China Everbright Water - RHB Invest 2016-08-09: Bigger Wave In 2H16

China Everbright Water - RHB Invest 2016-08-09: Bigger Wave In 2H16 CHINA EVERBRIGHT WATER LIMITED U9E.SI

China Everbright Water - Bigger Wave In 2H16

  • China Everbright Water’s (CEW) management is confident of securing another 1m tonnes of daily design capacity through new project wins and acquisitions in the second half. This remains higher than our expectation, given that the company has secured 0.45m tonnes/day of new contracts in 1H16. 
  • Maintain BUY, fine-tuning our DCF-derived TP to SGD0.80 (31% upside).

Committed to 1.5m tonnes of capacity growth. 

  • CEW management remains adamant to achieve at least 1.5m tonnes/day of capacity growth this year. This implies there would be at least 1.0m tonnes added via acquisitions and new projects in 2H16. 
  • We expect this to boost earnings in the second half, pulling up the weaker 1H16 results.

Gross margins likely to weaken in the near term. 

  • We think CEW is likely to get larger-scale public-private-partnership (PPP) projects going forward. We thus adjust our gross margin downwards in view of higher contribution from lower-margin construction projects.

Sowing for a future harvest. 

  • We cut our FY16F-17F earnings by 5-8% to reflect lower gross margins in the near term. 
  • Maintain BUY with DCF-derived TP of SGD0.80 (from SGD0.82), implying 19x FY17F P/E.

An underperforming 2Q16.

  • The company incurred a one-off deferred tax expense of HKD13m due to a change in tax calculation for a recently-acquired subsidiary. We expect this to normalise in subsequent quarters.
  • In addition, CEW also incurred HKD23m in forex losses, as a result off-shore borrowings. We note that 44% of the borrowings are off-shore as at 30 Jun. Management has since pared down non-CNY denominated debt to 40%. Nonetheless, the devaluation of the CNY remains a key risk in future quarters.

Juliana Cai RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-09
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.80 Down 0.820