China Everbright Water - RHB Invest 2015-11-25: Healthy Balance Sheet To Fulfill Large Aspirations

China Everbright Water - RHB Invest 2015-11-25: Healthy Balance Sheet To Fulfill Large Aspirations CHINA EVERBRIGHT WATER LIMITED U9E.SI 

China Everbright Water (CEWL SP) - Healthy Balance Sheet To Fulfill Large Aspirations 

  • We resume coverage on China Everbright Water (CEWL) with a BUY and SGD0.81 TP (17% upside). 
  • Following the reverse takeover of HanKore, we believe the company is well-positioned to take on more projects given its increased accessibility to government networks and improved financial support due to its SOE background. 
  • We expect EPS to grow at a 14.4% CAGR over FY14-17F, driven by capacity growth. 

 Full steam ahead after reverse takeover (RTO). 

  • Following the RTO of HanKore Environment Tech Group (HanKore), the enlarged group, CEWL, is now a wholly-owned subsidiary of China Everbright International (257 HK, NEUTRAL, TP: HKD11.40). 
  • Through our channel checks, we understand that it has been increasingly challenging for foreign-owned firms to secure new water projects in China. 
  • We believe CEWL’s state-own enterprise (SOE) background will now provide it with better access to new projects and lower cost of funding. 

 Upside from capacity growth. 

  • CEWL aims to be one of the leading waste water companies in China, with 10m tonnes of daily contracted treatment capacity in the next 3-5 years. Currently, the company has secured total design capacity of 4.6m tonnes/day. This translates to an average annual increment of 1.1m-1.8m tonnes/day. 
  • Similar to other large players, we expect the bulk of capacity expansion to be driven by acquisitions. 
  • However, due to increased competitiveness in the acquisitions market, management recently guided for a reduction in its IRR hurdle rate to 8% from 10%. 

 Strong balance sheet. 

  • CEWL has one of the strongest balance sheets in the industry, with net gearing as low as 0.18x as at Dec 2014. This gives ample room for the company to gear up for new project investments and reduces the risk of dilution from new share placements. 

 We resume coverage on CEWL with a BUY 

  • and a DCF-derived TP of SGD0.81, which implies 23x FY16F P/E. 
  • While this is slightly higher than the peer average of 20x FY16F P/E, we believe this valuation is justified as its strong balance sheet allows the company to take on new projects effortlessly as the opportunity arises. 

 Key Risks: 

  • Ultimately the price of water is controlled by the Government which underlined the need to raise water prices. However, any severe financial crisis may put the environmental issues on the back burner.

Juliana Cai RHB Research | http://www.rhbinvest.com.sg/ 2015-11-25
RHB Research SGX Stock Analyst Report BUY Maintain BUY 0.81 Same 0.81