CITIC Envirotech (CEL SP) - UOB Kay Hian 2018-02-28: 2017 Positive Results But Profits From Lanzhou Mega Project Only From 1Q18

CITIC Envirotech (CEL SP) - UOB Kay Hian 2018-02-28: 2017 Positive Results But Profits From Lanzhou Mega Project Only From 1Q18 CITIC ENVIROTECH LTD. CEE.SI

CITIC Envirotech (CEL SP) - 2017 Positive Results But Profits From Lanzhou Mega Project Only From 1Q18

  • CITIC Envirotech (CEL) delivered positive 2017 results with a 24.9% increase in net profit. CEL results were better than street estimates but lower than ours as we had included earnings from the Lanzhou mega project. However, recognition will now only start from 1Q18.
  • Institutional investors remain committed to share placement at a premium.
  • Opportunities for CEL continue to abound in China and beyond as it utilises its tech advantage. 
  • Maintain BUY but trim our DCF-based target price to S$1.06.



RESULTS


Positive 2017 results with 24.9% profit increase. 

  • CITIC Envirotech (CEL)’s 2017 results remained positive with net profit rising 24.9% y-o-y to S$127.3m. Revenue rose 66.9% y-o-y to S$908.8m with engineering revenue surging 115.3% y-o-y to S$686.5m and recurring water treatment revenue jumping 16.1% y-o-y to S$192.5m.

4Q17 results lower than our expectations as Lanzhou mega project was not included. 

  • CITIC Envirotech’s results were better than street estimates but lower than ours as we had assumed earnings from the mega Lanzhou project to be recognised in 2017. 
  • However, upon querying management, we understand that recognition for the project will only start from 1Q18. Progress in the project remains smooth and we believe we should be able to see earnings recognition soon.


STOCK IMPACT


Share placement as planned with institutional investors believing that CEL is the right investment. 

  • With the deadline approaching for the recent share placement, we also queried management on the progress and they have reassured us that buyers remain committed. As such, with institutional investors like China Everbright Ltd (same group as China Everbright Water) continuing to believe that CITIC Envirotech is the right investment despite the premium, we expect the share placement should be confirmed soon.

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

  • While the 16.1% y-o-y growth in recurring water treatment is lower than engineering’s 115.3%, we note the time lag between project engineering start and completion. As such, we believe that 2017’s growth in engineering revenue will lead to a huge jump in recurring water treatment profit in 2018.

S$0.015 dividend paid, as expected. 

  • In line with our expectations, CITIC Envirotech remains committed to paying dividends with S$0.015 announced for 2017, an increase from S$0.01 for 2016. This translates to a yield of around 2%, a very reasonable rate for a company growing at CITIC Envirotech’s pace.

Opportunities abound for CEL as China demands higher water quality. 

  • The Chinese government’s standards for wastewater is getting higher with the positions (and future) of government officials tied to how well they meet hard targets. 
  • Currently, conventional technology cannot fulfill long-term guidelines and the only viable technology available is membrane technology. With its technological advantage, we believe CEL is extremely well positioned in the current scenario and its > Rmb10b order wins momentum in 2017 should carry forward into 2018.

Utilising technological advantage. 

  • To further utilise its technological advantage, CITIC Envirotech is also expanding its membrane technology division to manufacture nano-filtration (NF) and reverse osmosis (RO) membranes in the US and production should start by 1H18.
  • The group is also actively carrying out research, development and design and has successfully developed and filed 22 patents, some of which will see commercialisation in 2018.


EARNINGS REVISION/RISK


Introducing 2020 earnings and reducing 2018-19 estimates by 8.2% and 6.5% respectively. 

  • We note the increase in non-controlling interest profits and factor them into our earnings estimates by reducing our 2018-19 net profit forecasts by 8.2% and 6.5% respectively. We also introduce 2020 net profit forecast.
  • Key risks include a delay in project construction and a weakening of the renminbi.


VALUATION/RECOMMENDATION

  • Maintain BUY but reduce our DCF-based target price to S$1.06, implying 11.6x 2019F PE, mirroring Singapore and Hong Kong peers’ average of 11.2x. 
  • The stock remains the cheapest on 2018 valuations vs its Singapore peers such as SIIC and China Everbright Water, with 2018 forward dividend yield of 3.6% looking attractive.


SHARE PRICE CATALYST





Edison Chen UOB Kay Hian | Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-28
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.06 Down 1.110



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