China Everbright Water - RHB Invest 2017-12-19: In A Better Position

China Everbright Water - RHB Invest 2017-12-19: In A Better Position CHINA EVERBRIGHT WATER LIMITED U9E.SI

China Everbright Water - In A Better Position

  • We see China Everbright Water (CEW) as the likely winner in a more challenging competition landscape in 2018. Its stable operations, robust project pipelines and balance sheet are strong guarantees of organic and inorganic bottomline growth in the next three years. 
  • Maintain BUY with an unchanged TP of SGD0.54 (27% upside). 
  • It remains our Top Pick among the Singapore-listed stocks in the water sector.

Earnings visibility. 

  • China Everbright Water (CEW) would continue to see a steady cash flow from its existing projects as the company has managed to maintain stable operating GPM at around 52%. This is an achievement as we see fluctuating and overall declining operating margins in the industry.
  • The execution of three large PPP (Public–private partnership) comprehensive environment renovation projects (Zhenjiang, Nanning and Zhangqiu) should contribute significant earnings in the next two years. Latest progress of these projects are as below: 
    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- September. China Everbright Water 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.

Limited risk exposure due to better geographical exposure. 

  • Receivable risk for these PPP projects should be relatively limited as the three local Governments involved are relatively sound financially – Zhenjiang ranks fifth in the wealthy eastern province of Jiangsu in terms of per capita GDP. The Nanning and Zhangqiu projects are located in the provincial capital of Guangxi and Shandong with strong backing from provincial and municipal Governments.
  • We believe China Everbright Water's strategy of selectively participating in PPP projects would substantially reduce AR impairment risk and reward shareholders over the long term.

Strong balance sheet supports further expansion. 

  • At end-3Q17, its net gearing was only 46%, one of the lowest among peers. 
  • We think China Everbright Water would be more flexible to gear up for potential M&As or bidding for attractive PPP projects, given its competitive advantage over the already highly-geared competitors.

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

  • We believe the company would maintain its earnings turnaround momentum (9M17 EPS +38% YoY). Current forward P/E of 11x looks undemanding in our view. 
  • Key downside risks include slow execution of projects and a deterioration in its operating margin.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-19
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.540 Same 0.540