OCBC Investment 2015-08-19: Citic Envirotech (CEL) - HOLD with new S$1.71 FV.

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Citic Envirotech: HOLD with new S$1.71 FV 

 FY15 year end now 31 Dec. 

 Upbeat on membrane sales. 

 More CNY devaluation is a risk.

Decent Jun quarter results 

• Citic Envirotech Ltd (CEL) recently reported its 2Q15 results (revising FY end from 31 Mar to 31 Dec) – with revenue climbing 26% YoY (+37% QoQ) to S$83.8m; this mainly driven by a sharp increase in treatment revenue to S$36.0m (+76% YoY). 
• Although reported net profit plunged by 85% YoY (-56% QoQ), we note that it was largely due to a one-off expense related to the offer by CKM (Cayman) Company of S$6.5m. Excluding this item as well as the large one-off gain of S$14.2m in the year-ago quarter, we estimate that core earnings would have come in around S$9.8m (+18% YoY and 30% QoQ). 
• Note that FY15 will be nine months and we have adjusted our numbers to reflect that. 

Still upbeat on overall industry, especially membrane sales 

• Going forward, CEL remains upbeat about its prospects in China, as the government has finally announced the Water Pollution Prevention Plan in Apr 2015, which includes a list of measures to tackle water pollution throughout the country. 
• In particular, CEL is positive about the greater need for membrane-based water treatment solutions for the treatment and recycling of water in China. It has already started to expand its membrane production capacity and should double its output to 10m m2 by early next year. In addition, CEL hopes to leverage on its Citic connection to expand its geographical reach in China. 

New VAT in place from 1 Jul 2015 

• However, we understand that water treatment companies in China would be subject to a 17% VAT from 1 Jul 2015 onwards, which will impact both EPC and treatment income. CEL, like many other water treatment companies, is in talks with the municipal governments to either get a rebate on this tax or improved tariffs to mitigate the impact. 
• For now, CEL expects to feel a potential 5-7% impact on bottom-line from 2H15 onwards. 

Maintain HOLD with S$1.71 fair value 

• Another risk is the CNY devaluation, but management is currently looking into the issue and may start to use hedges to mitigate the impact. 
• While still maintaining our 28x FY16F EPS, our revised fair value dips from S$1.78 to S$1.71; maintain HOLD. 

Carey Wong | http://www.ocbcresearch.com/ OCBC Investment Research 2015-08-19

HOLD Maintain HOLD 1.71 Down 1.78