China Jinjiang - CIMB Research 2017-05-25: Robust Capacity Growth Ahead

China Jinjiang - CIMB Research 2017-05-25: Robust Capacity Growth Ahead CHINA JINJIANG ENV HLDG CO LTD BWM.SI

China Jinjiang - Robust Capacity Growth Ahead

  • China Jinjiang Environment (CJE)’s 1Q17 net profit was in line with our expectations.
  • Management said the construction of new waste-to-energy (WTE) projects is progressing well and the FY17-18F capacity addition targets are achievable.
  • New WTE projects in China likely to be added this year, according to management.
  • CJE expects the two Indian WTE projects to deliver a high IRR of over 15%.
  • We reiterate Add, and see new project additions as key catalysts.

We remain upbeat after the 1Q17 conference call 

  • Today, CJE hosted a 1Q17 results teleconference. We remain upbeat on CJE as the construction of its new WTE projects is progressing in line with expectations.
  • Management added that some new WTE projects in China are likely to be added this year, on top of its 21,366MT projects currently under construction or in preparation.

1Q17 results in line with expectations 

  • Last week, CJE reported 6.8% yoy growth in 1Q17 net profit to Rmb127.4m. Although 1Q17 net profit accounted for 18.3% of our full-year forecast, we deem it in line given that more construction earnings will be recognised later this year when new WTE projects commence construction. 
  • WTE’s operations’ revenue and gross profit rose 38.2% and 32.9%, respectively, on the back of a 23.4% increase in electricity sales and 19.5% growth in waste treatment volume.

Yinchuan Zhongke and Linzhou Jiasheng WTE projects to boost BOT construction earnings this year 

  • CJE’s Build-Operate-Transfer (BOT) construction revenue fell 82.7% yoy in 1Q17 due to fewer construction services provided. More BOT projects are in the pipeline. 
  • We see the 1,000MT expansion of Yinchuan Zhongke WTE, which started construction in 2Q17, and the Linzhou Jiasheng 1,000MT WTE project, which is scheduled to commence construction in 2H17, as the major contributors to CJE’s BOT earnings in FY17F.

WTE capacity will jump 55% in 2017-18 

  • At end-16, CJE had WTE operating capacity of 28,230MT. 
  • After the latest review, the management is confident of achieving its targets of completing 5,660MT new capacity in FY17F and 10,000MT in FY18F. Of this 15,660MT new capacity, 1,000MT started operations earlier this month, 4,000MT is currently under construction and 6,660MT is close to completing its preparatory works.

Why is it going to India? 

  • CJE has secured two WTE projects in India, as part of its strategy to expand into Asia.
  • CJE wants to utilise its experience and expertise gained in China to explore the enormous potential in India. India’s WTE market is in an early development stage with only a few operating facilities. 
  • India promotes its WTE industry with favourable policies, subsidies (equivalent to Rmb0.79/kWh) and stringent emission standards. CJE’s two Indian projects have an expected IRR of over 15%, higher than the 8% in China.

Reiterate Add rating 

  • We reiterate Add rating with an unchanged DCF-based target price of S$1.10 (WACC 9.9%). 
  • CJE provides an opportunity for investors to tap into the fast-growing WTE market in China and the great potential in other Asian countries. It is attractively valued at 7.7x FY17F P/E and 6.5% FY17F dividend yield. 
  • Key risks to our view are the construction risks associated with new projects and FX risks from new Indian projects.

Keith LI CIMB Research | http://research.itradecimb.com/ 2017-05-25
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