China Jinjiang - CIMB Research 2017-03-21: A hidden jewel in China’s waste treatment industry

China Jinjiang - CIMB Research 2017-03-21: A hidden jewel in China’s waste treatment industry CHINA JINJIANG ENV HLDG CO LTD BWM.SI

China Jinjiang - A hidden jewel in China’s waste treatment industry

  • China Jinjiang (CJE) is the largest WTE operator in China but seems overlooked by investors.
  • A beneficiary of the government’s push for waste incineration.
  • 3-year EPS growth of 13.5% and dividend yield of 6.8% but only 7.3x FY17F P/E.
  • We initiate coverage with an Add rating and DCF-based target price of S$1.10.
  • Strong earnings growth and ongoing expansion of the WTE portfolio are catalysts.

An overlooked waste-to-energy (WTE) leader in China 

  • China Jinjiang (CJE) is a leading WTE operator in China but not so well-known to the investing community due to its short listing history. 
  • CJE is trading at FY17F P/E of 7.3x, at 43% discount to the environmental peers listed in Singapore and Hong Kong. 
  • We think this is unjustified given CJE’s longer operating history (over 18 years), large operating capacity (27.4k tpd (tonnes/day)) and projects for development (20.1k tpd).

Well-positioned to capture China’s WTE boom 

  • NDRC targets to raise China’s incineration capacity by 36% CAGR from end-2015 to end-2020. We believe there will be plenty of new investment opportunities available in the market. 
  • We think CJE can seize these opportunities given its extensive network, good track record and well-established technology in Circulating Fluidised Bed (CFB).
  • Our FY16-19 capacity CAGR forecast of 20% is a conservative estimate, in our view.

More “realistic” earnings as many projects are in BOO format 

  • With 84% of the portfolio in BOO (Build-Operate-Own) concession format, CJE recognises most of its earnings under conventional accounting method and does not include much construction earnings, which are pre-operational earnings made by the BOT (Build-Operate-Transfer) accounting treatment adopted by peers. 
  • BOT construction accounts for 5% of CJE’s gross profit in FY17F and 4% in FY18F.

WTE net profit expected to grow at 29.4% CAGR (FY16-19F) 

  • We forecast CJE’s net profit to grow at 13.5% from FY16 to FY19F driven by the WTE capacity expansion. Excluding the BOT construction earnings and non-core businesses, we expect the earnings from WTE to grow at a robust CAGR (FY16 to FY19F) of 29.4%.

Competitive edge over CEI and Canvest 

  • As compared to CEI and Canvest, the two major listed peers, CJE possesses a long history, a geographically diversified WTE portfolio and leading technology in CFB. 
  • The low investment costs for CFB (at 10-30% discount to the moving grate technology used by peers) allows CJE to capture opportunities in cities that are cost-sensitive.

Balance sheet may be stretched in 2018F 

  • We estimate CJE will have high capex of Rmb6.7bn for FY17-19F in order to complete the projects on hand. We believe this will lift the net gearing to the peak of 102% by end- 2018F. This may increase the risk for fund raising, especially in 2018F, in our opinion.

Low valuation and high dividend yield; initiate with Add rating 

  • CJE is trading at 7.3x FY17F P/E and 9.1x FY17F EV/EBITDA, the low end of the sector range. Its 3-year EPS CAGR (FY16 to FY19F) of 13.5% and 6.8% dividend yield for FY17F are not fully factored into the share price, in our view. 
  • We initiate coverage with Add rating and DCF-based target price of S$1.10. 
  • We expect that CJE’s strong earnings prospects and on-going expansion in WTE will trigger a re-rating. 
  • Key risks are the construction risk related to new projects and changes of electricity tariffs.

Keith LI CIMB Research | http://research.itradecimb.com/ 2017-03-21
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