China Everbright Water - RHB Invest 2017-11-15: Project Wins For Earnings Gain

China Everbright Water - RHB Invest 2017-11-15: Project Wins For Earnings Gain CHINA EVERBRIGHT WATER LIMITED U9E.SI

China Everbright Water - Project Wins For Earnings Gain

  • China Everbright Water’s (CEW)’s 3Q17 results showed solid improvement in operating profit, increasing by 41% YoY and 8% QoQ. Higher interest and tax expenses partially offset operation gain, but we expect both to fall back in 4Q17 to support NP growth. 
  • We believe the execution of three major PPP projects would be the key catalyst to earnings growth over the next two years, and raise our earnings forecast for 2017-2019 by 4-7%. 
  • Maintain BUY with unchanged TP of SGD0.54 (20% upside). We think the market has yet to fully price in the continual earnings turnaround at CEW. 

Results review. 

  • China Everbright Water’s (CEW) 3Q17 revenue of HKD746m was up 35% YoY but down 14% QoQ. We believe the QoQ decline was mainly due to the uneven revenue recognition pattern of the CNY1.4bn Zhenjiang sponge city project, which is based on construction milestones at various sub- projects. Revenue from operation increased by c.20% YoY and QoQ, thanks to tariff hikes at several wastewater treatment (WWT) projects in 2017.
  • Financial expenses increased by 28% QoQ due to an increase of HKD1.1bn in net borrowing in 3Q17. We believe CEW would use the proceeds raised by the panda bond in 3Q17 to pay down part of its old debt in the future. 
  • NP grew by 35% YoY but was down 13% QoQ due to higher financial and tax expenses.

Bulky projects’ execution the next catalyst. 

  • We expect the execution of three large public-private partnership (PPP) projects to make significant contributions to the bottomline in the coming quarters. During the conference call, management gave the latest project guidance as follows: 
    1. Zhenjiang sponge city project (CNY1.4bn) was 32% completed as at end- 3Q17, and should be 36-37% completed by end-2017;
    2. Nanning Shuitang River project (CNY1.5bn) started construction at end- Sep. The company expects 20-25% of the works to be done in 4Q17; 
    3. For the Zhangqiu project, the CNY396m environmental park would start construction first, 10% of which should be completed by end-2017.
  • Although revenue recognition may not strictly follow the construction completion ratio, we believe it is still a reliable indicator and therefore increase our construction revenue forecast for 2018-2019. 
  • Receivable risk for these PPP projects should be relatively limited as the three local governments involved are better positioned financially – Zhenjiang ranks 5th in the wealthy eastern province of Jiangsu in terms of per capita GDP, and the Nanning and Zhangqiu projects are located in the provincial capital of Guangxi and Shandong.

Maintain BUY with unchanged DCF-derived TP of SGD0.54. 

  • CEW’s valuations have remained subdued YTD following its lacklustre 2016 results. However, given the strong turnaround in 2017 (9M17 EPS +38% YoY) and promising growth potential (2016-2019F EPS CAGR of 24%), we think the current forward P/E of 11x is undemanding. 
  • Key risks include slow execution of projects and deterioration in operation margin.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-15
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.540 Same 0.540