Citic Envirotech - OCBC Investment 2015-10-30: QoQ improvement in Sep quarter

Citic Envirotech - OCBC Investment 2015-10-30: QoQ improvement in Sep quarter CITIC ENVIROTECH LTD U19.SI 

Citic Envirotech: QoQ improvement in Sep quarter 

 Underlying earnings +42% QoQ 
 Order flows are back 
 No change to FY16 forecast 

QoQ improvement in Sep quarter 

  • Citic Envirotech Ltd (CEL) saw its Sep quarter revenue tumble 32.7% YoY to S$70.9m, mainly due to weaker Engineering revenue (down 62.9% versus a year ago); but mitigated by the 28.9% jump in treatment revenue and 96.3% surge in membrane sales. 
  • NPATMI declined 16.5% to S$13.9m. But on a sequential basis, revenue was down just 15.5% QoQ while NPATMI actually jumped 318.8% (underlying profit grew 41.6%). 
  • As the company will be changing its year-end from end Mar to end Dec from next year onwards, this FY will consist of just three quarters. For the two quarters, revenue of S$154.7m fell 9.9%, while NPATMI dropped 56.0% to S$17.2m; but underlying net profit (before minority interest) slipped 5.3% to S$25.2m, after adjusting for a one-off S$6.5m fee relating to its general offer in Apr 2015, as well as a S$14.2m one-off gain on the disposal of AFS in the previous year-ago period. 

Starting to get VAT rebate 

  • Also included in the results was the rebate of S$1.9m; this is to offset the recent 17% VAT that the China government imposed on water treatment income, and should allay earlier fears that the VAT would drastically affect the profitability of the company. 
  • Recall that management previously highlighted that the effective tax is less than 5% on tariffs for municipal treatment after rebates; there is no impact on industrial projects as the VAT is directly passed on to the end users. 

One Belt, One Road prospects 

  • Going forward, management continues to remain upbeat about its prospects in China, citing stricter government policies on waste water discharge; the recent award of a RMB400m EPC project in Gansu Province is confirmation that the orders are starting to flow once again. 
  • Management also highlighted the opportunity for CEL to participate in the water infrastructure development projects along the One Belt, One Road trade routes; this after CITIC Limited announced in Jun 2015 that it would invest over RMB700b to support the initiative. 

Maintain HOLD with unchanged S$1.40 fair value 

  • We have adjusted our FY15 estimates to reflect the shortened FY; but have left our FY16 estimates largely unchanged. As such, our fair value (based on 23x FY16F EPS) remains at S$1.40. 
  • Maintain HOLD. 

Carey Wong OCBC Securities | 2015-10-30
OCBC Securities Analyst Report HOLD Maintain HOLD 1.40 Same 1.40