China Everbright Water (CEWL SP) - DBS Research 2018-03-01: Strong Balance Sheet To Support Growth

China Everbright Water (CEWL SP) - DBS Vickers 2018-03-01: Strong Balance Sheet To Support Growth CHINA EVERBRIGHT WATER LIMITED U9E.SI

China Everbright Water (CEWL SP) - Strong Balance Sheet To Support Growth

  • China Everbright Water (CEWL)'s FY17 results ahead of our expectation due to strong construction revenue.
  • Construction works of three sizeable water environmental projects to support FY18 growth.
  • Solid balance sheet allows more project wins in the PPP market.
  • Maintain BUY with Target Price of S$0.65.

What’s New 

  • China Everbright Water (CEW) reported 47% growth in FY17 earnings to HK$513m which is 7% and 2% above our and consensus estimates respectively. The major discrepancy is the higher-than-expected construction revenue which jumped 87% (vs our projected 71%). 
  • Net debt-to-equity ratio only climbed 4ppts to 45%, lower than expected.
  • Although trade receivables increased > 37%, it was mainly due to VAT refund. 
  • Collection of water tariff was progressing well. In some cases, collection was > 100%, implying collection of overdue amounts. Final DPS of 0.49 Scts was declared, translating into a stable payout ratio of c.15%.
  • Three major water environmental projects with total investment of Rmb5.5bn have already commenced construction. Coupled with various upgrading works with total investment of Rmb541m, these will drive construction revenue to grow > 30% in FY18.
  • Although treatment volume climbed only 3% in FY17, we expect stronger growth of 5% in FY18 following the completion of upgrade/expansion of 14 projects in FY17. Coupled with tariff hike, we estimate operating revenue to climb 8% in FY18.
  • Management has a target of achieving 10m tons of daily treatment capacity by 2020, up from 5m tons currently. We reckon this is a tough target to achieve. However, we believe CEW has a good chance of extending its market presence in the large scale water environmental projects.
  • Despite the recent new policies in tightening regulatory environment in the financial industry, CEW has made improvement in financing channels and issued corporate bonds. In addition, it has a very solid balance sheet for further expansion, compared with its peers which usually have very high net debt-equity ratio of > 70%. 
  • Management also reckoned that the government’s latest policies on the PPP market should allow capable operators, including CEW, to win more projects. In fact, CEW has also enhanced its competitive edges by improving its technical capability and partnering with an environmental protection company in Germany.
  • We have fine-tuned our earnings estimates. Target Price remains unchanged at S$0.65. Maintain BUY.

Patricia YEUNG DBS Vickers | http://www.dbsvickers.com/ 2018-03-01
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.650 Same 0.650