China Everbright Water - DBS Research 2016-04-20: First 'sponge city' project

China Everbright Water - DBS Research 2016-04-20: First 'sponge city' project CHINA EVERBRIGHT WATER LIMITED U9E.SI 

China Everbright Water - First "sponge city" project. 

  • Secured a PPP project for the construction of the sponge city in Zhenjiang, Jiangsu. 
  • A major step in venturing into the provision of comprehensive environmental services. 
  • Revise up FY16 and FY17 earnings by 8% and 12%. 
  • Maintain BUY with TP of S$0.69. 

What’s new: 

  • China Everbright Water (CEW) won the tender of a PPP project for the construction of the “sponge city” in Zhenjiang, Jiangsu. 
  • The Zhenjiang Sponge City Project is one of 16 “sponge city” pilot projects jointly announced by the Ministry of Finance, the Ministry of Housing and Urban-Rural Development and the Ministry of Water Resources of the PRC. 
  •  The total investment is estimated to be Rmb2.585bn, which comprises of Rmb1.2bn subsidy from the central government and Rmb1.385bn investment from the project company. 
  • The project includes: 
    1. the ecological restoration, repair, low impact development and renovation of pipeline networks, flooding and waterlogged areas within the Project area. This part will be funded and constructed by the local government but will be co-ordinated by CEW. 
    2. the construction and operation of Zhengrunzhou wastewater treatment plant (275,000 tons/day in total), a series of rainwater pump stations, drainage networks, rainwater storage tanks and the ecological restoration and repair of certain rivers. This part will be carried out by a 70:30 JV between CEW and Zhenjiang Waterworks Corporation which is an indirect subsidiary of the State-owned Assets Supervision and Administration Commission of the Zhenjiang People’s Government. Concession period is 23 years. 

Our view: 

  • We believe this is a major step forward for CEW in diversifying its revenue stream and stepping into the provision of more comprehensive environmental services. 
  • It also demonstrates CEW’s ability to secure large projects from the government by leveraging on its strong engineering and operational ability and good reputation in the water sector. 
  • With this track record, we believe CEW will be able to secure more of such projects, given that investment amount for the construction of sponge cities is expected to be at least Rmb6trn by 2030. 
  • CEW’s net debt-equity ratio was 41.8% as at the end of FY15 and management has an upper limit of 70-80%. 
  • Despite the large scale of this project, we believe CEW can still finance the project through internal resources and bank borrowings. CEW’s total project wins YTD amounted to Rmb1.5bn; the first project was a WWT plant with a capacity of 90,000 tons and an investment of Rmb160m. As CEW has secured this large scale operation at an earlier than expected time, we have raised our growth assumption on the construction revenue, leading to an upward revision of 8% and 12% in FY16 and FY17 earnings estimates respectively. 
  • Our TP is also nudged up to S$0.69, based on 26x 12-month rolling PE (adjusted for construction revenue). Maintain BUY.

Singapore Research DBS Vickers | http://www.dbsvickers.com/ 2016-04-20
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.69 Up 0.64