China Everbright Water - CIMB Research 2016-05-13: Building water infrastructure first

CHINA EVERBRIGHT WATER LIMITED U9E.SI

China Everbright Water - Building water infrastructure first

1Q16 EPS was slightly below, at 22% of our full-year forecast, due to higher mix of construction activities and increased operating expenses.
1Q16 topline rose 51% yoy and 43% qoq; net profit grew 1% yoy but fell 5% qoq.
We lower our FY16-18F EPS by 5.3-10.0% as we adjust our assumptions for changes in sales mix and higher admin expenses.
Good track record and net gearing of 42.3% should allow CEWL to achieve 10mt/d of water assets by 2020.

CEWL reported 1Q16 revenue of HK$657m (US$85m), which was ahead of our forecast (30% of our FY16F) and grew 51% yoy mainly due to an increase in construction activities.
As sales mix tilted towards construction (1Q16: 52% vs. 1Q15: 32%), gross profit margin fell 14% pts to 36% in 1Q16.
Bottomline was further impacted by higher admin expenses arising from the acquisition of Dalian Dongda.

CEWL last month announced its first sponge city project, via a 70/30 joint venture with SOE-backed Zhenjiang Waterworks. It has a project value of c.Rmb2.585bn (US$396m) with a concession term of 23 years.
CEWL is expected to invest Rmb323.4m (US$50m), with an estimated project IRR of 8-10%. Zhenjiang is one of the 16 ‘sponge cities’ pilot projects announced by the Chinese government and we believe there is scope for CEWL to obtain similar projects in the future (2nd batch of cities released in Mar 16).

Apart from the maiden sponge city project, CEWL is also extending its track record in the wastewater treatment (WWT) space with 2 transfer-operate-transfer (TOT) project wins at Rmb160m. These plants not only have a combined designed capacity of 0.09mt/d and concession period of 30 years, but have also achieved the national Grade 1A discharge standard.
Successive TOT project wins could see more meaningful contribution to CEWL’s treatment income.

CEWL had a net gearing ratio of 42.3% and total designed WWT capacity of 5mt/d as at end-Mar 16. It can afford more acquisitions (based on a comfortable net gearing level of 70-80%, according to the management), in addition to its current construction pipeline of 0.18mt/d WWT projects.
With the construction of more WWT plants completed, we should start seeing greater proportion of operation service revenue.

We tweak our estimates to adjust for changes in sales mix and higher admin costs, hence our FY16-18F EPS estimates fall by 5.3-10.0%. But our DCF-based target price remains intact at S$0.81 (WACC: 7%); reiterate Add.
As China’s WWT landscape becomes increasingly competitive, CEWL is planning to leverage on its technical expertise and strong SOE backing to generate sustainable returns and become a global environmental player.

NGOH Yi Sin CIMB Securities | Roy CHEN CIMB Securities | Keith LI CIMB Securities | http://research.itradecimb.com/ 2016-05-13

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