CHINA EVERBRIGHT WATER LIMITED
U9E.SI
China Everbright Water - Bright future for China water sector
- On track to becoming top-tier market player with 10mt/d by 2020.
- SOE-backed CEWL is poised to gain access to new projects through industry consolidation and release of water assets by municipal governments.
- Further stimulus from China’s 13th 5-year plan and Water 10 Plan.
- VAT rebate reduction (wef Jul 15) will adversely affect operation income, but can be mitigated through higher water tariffs.
- Maintain Add with TP of S$0.94. Strong project pipeline to sustain earnings growth.
■ On track to becoming top-tier water player with 10mt/d by 2020
- Since the RTO of HanKore in Dec 14, CEWL has proven it is on track to achieving its target of 10mt/d of water assets by 2020, via a sizeable acquisition of Dalian Dongda Water (1.125mt/d) and other smaller project wins (mix of BOT/ TOT) in 2015. This increases its designed capacity from 3.4mt/d to 4.6mt/d, with further expansion to drive 3-year EPS growth of 22.7%.
- The market leader, Beijing Enterprises Water, currently owns 23mt/d of assets.
■ Highly-fragmented industry with increasing competition
- China’s water sector remains highly fragmented, with the top 10 municipal WWT players making up c.25% of market share. 50% of water assets are still owned by municipal governments.
- With the push towards greater PPPs and higher environmental standards, we see potential in CEWL with its SOE-backing to benefit from industry consolidation and release of water projects.
- A risk is intensifying competition among peers which may weigh on project IRRs (8-10% for municipal projects) and the bidding process.
■ Favourable industry policies: 13th 5-year Plan and Water 10 Plan
- In a consultation document for the 13th 5-year plan, we noted stricter requirements for water standards to be complied with by 2017.
- Should this be implemented in 2016, it will drive significant upgrading works as c.27% of combined capacity(1.26mt/d) have not met the highest Grade 1A standard. These, in turn should substantiate water tariff hikes, which we have already seen in some projects.
■ Effective Jul 15, VAT rebate reduced from 100% to 70%
- A negative surprise came from the State Administration of Taxation in China when it lowered the VAT rebate from 100% to 70% (based on 17% standard VAT rate), effective Jul 15.
- CEWL estimates that it would have a c.5% downward impact on its 2H15 net profit, which could be offset through negotiating for higher water tariffs.
■ Reiterate Add with strong project pipeline
- CEWL’s project pipeline remains strong, with 0.185mt/d of projects under construction and 0.650mt/d in preparation. The recently-proposed share premium reduction may pave the way for future dividends.
- FY15 forecast net gearing is c.41%, signifying leverage potential to improve ROE.
- Ties with China Everbright International (SOE) and IFC have also brought about more affordable financial resources to bring down overall financing costs.
- Maintain Add with a DCF-based target price of S$0.94 (WACC: 6%).
NGOH Yi Sin
CIMB Securities
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Roy CHEN
CIMB Securities
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Keith LI
CIMB Securities
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http://research.itradecimb.com/
2015-12-09
CIMB Securities
SGX Stock
Analyst Report
0.94
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0.94
