China Everbright Water - DBS Vickers 2015-09-16: More projects to come.


More projects to come 

  • Dalian Dongda Water with good growth potential. 
  • FY15 capacity target reached but continue to explore more opportunities. 
  • Maintain BUY with TP of S$0.80. 

Good growth potential in projects of Dalian Dongda Water. 

  • Following the acquisition of Dalian Dongda Water, China Everbright Water (CEW) added 1.125m tons of treatment capacity to reach 4.6m tons per day. In addition to an extension of geographical reach into Liaoning and Inner Mongolia, the transaction also offers good growth potential. With an utilization rate of c.74% and an average tariff of c.Rmb0.7-0.8 per ton, CEW will extend the existing pipeline network and negotiate for tariff hike with local governments. 
  • Upgrading of the existing grade 1B plants (accounting for c.60% of Dalian Dongda Water’s projects) can also drive growth. 
  • In addition, as most of the plants are located in the major cities of Liaoning which have the highest income within the province, further plant expansion will be required as population grows. 

Continue to search for new projects. 

  • Although CEW has already reached its capacity target for this year after the transaction, it will continue to look for new projects through M&A and securing from local government. In fact, after a transitional period in 1H, we should see more business development in the coming 12 months. 
  • We believe CEW’s long term target of reaching 10m tons by 2020 should be achievable. 

Maintain BUY. 

  • We have lowered our assumption in interest expense as net debt-equity ratio is slightly better than expected. FY16 earnings projection is fine-tuned. 
  • We maintain our BUY rating. Our TP of S$0.80 is based on 30x FY16 adjusted PE where earnings are adjusted to reflect only operational projects. We have lowered our target adjusted PE to reflect the fragile market sentiment.

Patricia YEUNG | Tony WU CFA | http://www.dbsvickers.com/ DBS Securities 2015-09-16
BUY Maintain BUY 0.80 Down 1.05