China Everbright Water - RHB Invest 2017-08-08: Sponge City Project Is Underway

China Everbright Water - RHB Invest 2017-08-08: Sponge City Project Is Underway CHINA EVERBRIGHT WATER LIMITED U9E.SI

China Everbright Water - Sponge City Project Is Underway

  • Everbright Water’s 2Q17 results came in slightly ahead of our expectation. 
  • 2Q17 revenue grew 30% YoY to HKD669m on the back of increased construction activities related to the sponge city project and the river basin ecological restoration project. 
  • PATMI surged 81% YoY, led by stronger revenue, tariff hikes and the absence of forex losses. 
  • With the sponge city project underway, we believe FY17 would continue to be a strong year for the company. 
  • Maintain BUY, with an unchanged DCF- based TP of SGD0.54 (13% upside).

Strong set of 2Q17 results. 

  • China Everbright Water’s (Everbright Water) revenue grew 30% YoY as a result of large projects underway, including the sponge city and restoration of the river basin. Despite a higher proportion of low-margin construction revenue (60% in 2Q17, compared with 53% last year), its overall gross margin was held up due to tariff hikes in five existing projects. 
  • In addition, administrative expenses also remained stable in spite of the higher operating cost as there was no forex loss in 2Q17. As such, 2Q17 PATMI jumped 81% YoY to HKD141m.

Issue of first tranche of Panda bonds completed. 

  • The group issued CNY1bn of 5-year corporate bonds at an interest rate of 4.55% last month. We think there could be a marginal increase in finance cost moving forward. 
  • We think net gearing should not be significantly impacted since the proceeds are meant to repay existing borrowings and replenish working capital.

Strong growth pipeline in the near term. 

  • YTD, Everbright Water has secured new projects with a total investment value of CNY4.3b. These projects have a total daily wastewater treatment capacity of 255,000 tonnes. 
  • We also note that four out of seven of the new projects are upgrading works. The group’s treatment capacity, with national Grade 1A standard, would rise to 88% from 78% upon the completion of these four projects. 
  • We expect to see further tariff hikes when these projects are completed.

Maintain BUY, with a DCF-derived TP SGD0.54. 

  • With the strong pipeline of projects underway, we think the near-term growth drivers for Everbright Water are secured. 
  • We make no change to our forecasts at the moment. Note that further additions of new projects would be positive to its share price.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-08-08
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.540 Same 0.540