CHINA EVERBRIGHT WATER LIMITED
U9E.SI
Timely acquisition of 1.1mt/d
- China Everbright Water (CEWL) recently announced the proposed acquisition of Dalian Dongda Water (DDW) via equity transfer at Rmb800m, translating into FY14 P/E of 20.4x which we think is fair. This acquisition not only strengthens CEWL’s asset portfolio by 1.125 mt/d of municipal wastewater treatment plants to over 4.6mt/d, but also expands their geographical coverage into Liaoning and Inner Mongolia.
- We keep our numbers unchanged as this is within our capex assumptions, and we see more meaningful earnings contribution in FY16 onwards. Our DCF-based target price of S$1.13 (WACC: 6%) is intact.
- Overall, we view this as a stride towards CEWL’s target of 10mt/d by 2020, and reiterate an Add rating.
What Happened
- On 28 Aug 15, CEWL announced the proposed acquisition of the entire equity interest in Dalian Dongda Water (DDW) from Dongda Group and Liu Yubao, which will be completed in three tranches.
- The first two tranches totalling 90% interest will involve a consideration of Rmb800m (vs. independent valuation of Rmb897m), while the remainder 10% interest will be transferred over a three-year period with a contingent payment of up to Rmb203m. DDW has 17 municipal waste water treatment projects and offers water environment improvement services.
What We Think
- Besides the TOT project win of 0.04mt/d in Ju County in 1H15 and BOT expansion project win of 0.05mt/d in Jinan earlier this Aug, this is CEWL’s first significant M&A since the RTO of HanKore. We expect more developments to come as management guided that they are in talks for c.50 projects/deals.
- Based on DDW’s FY14 net profit of Rmb39.1m (including their acquisition of Panjin Municipal Waste Water Treatment in Feb 15), the purchase price of Rmb800m implied a FY14 P/E of c.20x. Assuming the completion of the proposed acquisition on 1 Jan 14, FY14 EPS for CEWL would have increased from HK$0.15 to HK$0.17.
- This acquisition will be funded via internal resources/external borrowings/combination, and has potential to improve CEWL’s ROE. Net gearing is expected to rise to c.40% from 10.2% as of 2Q15.
What You Should Do
- We think the share price will react positively to this proposed acquisition as it should alleviate investors’ concerns about the slow progress in CEWL’s expansion.
- Our Add recommendation and target price of S$1.13 remain intact.
NGOH Yi Sin | Roy CHEN | Keith LI | http://research.itradecimb.com/ CIMB Securities 2015-08-31
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