CHINA EVERBRIGHT WATER LIMITED
U9E.SI
China Everbright Water - CEWL targets over 20% more assets in FY16
- CEWL reported FY15 core EPS of 15.8 HK cts (+6.3% yoy), in line with our forecast at 102%, but below consensus at 93%.
- Positive industry outlook with financial strength to support CEWL’s expansion plans.
- CEWL remains on track to achieve 10mt/d by 2020 and higher water tariffs.
- Undemanding valuation at below 1x P/BV, 12.2x FY17 P/E; maintain Add.
■ Construction the main driver of FY15 top-line growth
- CEWL’s FY15 revenue of HK$1.8bn was 73% higher than FY14 revenue of HK$1.1bn, largely due to a 294% rise in construction income on the back of several BOT upgrading and expansion projects, vs a 20.4% yoy increase in operating income.
- Acquisition of Dalian Dongda in 2015 only contributed two months’ earnings, which is minimal.
■ Higher admin expenses: the new norm after RTO
- Construction activities accounted for 33% of FY15 revenue (FY14: 11%), while operation service revenue represented 41% (FY14: 59%). The change in sales mix resulted in lower gross margin of 45% from 57% in FY14.
- Admin expenses grew 162% to HK$204m due to the full-year effect of HanKore RTO, but was offset by 679% yoy surge in other income (additional HK$92m from VAT refund and government grant). Hence, FY15 net profit increased by 38.8% yoy, while core EPS grew 6.3% as a result of placement dilution.
■ Still has considerable financial strength for M&A-driven growth
- With a net gearing ratio of 41.8% as of end-15 and a US$140m IFC loan still unutilized, CEWL has the financial muscle to take on more aggressive M&As and project wins, in our view.
- Management has proposed FY15 DPS of 0.35Scts for the first time, and conducted three rounds of share buybacks in Jan-16, further reflecting its confidence. FY15 operating cash flow was positive at HK$32.6m but significantly lower than FY14’s HK$316.7m, largely due to an increase in service concession financial receivables.
■ FY16: targets addition of 1.0-1.5mt/d
- FY15’s acquisition of 1.125mt/d has expanded CEWL’s portfolio to over 4.6mt/d. Management is on track to attain 10mt/d by 2020 as it aims to add another 1.0-1.5mt/d in FY16.
- It also plans to expand into integrated environmental water business, such as sponge city construction and sludge treatment.
■ Upgrading works continue to drive higher tariffs
- According to management, the average tariff rate for CEWL is Rmb1.1/ton and Rmb0.83/ton for Dalian Dongda.
- We see scope for higher tariffs based on ongoing negotiations with municipal governments and stricter WWT requirements, which we believe will drive upgrading projects (c. 30% of combined designed capacity has not met Grade 1A).
■ Maintain ADD with lower DCF-based TP of S$0.81
- We adjust our assumptions for tariffs and project values, leading to a 17-18% drop in FY16-17 EPS estimates.
- Our DCF-derived target price thus falls to S$0.81 (WACC: 7%).
- CEWL is looking attractive at current price levels of below 1x P/BV and 12.2x FY17 P/E, with 3-year EPS CAGR of 25.0%.
- We maintain our Add recommendation.
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/
2016-02-23
CIMB Securities
SGX Stock
Analyst Report
0.81
Down
0.94
