CITIC Envirotech - CIMB Research 2016-04-15: Foray into sludge treatment

CITIC ENVIROTECH LTD U19.SI

CITIC Envirotech - Foray into sludge treatment

CEL announced its first BOT sludge treatment project worth Rmb220m.
In Mar 16, it also announced the acquisition of five WWT projects for total investment of Rmb477m. These projects add to CEL’s strong project pipeline.

These new projects will benefit CEL in three ways:
1. more recurring income,
2. higher membrane sales, and
3. upward revision in water tariffs.

This project involves the design, construction and operation of a 700 tonne/day treatment plant to process the sludge generated by six municipal waste water treatment (WWT) plants. This build, operate and transfer (BOT) project has a concession period of 30 years and will command an internal rate of return (IRR) higher than the typical IRR of industrial WWT projects (10-12%), according to management.
Industry statistics show that China’s WWT plants produced about 30m tons of sludge in 2012, of which less than 20% was treated before disposal. Favourable government policies in mandating upgrading of all sludge treatment facilities by end-2017, as well as higher treatment rate of sludge by end-2020 for prefecture cities and cities of a higher grade, should support growth of the sludge treatment market.
Management is also optimistic on the opportunities in the sludge treatment market, as the majority of WWT plants in CEL’s portfolio has yet to be equipped with sludge treatment facilities.

CEL will invest Rmb64m in a 40,000 m3 /day municipal WWT plant via a 95%-owned JV with Xiaochang Philip Water. The plant will have a concession period of 27 years.
CEL is also involved in another project to acquire and expand an industrial WWT plant in Baiyi Industrial Park, China, for total investment of Rmb83m. The plant will have a concession period of 30 years.

Apart from the Baiyi Industrial project, which will involve an upgrade to membrane bioreactor (MBR) technology, CEL recently completed an engineering, procurement and construction (EPC) project for a municipal WWT plant in Fuzhou City. At 200,000 m 3 /day, it is one of the largest WWT plants using MBR technology in China.
CEL was also awarded a Rmb198m project to upgrade an existing 200,000 m3 /day industrial WWT plant in Gaoyang County, from Grade 1B to surface water quality grade V. It also recently completed the acquisition of two municipal WWT plants from Fujian Li Yang Environmental Protection for Rmb132m. Both plants are operating at full capacity and will be upgraded to Grade 1A discharge standard.
These upgrade projects will not only generate membrane sales for CEL, but also allow the company to negotiate higher water tariffs.

We make no changes to our EPS forecasts as we have already accounted for these project wins in our model.
Maintain Add rating, with unchanged DCF-derived target price of S$1.61 (WACC: 7%).

NGOH Yi Sin CIMB Securities | Roy CHEN CIMB Securities | http://research.itradecimb.com/ 2016-04-15

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