China Everbright Water - DBS Research 2016-05-16: Q1 results distorted by VAT

China Everbright Water - DBS Research 2016-05-16: Q1 results distorted by VAT CHINA EVERBRIGHT WATER LIMITED U9E.SI 

China Everbright Water - Q1 results distorted by VAT

  • 1QFY16 net profit climbed only 2% due to VAT, higher effective tax and administrative cost
  • Growth would have been stronger at low- teens if stripping out VAT impact
  • Efficiency improvement from M&A will be reflected gradually
  • Maintain BUY with TP under review.


  • China Everbright Water (CEWL SP) reported net profit growth of 2% to HK$103.1m in 1Q16. Low profit growth rate was negatively affected by the implement ration of VAT (which was imposed starting in July 2015), higher effectively tax rate and higher administrative expenses. Stripping out the impact of VAT, net profit growth would have been stronger at low teens. Net debt-equity ratio climbed marginally from 41.8% in FY15 to 42.3% in 1QFY16 which was a reasonable level.
  • Total turnover jumped 50% to HK$657.2m due to > 140% increase in construction revenue which also dragged down overall gross margin from 49.9% in 1QFY15 to 36% in 1QFY16. Another reason of lower gross margin was that there was relatively more outsourcing work in construction in 1QFY16 which lower gross margin of construction revenue by 1-2ppts. We believe as the construction progress changes, the amount of outsourcing work will decline and gross margin will rebound to normal level of 22-24%.
  • The benefit of the integration of Dalian Dongda, which was acquired in 2HFY15, has yet to be reflected. We expect the benefit will be gradually shown through improvement in utilization of water plants, tariff hike and better margins.
  • YTD, CEWL successfully secured the contract of Zhangqiu wastewater plants (total treatment capacity of 90,000 m3/day) and the construction of Zhenjiang ‘sponge city’ in Jiangsu. Its target of adding 1-2m tons of new capacity to its portfolio of 4.6m tons/day remains intact. We thus expect more deals and major M&A to be concluded in the rest of the year which could be positive share price catalyst.


  • 1Q results accounted for 19% of our full year forecast. We keep our earnings forecast unchanged for now as we have factored in M&A in our forecasts. In addition, growth in 2H should accelerate as the sponge city project kick starts.
  • The weak 1Q may trigger some selling pressure, given CEWL gained as much as > 70% so far this year. However, we see any share price weakness as good buying opportunities because we are optimistic about is growth strategy and its leading market position. We maintain BUY with TP under review.

Patricia YEUNG DBS Vickers | Tony WU CFA DBS Vickers | 2016-05-16
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 99999 Same 0.69