China Everbright Water - RHB Invest 2015-12-02: Waters Run Deep

China Everbright Water - RHB Invest 2015-12-02: Waters Run Deep CHINA EVERBRIGHT WATER LIMITED U9E.SI 

China Everbright Water (CEWL SP) - Still Waters Run Deep 

  • We expect CEWL to ramp-up its operational capacity and pursue new capacity acquisitions in 2016, as HanKore and CEI have been inactive in the water space for some time. 
  • Maintain BUY with a SGD0.81 TP (from SGD1.19, 19% upside) as we believe the reverse takeover of HanKore and the spinning off of CEI’s waste water arm allows the new enlarged firm to focus more on growing capacity going into next year. 

 State-owned enterprise (SOE) parentage changes the game. 

  • Both HanKore Environment Tech Group Ltd (HanKore) and China Everbright International (CEI) have been less active in the water space for some time. 
  • Since the reverse takeover of HanKore by CEI, the enlarged group, China Everbright Water (CEWL), has now been more aggressive in pursuing capacity growth. It targets to reach 10m tonnes/day of total design capacity in 3-5 years time. This translates to an average of 1.1m- 1.8m tonnes/day of expansion pa. 
  • We believe the SOE backing gives CEWL greater access to new projects and potential targets. In 2015, it completed another mega acquisition, Dalian Dongda Water Co (Dongda Water), which has > 1m tonnes/day of capacity. 

 Strong balance sheet. 

  • CEWL has one of the strongest balance sheets in the water space; as at end-2014, the company’s net gearing was as low as 0.18x. With its new SOE parentage, it can also secure new loans at much lower costs in China or receive shareholder loans at attractive rates. We expect finance costs to drop to 5% in 2016 vis-à-vis 7.5% during the HanKore days. 

 Potential dividend payout. 

  • On 23 Oct, CEWL proposed a share premium reduction exercise to offset the impairment loss of HKD4.7bn with the share premium account credit. While there was no net asset value impact on the company, the eradication of these accumulated losses would allow for CEWL to make future dividend payments. 
  • Since CEI does give dividends, we think it may be possible for the company to make dividend payouts possible in the near future. 

 Deeper pockets to fund growth, maintain BUY with a SGD0.81 TP. 

  • The reverse takeover of HanKore has advanced the game plan for CEWL. 
  • We believe the company now has the financial ability to fund its growth aspirations. 
  • Maintain BUY with DCF-derived TP of SGD0.81.

Juliana Cai RHB Research | http://www.rhbinvest.com.sg/ 2015-12-02
RHB Research SGX Stock Analyst Report BUY Maintain BUY 0.81 Same 0.81