CITIC Envirotech (CEL SP) - UOB Kay Hian 2018-01-09: Placement At Premium Is A Strong Vote Of Confidence

CITIC Envirotech (CEL SP) - UOB Kay Hian 2018-01-09: Placement At Premium Is A Strong Vote Of Confidence CITIC ENVIROTECH LTD. CEE.SI

CITIC Envirotech (CEL SP) - Placement At Premium Is A Strong Vote Of Confidence

  • Well positioned in a growing industry, CITIC Envirotech (CEL)’s new share placement at a 14.8% premium was accepted by partners, including the owner of its competitor. Other partners include a former KKR senior executive (who saw the potential in CITIC Envirotech and made KKR a fortune from it) returning at a higher price. This is a testament to CITIC Envirotech’s business potential, competitive advantages and technological prowess. 
  • The placement will lower gearing, increase growth and expand CITIC Envirotech’s business network.
  • Maintain BUY and DCF-based target price of S$1.09 on stronger growth.



WHAT’S NEW


Share placement at S$0.85 with new partners willing to accept a 14.8% premium.

  • CITIC Envirotech (CEL) announced a placement of 83.2m shares at S$0.85 each with the new partners willing to accept a 14.8% premium. 
  • The new partners include China InnoVision Capital and an investment partnership between China Everbright and Shandong Hi-speed Group (a Shandong state-owned enterprise). At S$0.85, the placement price is higher than what previous strategic investors (CITIC: S$0.825, China Reform Fund: S$0.725) had paid.

Former KKR senior executive returning to invest at a higher price. 

  • China Innovision Capital was set up by former KKR senior executive, Mr Zhao Fu. One of the first team members in KKR Asia, he was instrumental in KKR’s investment in CITIC Envirotech and allowing KKR to make a multi-bagger from CITIC Envirotech. Now that he has returned and investing in CITIC Envirotech at a higher price is a testament to the potential of CITIC Envirotech’s business, the bright outlook of the industry and a vote of confidence in CITIC Envirotech’s ability to perform.

Competitor’s investment is evidence of CITIC’s competitive advantage and prowess. 

  • Another noteworthy partner is China Everbright which owns China Everbright Water, a water treatment company also listed on the SGX, making it one of CITIC Envirotech’s closest peers. 
  • The fact that one of its competitors has chosen to invest in CITIC Envirotech at a 14.8% premium is evidence that CITIC Envirotech holds an array of competitive advantages (such as its membrane technology) that industry professionals agree with and think that it is the right company to ride the current water treatment trend.


STOCK IMPACT


Placement to increase growth rate with influx of capital and expand network. 

  • The S$70.7m placement funds will help CITIC Envirotech (CEL) lower its gearing and take up more projects, thereby accelerating its growth rate. 
  • These well-connected investors will also expand CITIC Envirotech’s already strong business network and open more doors and opportunities.

Membrane technology makes it well positioned in China’s future of high water quality. 

  • China is demanding higher standards for wastewater and positions government officials (and their future) 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.

Dazzling outlook with another S$1b project win in 2018. 

  • With management bidding for multiple mega projects and confident of winning some, we believe the share placement will help secure these projects and more. 
  • We believe CITIC Envirotech can deliver at least another S$1b in project wins in 2018, sustaining its project wins momentum.


EARNINGS REVISION/RISK


Raise earnings for 2017-19. 

  • We raise our 2017-19 net profit forecasts by 4.1%, 6.3% and 7.6% respectively as we believe the new partners will accelerate development. We now assume faster growth for CITIC Envirotech.
  • 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$1.09.


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/ 2018-01-09
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.09 Down 1.100



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