China Everbright Water Limited - Phillip Securities 2016-05-09: Trash to Treasure

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CHINA EVERBRIGHT WATER LIMITED U9E.SI 

China Everbright Water Limited - Trash to Treasure 

• Waste water treatment (WWT) capacity expansion and the ongoing hike of water tariff are expected to improve the company performance. 
• War chest funds are supportive of growth initiatives. 
• Sponge City Project offers the group opportunities to gain experience in the industrial chain integration. 
• We initiate coverage on China Everbright Water Limited (CEWL) with Accumulate rating and S$0.73 TP based on 19.3x P/E, which implies an upside of 14.4%. 

Investment Thesis 

China is still facing water shortage amid increasing demand for water. 

• China’s insufficient water resources and massive water demand pressurise the availability of water supply. Thus, water recycling is the most efficient way to solve the problem, and the WWT is poised to tap into the widening supply-demand gap. 

The upswing of urban waste water discharge drives the strong demand for related treatments. 

• Household waste water discharge volume dominated the total waste water discharge volume, and the number of urban WWT plants increased exponentially from 2005 to 2014 with CAGR of 14.7% of designed capacity. 
• As urbanisation continues to increase, will result in higher demand for WWT. 

Impetus to improve WWT quality standards, as pollutants in discharge water remain high. 

• On average, the quality of WWT discharge is significantly below the stipulated national standards. Thus, prompting the Chinese government to take action in improving the quality of water discharge. (Potential higher water tariff, following the improved quality, could lift its top line, while enhanced efficiency and productivity could bring higher margin.) 

Favourable policies and regulations promote further development of WWT. 

• The 13th Five-year Plan guides the continuity of investment in WWT. The Water Pollution Prevention and Control Plan guides that the sector needs to be regulated and improved. 
• In conjunction, the central government and WWT operators are expected to further collaborate efforts to spur the quality of WWT. 

Investment Actions 

• CEWL is riding on the tailwind of beneficial WWT market conditions as well as the support of government policies. 
• We initiate on CEWL with an “Accumulate” rating and SG$0.73 TP based on 19.3x P/E, which implies an upside of 14.4%. 

Chen Guangzhi Phillip Securities | http://www.poems.com.sg/ 2016-05-09

Phillip Securities SGX Stock Analyst Report ACCUMULATE INITIATE ACCUMULATE 0.73 Same 0.73