 

  • During 1HFY16, three projects were able to increase water tariffs. In particular, the hike in Xianyang project was very high at 39% due to the upgrade. 
  • In addition, management has already initiated communication with the local governments with regards to a hike in water tariff to compensate for the reduction in VAT refund from 100% to 70%. 
  • Coupled with more project upgrade for other plants, the uptrend in treatment fee will continue. 

Recommendation 


Maintain BUY. 

  • CEW’s target of becoming a top three player in China in 3-5 years remains intact. 
  • This will be achieved through M&A, which is a good share price catalyst. 
  • We maintain our BUY rating with TP of S$1.05, based on 46x FY16 adjusted PE where earnings are adjusted to reflect only operational projects. 
  • Target adjusted PE of 46x is at - 1SD from the historical average of 50x since the reverse takeover of HanKore in 2014. 


Analyst: Patricia YEUNG

Source: http://www.dbsvickers.com/


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