CITIC Envirotech (CEL SP) - UOB Kay Hian 2017-12-13: Looking Forward To Yet Another Dazzling Year Of S$1b In Project Wins

CITIC Envirotech (CEL SP) - UOB Kay Hian 2017-12-13: Looking Forward To Yet Another Dazzling Year Of S$1b In Project Wins CITIC ENVIROTECH LTD. CEE.SI

CITIC Envirotech (CEL SP) - Looking Forward To Yet Another Dazzling Year Of S$1b In Project Wins

  • With fundamentals intact and an upcoming 30% dividend likely, we see no reason to worry about the recent CITIC Envirotech share price correction but instead see it as an opportunity to buy.
  • With CITIC Envirotech (CEL)’s excellent position in this growing market, we expect it to win yet another S$1b worth of projects in 2018 (CEL exceeded 2017’s S$1b target by ~50%). We think 4Q17 and beyond will continue to be stellar with recurring income catching up in 2018 (+52.9% yoy). 
  • Maintain BUY and target price of S$1.10.



WHAT’S NEW


Share price correction offers buying opportunity at strategic investors’ levels.

  • CITIC Envirotech’s (CEL) recent price correction offers investors a buying opportunity to go in at or below the levels of strategic investors (CITIC’s S$0.825, China Reform Fund’s S$0.725). 
  • With CITIC Envirotech's stellar 3Q17 results, there are no fundamental reasons supporting such a price correction. A 30% dividend payout is also to be expected for 2017, likely to be announced around Feb 18.

Dazzling outlook with another S$1b project wins in the year ahead. 

  • Management has shared it is bidding for multiple mega projects and is confident of winning some projects. 
  • With CITIC Envirotech exceeding its S$1b 2017 project wins target by about 50%, we believe CITIC Envirotech can and will deliver at least another S$1b in project wins in 2018, sustaining its project win momentum.


STOCK IMPACT


Stellar results expected to continue in 4Q17. 

  • After reviewing macro conditions, we believe there is a low probability of any major negative changes for CITIC Envirotech in 4Q17. As such, it will likely continue to deliver stellar results, with a significant chance of beating our forecast and ending 2017 with a bang.

Recurring water treatment growth will catch up with engineering’s in 2018. 

  • While current growth from recurring water treatment is lower than that from the engineering segment, we note the time lag between engineering projects’ start and completion. As such, we believe that the engineering segment’s 2017 growth will lead to a huge jump in 2018’s recurring water treatment profits and recurring water treatment income growth of 52.9% in 2018.

Well positioned in China’s future of high water quality. 

  • China is demanding higher standards for wastewater and the positions (and the future) of government officials are tied to how well they meet these hard targets. 
  • Currently, conventional technology cannot fulfill long-term guidelines and the only viable technology available is membrane technology. As such, we believe CITIC Envirotech is extremely well positioned in the current scenario and should sustain its order wins momentum.

Contract win underlines our confidence in CEL’s ability to deliver results. 

  • As such, we believe CITIC Envirotech is extremely well positioned in the current scenario and the market has misunderstood the situation. 2017’s project wins and its 2018 project win target underline our confidence in CITIC Envirotech's ability to deliver results. 
  • We believe the street is too conservative on CITIC Envirotech's ability to win contracts/ achieve profits and we reiterate our confidence in CITIC Envirotech's profit growth and it hitting/exceeding our forecast for 2017.


EARNINGS REVISION/RISK

  • No change in estimates.
  • Key risks include a delay in project construction and a weakening of the renminbi.


VALUATION/RECOMMENDATION

  • Maintain BUY and DCF-based target price of S$1.10.


SHARE PRICE CATALYST

  • Stronger-than-expected results.
  • Further contract wins.
  • Share buybacks from CITIC Envirotech.




Edison Chen UOB Kay Hian | Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2017-12-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.100 Same 1.100



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