Maybank Kim Eng 2015-08-03: China Everbright Water CEWL - 2Q15 Results. More aggressive M&As needed. Maintain BUY.

More aggressive M&As needed 

  • 2Q15 net profit up 10% YoY, driven by HanKore consolidation. 
  • CEWL needs to become more aggressive in M&A going forward 
  • Cut EPS by 2-10% due to lower acquisition assumption. Maintain BUY with TP SGD1.06, at 30x FY15E PER. 

HanKore consolidation drove growth 

  • 2Q15 revenue grew 93% YoY to HKD510m and net profit rose 10% YoY to HKD110m. 
  • Since 2Q14 numbers did not consolidate HanKore’s financials as the RTO was only completed in 4Q14, a YoY comparison is not very meaningful. 
  • On QoQ basis, revenue and gross profit grew 17% and 4% respectively. GPM dropped 5.6ppt, which might be attributable to higher percentage of construction revenue. 
  • Net profit grew 10% QoQ thanks to lower finance cost. 

Big acquisitions needed 

  • 1H15 net profit only accounted for 39% of our full-year forecast. 
  • Management has set a minimum wastewater treatment capacity acquisition target of 1m tons. 
  • Big acquisitions are needed for the rest of the year to achieve that goal given CEWL has not done much M&A YTD. 
  • CEWL has completed the SGD113m share placement with IFC in April and obtained USD140m loan facilities from IFC last week. 
  • We believe it has a big enough war chest for expansion. Rich cash position and high expectation from Everbright Group could make CEWL more aggressive in M&A going forward. 
  • Maintain BUY on CEWL as we believe, with strong government background and robust balance sheet, CEWL is well positioned to benefit from industry consolidation. 
  • But as its acquisition YTD has fallen behind schedule, we cut our FY15 capacity acquisition assumption to 0.5m tons from 1m tons previously but keep our FY16/17 assumption at 1m tons each year. 
  • We also factored in lower financing cost thanks to IFC loan facilities. 
  • As such, EPS forecasts were cut 2-10% for the next three years and TP is adjusted to SGD1.06 from SGD1.17, still pegged to 30x FY15 PER.

Analyst: Wei Bin

Source: http://www.maybank-ke.com.sg/