CITIC Envirotech Ltd - DBS Research 2015-10-29: Paving way for a rebound Paving way for a rebound

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CITIC ENVIROTECH LTD U19.SI 

CITIC Envirotech Ltd - Paving way for a rebound 

Paving way for a rebound 

• Results dragged by slow down in EPC revenue. 
• Chengdu Xingrong to boost EPC work in 4Q2015. 
• Project flow to accelerate after internal restructuring. 
• Maintain BUY with TP of S$1.60 .

Results affected by lumpy EPC operation. 

• CITIC Envirotech (CEL SP) reported a 17%/54% drop in net profit for 3M/6M ended Sept 2015. 
• Stripping out one-off items (such as disposal gain of Memstar Technology and fees related to the general offer), net profit declined 17%/5% for the corresponding periods. Drop in 3rd party EPC operation was the major reason for the disappointing results. 
• However, there were a few positive points to note. First, thanks to improving utilization of operating plants, treatment service increased 29%/50%, indicating solid recurring revenue. Second, orders from Beijing Drainage and Chengdu Xingrong projects have boosted membrane sales growth to 96%/57%. 

Expect a rebound in coming quarters. 

• Despite the disappointing quarterly results, we expect a rebound in the coming quarters. 
• First, Chengdu Xingrong project has already started and the corresponding EPC revenue should kick in. Although the first block of EPC work (worth S$300m) would likely take at least two years to complete, coupled with the recent project wins (such as a MBR treatment plant in Gansu with total investment of Rmb400m), this should boost EPC revenue. 
• Second, since taken over by CITIC Group, there have been a lot of internal restructuring and integration which have slowed down CEL’s business development. However, the process is closed to complete and acceleration of deal flow should be expected. 
• In particular, CITIC Group has announced to invest Rmb700bn to support “One Belt One Road” policy. As CITIC Group’s flagship water treatment platform, CEL will poise to benefit from these business opportunities. 

Maintain BUY. 

• We remain optimistic about CEL’s outlook because of its leading market position in membrane and the excellent business opportunities from its partnership with CITIC Group. To reflect the above results and adjust for the change of year end (from Mar to Dec), we have cut our FY15 estimates by 49%. FY16 earnings projection is also lowered by 15%. 
• TP is adjusted down to S$1.60, based on 15x FY16 3rd party EPC earnings (adjusted to strip out construction revenue of BOT projects), 40x for treatment services and 18x for membrane sales.

Patricia YEUNG DBS Vickers | http://www.dbsvickers.com/ 2015-10-29

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.60 Down 1.70