China Everbright Water - CIMB Research 2015-12-09: Bright future for China water sector

China Everbright Water - CIMB Research 2015-11-16: Project pipeline to sustain growth 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 | Roy CHEN CIMB Securities | Keith LI CIMB Securities | http://research.itradecimb.com/ 2015-12-09
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.94 Same 0.94