China Jinjiang - CIMB Research 2018-03-07: More Conservative Dividend Payout Going Forward

China Jinjiang - CIMB Research 2018-03-07: More Conservative Dividend Payout Going Forward CHINA JINJIANG ENV HLDG CO LTD BWM.SI

China Jinjiang - More Conservative Dividend Payout Going Forward

  • China Jinjiang’s (CJE) FY17 net profit was 12% below our forecast.
  • We expect operating capacity to drop 9.5% in FY18F due to plant closures and divestments but should grow at 28% p.a. in FY19F and FY20F.
  • We think dividend payout will be cut to 30% in FY18F-20F due to capex needs.
  • FY18F-19F EPS cut by 14%-18% and DCF-based Target Price cut to HK$0.85/share.
  • Attractive valuation with FY18F P/E of 5.2x and dividend yield of 5.7%. Maintain ADD.

FY17 net profit was 12% below our forecast 

  • China Jinjiang Environment Holdings (CJE) released FY17 results on 29 Feb and hosted a conference call with the investing community on 5 Mar. 
  • The net profit increased by a modest 0.6% y-o-y to Rmb601.2m, short of our forecast by 12%. The miss was due to low waste-to-energy (WTE) gross margin from the high coal price, higher-than-expected finance costs and lower-than-expected quantity of waste processed (13-14% below our forecast).

We expect FY18F waste volume to stay flat y-o-y 

  • In FY17, the waste processed by CJE increased by only 3.2% due to low capacity growth (+3.1% y-o-y to 28,280 tonnes/day by end-17) and partial closure of eight WTE plants for technical upgrades. 
  • For FY18F, we expect the waste processed to drop 0.3% y-o-y due to the potential closure of Zibo and Kunming plants due to the government’s policies and the disposal of 70% interest in Hothot and Zibo projects.

Capacity addition target aggressive 

  • We expect CJE’s WTE capacity to drop 9.5% y-o-y to 25,580 tonnes/day by end-18F, due to plant closures and divestments. In FY19F, we expect 7,250 tonnes/day new capacity to come onstream, including the completion of technical upgrades for eight existing plants and new projects expected to commence operations this year. 
  • CJE is currently seeking government approvals for another three WTE projects (3,300 tonnes/day), which are likely to contribute to our FY20F capacity addition forecast of 9,200 tonnes/day.

We expect dividend payout to be cut to 30% in FY18F-20F 

  • We think CJE will have high capex needs in the next few years. Currently, it has more than Rmb10bn worth of WTE projects under construction or in preparatory stages. In our forecasts, we assume total operating cash inflows in FY18F-20F of only Rmb5.5bn, implying CJE will need to source for more funds or continue with divestments. 
  • We expect CJE’s dividend payout will be cut from 50% in FY17 to 30% in FY18F-20F and net gearing to rise from 61% at end-17 to a high of 95% by end-20F.

FY18F-19F EPS cut by 14-18% 

  • We cut our FY18F-19F EPS as we expect the disposal of projects, the slow progress in new project construction, and the temporary closure of some facilities for technical upgrades to lead to lower volumes of waste processed. 
  • We also adjust our forecasts to align with the low gross margin and high finance costs in FY17, and introduce FY20F forecasts. Our DCF-based target price is cut from S$1.10/share to S$0.85/share.

Maintain ADD 

  • We maintain ADD. Despite the FY18F-19F EPS cut, CJE’s valuation remains attractive at FY18F P/E of 5.2x and dividend yield of 5.7%. 
  • Potential re-rating catalysts include faster progress in the technical upgrades of the eight plants, compensation agreements with local governments regarding the closure of Zibo and Kunming plants, and the start of construction of more WTE projects. 
  • Key potential risks are interest rate hike, FX risks for overseas projects and a surge in coal price.

Keith LI CIMB Research | 2018-03-07
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.85 Down 1.100