CITIC Envirotech (CEL SP) - UOB Kay Hian 2017-03-29: Targeting A Torrent Of S$1b In New Project Wins

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CITIC ENVIROTECH LTD. CEE.SI

CITIC Envirotech (CEL SP) - Targeting A Torrent Of S$1b In New Project Wins

• Initiate coverage on CITIC Envirotech (CEL) with BUY and a DCF-based target price of S$1.10. 
• With a proven track record in water treatment, CEL is the best in class in offering investors superior technological know-how protected with a suite of IP rights. It is poised to sustain a strong performance in 2016, with a torrent of S$1b in new orderbook wins targeted for 2017. 
• Riding on favourable industry dynamics and the entry of a new strategic shareholder, investors can look forward to new areas of growth in river rehabilitation, sludge treatment and the circular economy.

INVESTMENT HIGHLIGHTS 

Initiate coverage with BUY

• Initiate coverage with BUY and a DCF-based street-high target price of S$1.10, implying 33% upside to current levels. 
• Our target price for CITIC Envirotech (CEL) implies a 2018 forward PE of about 15.8x vs the average of 15.3x for Singapore-, Hong Kong- and Chinese-listed peers.

Clean water a priority for China, opportunities abound for companies with technological advantages. 

• China’s annual water shortage has reached 50b cu m in 2016 with two-thirds of its cities experiencing varying levels of shortages. China’s newest 13th Five-Year Plan has made water and the environment a priority with action plans like “Water Ten” and new, specific water pollution laws pending. These stricter environmental goals open tremendous opportunities for environmental companies with a tech edge.

China’s 2017 investment in major water projects to exceed Rmb900b with 9% growth going forward. 

• China’s National Development and Reform Committee (NDRC) has announced that China will start 15 new major water conservation projects in 2017 and that total investment in major water projects under construction should exceed Rmb900b by end-17. 
• BMI Research forecasts that water infrastructure investments will grow at 9% with most of the investments going into the wastewater segment.

Order surge after CRF’s entry; now targeting three new growth areas. 

• Following Kohlberg Kravis Robert’s (KKR) share sale to China Reform Fund (CRF) in Nov 16, CEL’s order wins have been from December onwards. We believe the entry of this new shareholder has opened many doors for CEL.
• CEL is now targeting three new areas of growth: river rehabilitation, sludge treatment and in the circular economy.

Targeting S$1b worth of new projects to sustain order win momentum. 

• With this momentum, management have targeted S$1b worth of projects for 2017. This should grow CEL’s orderbook and help them maintain their steadily increasing order win momentum (2015: Rmb3b, 2016: Rmb4.5b) to achieve a new high in order growth in 2017.

Proven water treatment leader with 59 plants and 5.0m cu m capacity. 

• With an over 10-year track record, CEL is a proven water treatment leader with 59 plants and experience in multiple industries with various blue chip clients. It has a full suite of leading technologies including advanced “3G-TIPS” membranes and MBR technology, which delivers high quality water treatment and low land requirements.

Superior margins to peers’, superior 15% IRR vs 8% average. 

• Thanks to its technology and focus on industrial wastewater, CEL boasts margins superior to its peers. CEL also guides for a 15% IRR for its industrial waste water and new growth businesses compared to an 8% IRR for a typical municipal water treatment project.

Valuation 

• Initiate coverage with a BUY and DCF-based street high target price of S$1.10. 
• On the back of China’s focus and efforts towards combating high levels of environmental pollution, we like CEL for its: 
  1. superior technology with a focus on industrial wastewater, 
  2. S$1b in targeted new orderbook wins, and 
  3. unlocking new areas of growth through its new strategic shareholder, the CRF.
• Our target price implies a 2018F PE of 15.8x which is at a 18.2% premium to other SOE- linked listed water treatment companies in the region. We find this premium justifiable, given CEL’s: 
  1. superior water treatment and membrane technology, 
  2. proven track record in tackling more advanced industrial water treatment projects, 
  3. higher project IRR vs its peers and 
  4. strong shareholder and sponsor profile with state-owned CITIC and the CRF controlling approximately 79% of the company. 
• By having both CITIC and the CRF as substantial shareholders, CEL could see lower financing costs as a subsidiary of the CITIC Group. It could also leverage on CRF’s expertise for strategic advice as CRF is under the direct supervision of the Chinese central government.

Edison Chen UOB Kay Hian | Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-29

UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 1.10 Same 1.10