China Everbright Water - RHB Invest 2016-03-03: Wins New Projects Via PPP Model

China Everbright Water - RHB Invest 2016-03-03: Wins New Projects Via PPP Model CHINA EVERBRIGHT WATER LIMITED U9E.SI 

China Everbright Water: Wins New Projects Via PPP Model 

What’s New 

Adds 90,000 tonnes to total design capacity. 

  • China EverBright Water (CEW) announced yesterday that it has clinched two new waste water treatment projects (Zhangqiu No.1 Plant and Zhangqiu No.2 Plant) from Zhangqiu’s municipal government. 
  • Both projects are currently operational, and comply with China’s national Grade 1A water discharge standards. 
  • This also brings CEW’s YTD total design capacity to approximately 4.7m tonnes, in line with our forecasted growth. 

Our View 

When big gets bigger. 

  • Before this, the company won the Zhangqiu No.3 wastewater treatment plant project in May 2013. We think its success in winning the two projects is largely attributed to its strong footprint in Zhangqiu as well as the whole of Shandong province, as: 
    1. prevailing projects are good testaments of the company’s operational capability, and 
    2. an existing presence tends to improve synergies across projects. 
  • As a result, with intensifying competition in the water treatment sector, we continue to favour bigger state-owned enterprises (SOEs) compared to smaller players. 

More transfer-operate-transfer (TOT) projects going forward. 

  • We note that both the Zhangqiu No.1 and No.2 plants were originally invested, constructed and upgraded by the local government. 
  • We think the government’s relinquishing of these projects exemplifies the local governments’ accelerated adoption of the public-private-partnership (PPP) model. 
  • We estimate that about more than 50% of China’s waste water treatment plants are still run by local governments. 
  • We expect the transfer of such operations to SOEs and private players by local governments to increase in the coming years. 

Better than build-operate-transfer (BOT) projects. 

  • We think more TOT projects would also be beneficial to CEW’s operating cash flow as the water treatment plants would already be up and running, compared to new BOT projects. 
  • The total investment for the two Zhangqiu projects amounts to CNY160m. This implies approximately CNY1,778 per tonne of capacity acquired. 
  • This is also cheaper than the average construction cost for BOT projects, which is about CNY2,000 for each tonne of water treatment capacity built. 

Maintain BUY with an unchanged SGD0.82 TP (65% upside). 

  • Our DCF- derived TP implies about 23.5x FY16F P/E. We believe this is justified, and in line with our forecasted 3-year CAGR of 25%. 
  • We believe CEW’s current valuation – at 14x FY16F P/E – is a good entry point as its peers are trading at about 16x FY16F P/Es.

Juliana Cai RHB Invest | http://www.rhbinvest.com.sg/ 2016-03-03
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