China Jinjiang - CIMB Research 2017-08-18: 2Q17 Riding On Asia’s Demand For Waste Treatment

China Jinjiang - CIMB Research 2017-08-18: 2Q17: Riding On Asia’s Demand For Waste Treatment CHINA JINJIANG ENV HLDG CO LTD BWM.SI

China Jinjiang - 2Q17: Riding On Asia’s Demand For Waste Treatment

  • China Jinjiang (CJE)’s 2Q17 results were largely in line with our expectations.
  • 1H17 waste-to-energy (WTE) gross margin of 41.5% was negatively affected by startup of new plants but we expect it to recover in 2H17F and meet our FY17F of 42.8%.
  • WTE capacity grew 15.6% in the last three months to 57,311 tonnes per day (tpd) in Jul.
  • We trim FY17-19F EPS by 1.8-2.2% to adjust for new project completion schedule.
  • Maintain Add and TP of S$1.10, with new projects as a potential key catalyst.

2Q17 results in line with expectations 

  • CJE recently released its 2Q17 results, which showed net profit rose 10% yoy to Rmb168.3m on the back of a 16.4% increase in revenue. 
  • 1H17 net profit of Rmb295.7m (+8.6% yoy) accounted for 42% of our full-year forecast, which we deem in line as we anticipate stronger earnings in 2H17F from the two newly-commissioned WTE projects ramping up and another four WTE projects starting operations.

Expect WTE gross margin to normalise in 2H17F 

  • Gross margin contracted 7.2% pts yoy in 2Q17 due to initial operations of the Gaomi and Qitaihe plants in 1H17. We think the ramp-up of new plants will result in better utilisation in 2H17F. For FY17F, we forecast gross margin of 43% (mid-point of management’s target of 41-45%). 
  • VAT rebate dropped 51.4% yoy in 2Q17 due to a change in accounting treatment (input VAT for equipment purchases netted off with output VAT for electricity sales). Rmb14.5m net profit from sludge treatment was recognised in 2Q17.

CJE’s WTE portfolio is growing rapidly 

  • CJE’s WTE portfolio is growing rapidly, increasing by 7,715tpd (+15.6%) in last three months to 57,311tpd (including newly-secured projects of 3,700tpd in China, 1,165tpd in India and 3,410tpd resource-recycling projects). 
  • Completion of some of the four projects under construction (4,500tpd) may be later than our expectation of end-2017F but we foresee minimal impact on our earnings forecasts. Three projects (4,400tpd) are due to start construction in 2H17F and two (2,000tpd) are awaiting government approvals.

Going overseas: Indonesia may be next 

  • CJE is expanding to Asian markets to capture the rising demand for waste treatment there. CJE recently secured its third WTE project in Gurgaon (1,165tpd). This, together with the two projects secured earlier this year, brings CJE’s total capacity in India to 3,271tpd. 
  • CJE is actively looking for opportunities in Indonesia and set up subsidiaries there recently. We expect positive news regarding its Indonesia ventures soon.

Earnings revisions 

Trimming FY17-19F net profit forecasts 

  • We lower FY17-19F net profit by 1.8-2.2% to factor in the following changes.
    1. Slight delay in the four projects currently under construction and more evenly-spread construction over the next two years, leading us to lower our year-end operating capacity assumptions by 2.2-11.2% for FY17-19F.
    2. Five new WTE projects in China secured and plans for starting resource recycling.
    3. Raise FY17-19F service income revenue by 21.4-38.4% to reflect the strong revenue growth of 52.5% in 2Q17.
    4. Lowering VAT rebate in FY17-19F by 36-50% to reflect the new accounting treatment, partly offset by sludge treatment income.

Maintain Add rating 

  • We maintain Add rating on CJE, with unchanged DCF-based target price of S$1.10 (WACC 9.9%). 
  • In our view, the rapid growth of CJE’s WTE portfolio in China and ongoing expansion overseas will strengthen its market leadership position and support earnings growth ahead. We deem its current valuation attractive at 6.9x FY17F P/E and 7.4% dividend yield in FY17F. 
  • Key risks are construction risks associated with new projects and FX risks from new overseas projects.

Keith LI CIMB Research | 2017-08-18
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.100 Same 1.100