China Everbright Water (CEWL SP) - DBS Research 2017-05-15: Decent 1Q Results

China Everbright Water (CEWL SP) - DBS Vickers 2017-05-15: Decent 1Q Results CHINA EVERBRIGHT WATER LIMITED U9E.SI

China Everbright Water (CEWL SP) - Decent 1Q Results

  • 1QFY17 net profit climbed 11%, thanks to >3 0% growth in construction revenue
  • Robust growth in construction revenue to continue for the rest of FY17 ed-TH / sa- DL
  • Expect FY17 capex to grow > 25%
  • Maintain BUY with TP of S$0.64

What’s New 

  • China Everbright Water (CEW) registered 18% and 11% growth in 1QFY17 revenue and net profit respectively. 1Q net profit accounted for c.24% of our full-year estimate and we keep our earnings projections unchanged.
  • Top-line growth was mainly driven by an increase in construction revenue (up >30% y-o-y) with its contribution to total revenue rising from 52% in 1QFY16 to 58% in 1QFY17. This was mainly attributable to the construction of the sponge city in Zhenjiang and the Fuhe River Basin restoration project.
  • Thanks to the settlement of a US$-denominated loan, no further forex loss was recognised in 1QFY17, which also lowered operating expenses. Nevertheless, the positive impact was partly offset by higher finance costs (due to an increase in bank borrowings and higher percentage of longterm borrowings which bear higher interest rates).
  • Going forward, we expect CEW’s growth momentum to continue. Apart from the sponge city and restoration projects, there are more projects under construction, including the upgrade projects in Shandong and Liaoning. In particular, two of these upgrade projects will be completed this year. In addition, the Rmb3bn PPP project in Zhangqiu will kick-start this year. 
  • Although the project will span over eight years with annual capex estimated at Rmb400-500m, it gives good earnings visibility. With the overall capex budgeted at HK$2.5-2.7bn for FY17 (FY16: c.Rmb2bn), we are optimistic that construction revenue will register robust growth of > 30% in FY17.
  • On the balance sheet, we are not too worried about the longer A/R days (compared with end-FY16) because it was due to seasonality. Some governments settle their bills semiannually but more governments make annual payments.
  • Thus, we are optimistic that A/R days will improve by yearend, if not earlier. In addition, as a result of management’s effort in controlling A/R and collecting overdue payments, many projects, particularly those in Liaoning, have already ironed out the payment schedule to fully settle the overdue payments within 2-3 years. Dandong project is the exception and management needs to step up its efforts.
  • Management’s target of achieving 10m tons of daily treatment capacity remains intact. Although it only has c.5m tons of daily capacity under its portfolio currently, we are pleased with the momentum of the recent deal flow with YTD project wins of >Rmb4bn (FY16: Rmb2.5bn).
  • Our earnings forecasts remain intact with FY17 earnings growth estimated at 35%. CEW's share price has corrected by as much as 44% in the past 12 months and we reckon the current valuation is attractive. 
  • We maintain our BUY rating with TP of S$0.64, based on 24x 12-month rolling adjusted PE (stripping out construction revenue).

Patricia YEUNG DBS Vickers | http://www.dbsvickers.com/ 2017-05-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.640 Same 0.640