China Everbright Water Limited - Phillip Securities 2016-05-17: Look forward to better quarters ahead

China Everbright Water Limited - Phillip Securities 2016-05-17: Look forward to better quarters ahead CHINA EVERBRIGHT WATER LIMITED U9E.SI 

China Everbright Water Limited - Look forward to better quarters ahead

  • Revenue met 26% of our full year expectations of HK$2,536mn.
  • HK$236mn gross profit met 20% of our full year expectations of HK$1176mn.
  • HK$106mn net profit met 19% of our full year expectations of HK$561mn.
  • Based on the estimate that the gross profit margin (GPM) will be normalised to 45% from 36%, we maintain “Accumulate” with the TP at S$0.73.

The pace of capacity expansion continues amid the uptrend of water tariff hike

  • In 1Q16, CEWL secured two WWT projects in Zhangqiu, Shandong Province, with a total daily designed capacity of 90,000 m3. Meanwhile, the group also won the tender of Zhenjiang Sponge City Project, and the 2 WWT plants under preparation will add an additional daily capacity of 275,000 m3. Thus, the accumulated daily designed capacity achieved approximately 5mn m3 during the period. Moreover, other projects whose capacities totaled to an amount of 275,000 m3 will commence operation in FY16.
  • Stipulated in the “Note of Issues Concerning the Standards for the Collection of Water Resource Fees”, waste water discharge fees are expected to be raised accordingly. As of Dec-15, the average water tariff under Dalian Dongda was Rmb0.83/tonne, and it is assumed to be below average. However, this could potentially provide a growth of 30% to 40% in water tariff, after the group gradually upgrades the plants in terms of capacities and waste water discharge standard.

Slight growth in net borrowings; gearing level remained stable

  • Since its capital-intensive business involves a large amount of construction work and drains funds quickly, CEWL managed to secure sources of funds to support expansion. 
  • The gearing ratio (D/A) was 47.7% in 1Q16, and has decreased by 0.2ppt QoQ. 
  • During the same period, the group has refinanced HK$1039mn of its borrowings while having repaid HK$992mn in outstanding loans. As a result, the group’s finance costs went up by 25.2% to HK$46.5mn. However, the group is expected to mitigate its interest burden through continuous refinancing through lower rate loans.

Zhenjiang Sponge City is a good start for CEWL to tap into the integrated water value chain.

  • The project was one out of the first batch of 16 pilot projects, which will exemplify the successful bidders’ capabilities towards integrated water system construction and management. The investment scale is estimated to be approximately Rmb2.6bn, out of which Rmb1.2bn is expected to come from government subsidies, while the remaining Rmb1.4bn will be contributed from the joint venture (CEWL and Zhenjiang Waterworks Corporation). 
  • In the foreseeable future, CEWL will obtain a substantial portion of its revenue from infrastructure construction and management fees through the operation of related facilities.

Investment Action

  • While there was a substantial growth in top line, the growth in bottom line was flattish, and this was mainly attributed to the 92% increase in cost of sales, resulting in an increase in construction costs. 
  • The GPM of construction services is thinner than operating services. 
  • With the construction of projects to be completed by 2H16, we assume that the GPM will be normalised back to above 45% from the current 36%, based on the previous quarters’ record. Therefore, the bottom line is estimated to increase as well. 
  • We maintain our call of Accumulate with an unchanged TP of S$0.73, based on average forward PER of 19.3x.

Chen Guangzhi Phillip Securities | http://www.poems.com.sg/ 2016-05-17
Phillip Securities SGX Stock Analyst Report ACCUMULATE INITIATE ACCUMULATE 0.73 Same 0.73