China Everbright Water - CIMB Research 2015-11-16: Project pipeline to sustain growth

China Everbright Water - CIMB Research 2015-11-16: Project pipeline to sustain growth CHINA EVERBRIGHT WATER LIMITED U9E.SI 

China Everbright Water - Project pipeline to sustain growth 

  • 9M15 core EPS below expectations at 70%/69% of our/consensus FY15 forecasts, due to higher-than-expected tax and finance expenses. 
  • Lower 3Q15 EBITDA margin of 40% (3Q14: 49%) due to higher mix of construction income. Estimated net gearing of 41% still allows for leverage and ROE expansion. 
  • Successful negotiations for tariff hike and continual upgrading projects lift our assumed water tariffs marginally upwards. 
  • Proposed share premium reduction to allow possible dividend payments. 
  • Maintain Add with a lower TP of S$0.94, based on DCF valuation (WACC: 6%). 

■ 3Q15 topline grew 63% yoy, driven by construction activities 

  • 3Q15 revenue rose 63% yoy, due to expansion and upgrading of water treatment plants which led to higher construction revenue (3Q14: no construction revenue). At 71% of our FY15 estimates, we consider 9M15 income to be in line as projects which have recently completed construction will commence operation and contribute to operation services income. 
  • Completed acquisition of Dongda Water (FY14 operating income: HK$283m, net profit: HK$47m) will also contribute 2 months’ earnings to CEWL in 4Q15. 

■ 9M15 core EPS fell 3.9% yoy 

  • Due to the higher mix of construction revenue, gross margin for 3Q15 dipped to 47% (3Q14: 52%, 2Q15: 44%). Interest expenses for 3Q15 were reduced by 41% yoy, thanks to the refinancing of high interest rate loans. 
  • Though 9M15 core net profit rose 26.7% yoy, core EPS fell 3.9% due to the enlarged share base. 
  • After including the payment and loan made for Dalian acquisition, CEWL’s estimated net gearing will increase to c.41% by end-15, vs. 3Q15’s 24.5%. 

■ Marginal upward adjustment for water tariffs 

  • CEWL has embarked on a series of negotiations for higher water tariffs (see Figure 2), to mitigate the VAT implementation (effective Jul 15). Given this, and the upgrading of projects (from existing National Grade 1B/2 to 1A) which will allow for higher tariffs, we also marginally lift our average tariff growth rates assumptions from 4.6% to 5.1% pa, starting with an average tariff rate of c.Rmb1/ton for FY15. 

■ Share premium reduction – potential dividends? 

  • In Oct 15, CEWL proposed to reduce its share premium to offset against accumulated losses, which include impairment loss of HK$4.7bn from the RTO of Hankore. 
  • While this transaction will take place in the accounts of the holding company, and not affect CEWL’s financials on the group level, this could allow for future dividend payments should there be retained profits. 

■ Maintain Add, with a lower DCF-based target price of S$0.94 

  • CEWL remains committed to becoming a leading water company in the PRC and achieve 10mt/d of designed capacity by 2020 (currently about 4.6mt/d). 
  • While we think that CEWL will be able to increase its designed capacity by 1mt/d pa, we revise our earnings estimates slightly downwards to reflect a more subdued construction pace, different mix of acquisitions/project wins, higher depreciation.

NGOH Yi Sin CIMB Securities | Roy CHEN CIMB Securities | Keith LI CIMB Securities | http://research.itradecimb.com/ 2015-11-16
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.94 Down 1.13