CITIC Envirotech - CIMB Research 2015-12-09: Long-term winner in China’s water sector

CITIC ENVIROTECH LTD U19.SI

CITIC Envirotech - Long-term winner in China’s water sector

CEL has the makings of a long-term winner in China’s water sector: SOE backing, financing power, considerable track record and technological edge in MBR.
As an industrial wastewater expert, CEL enjoys higher project IRRs of 12-15% which may come under threat in the midst of intensifying competition.
Upstream move into membrane production to benefit from China’s 13th 5-year plan.
Stronger financial capability for future expansion.

Maintain Add. Key risk is lumpy EPC revenue, and catalysts are faster-than-expected expansion and tariff hike.

We have identified the following attributes which CEL possesses to become a long-term winner in the China wastewater treatment (WWT) sector:
1. SOE status (CITIC is the major shareholder at 55%),
2. financing power as net gearing is estimated at c.46% by end-FY15,
3. track record with more than 10 years’ experience in membrane bioreactor (MBR) WWT projects, and
4. competitive edge in membrane-based technologies.

Given its strategic focus on industrial WWT, CEL typically enjoys a higher IRR of 12- 15%, vs. IRR of 8-10% for municipal WWT projects.
While we expect stiffer competition in the WWT landscape with an increasing number of SOEs being involved in the business (CEWL, SIIC etc.) to weigh on project IRRs, CEL continues to deliver project wins like its recent PPP project (worth c.Rmb549m) in Liaoyang City, China and MBR WWT plant (Rmb400m) in Gansu Province, China.

With over 10 years of experience in MBR projects (mix of EPC and O&M), CEL recently moved upstream into membrane production after acquiring Memstar in 2014.
Under China’s upcoming 13th 5-year plan, stricter water discharge standards may result in a higher penetration rate of membrane technology in WWT and increase water tariffs in the long run.
As membrane production capacity rises from its current 5m sqm/ year, we see growth potential for membrane sales in international markets outside China.

Since CITIC and KKR came on board as strategic investors, CEL’s borrowing costs have significantly tapered from 7.25% to below 4.7%.
Their recent issuance of perpetual securities (US$175m, 5.45%) could also lower overall finance costs from average cost of 8.4% previously. This optimized capital structure and estimated net gearing of c.46% as at end-FY15 gives room for further leverage to boost ROE.

CEL remains on track to achieve our capex assumptions of S$225m for FY15, and S$250m p.a. in FY16-17.
We maintain our Add rating with a DCF-based target price of S$1.80 (WACC: 6%).
Key risk is lumpy EPC revenue, while catalysts are faster-thanexpected acquisitions/project wins and tariff hikes.

NGOH Yi Sin CIMB Securities | Roy CHEN CIMB Securities | http://research.itradecimb.com/ 2015-12-09

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