China Everbright Water - RHB Invest 2017-03-30: New Contract Awarded

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CHINA EVERBRIGHT WATER LIMITED U9E.SI

China Everbright Water - New Contract Awarded

What’s New? 

• A consortium led by Everbright Water has entered into a new PPP Project in Suizhou with an investment value amounting to CNY956m. The company would hold a 78.4% equity stake in the project company.
• The contract includes an industrial waste water treatment plant in the Xihe County for a concession period of 25 years and a daily treatment capacity of 10,000 tonnes.
• As with most large-scale PPP projects, this contract also includes landscaping works, pipeline works and water environment restoration works.

Our Views.

Downward trend in IRR due to large-scale PPP. 

• According to management the estimated internal rate of return (IRR) for the project is about 8.6%. While this is higher than the company’s benchmark of 8%, we think it is on the low side as the project involves treating industrial wastewater. 
• Nevertheless, we believe that this ought to be the case going forward since most of the large scale public-private partnership (PPP) projects are likely to include lower-yielding sub-projects like the above mentioned landscaping, pipelines and water restoration works.

More likely to focus on investment value than capacity growth. 

• Given the Chinese government’s policy direction shift to support PPP projects, we think there is likely to be more of these large-scale, huge investment PPPs in the future. 
• Given the capital constraints, we think China Everbright Water (Everbright Water) is likely to put less focus on water treatment capacity growth.
• Instead, it would focus on getting projects that meet its benchmark IRR of 8%.

Maintain BUY with an unchanged TP SGD0.54 (13% upside). 

• While the wastewater treatment project is relatively smaller in size, the large investment value of the project is likely to put Everbright Water in line with our forecasted growth. 
• Assuming the construction of the project commences in 2H17, we estimate this PPP project to account for approximately 9ppts of our FY17F EPS growth. 
• Coupled with the construction earnings from its Zhenjiang Sponge City project, we are positive on the Group’s earnings outlook for the year.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-03-30

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