CITIC Envirotech (CEL SP) - UOB Kay Hian 2018-04-26: On Track For A Stellar 2018

CITIC Envirotech (CEL SP) - UOB Kay Hian 2018-04-26: On Track For A Stellar 2018 CITIC ENVIROTECH LTD. CEE.SI

CITIC Envirotech (CEL SP) - On Track For A Stellar 2018

  • CITIC Envirotech (CEL) delivered stellar 1Q18 results with a 144.5% y-o-y profit surge.
  • China’s formation of its new environmental ministry is a reminder of its staunch anti-pollution stance. CEL is well positioned to capture the huge opportunities available given its Chinese business network and significant technological advantage.
  • We believe CEL’s terrific results will continue for 2018 and is a great way to bank on China without worrying about trade war issues.
  • Maintain BUY and DCF-based target price of S$1.06.



WHAT’S NEW


Stellar 1Q18 results as expected.

  • In line with our expectations, CITIC Envirotech (CEL) delivered terrific results for 1Q18 with net profit surging 144.5% y-o-y to S$41.7m on the back of a 148.1% jump in revenue. We believe contributions from the Lanzhou project have now been recognised. 
  • Engineering business revenue grew to S$121.9m (+126.6% y-o-y) while membrane system sales surged to S$90.9m (+361.4% y-o-y). Also, recurring water treatment revenue continued to grow 23.1% y-o-y to S$46.4m. 
  • Excluding financial income from service concessions, the growth rate would have been higher at 34.1% y-o-y.


STOCK IMPACT

  • China’s staunch stance on pollution continues with formation of new environmental ministry. With the powerful President Xi holding control of the party, China’s formation of the new Ministry of Ecological Environment is a sign of its staunch stance on environmental protection. The ministry, which has sweeping powers to curb pollution, will be a major step in carrying out the strict policies on environmental protection. China’s government standards for wastewater is getting higher with the positions (and future) of local government officials tied to how well they meet hard targets.
  • CEL well positioned to capture opportunities in China’s environmental protection given technological advantage. We believe China’s efforts to control pollution and protect its environment will open up multiple opportunities for companies who have the right resources. CEL is well positioned to capture these opportunities given its business network in China (CEL now counts China Reform Fund, SOE Shandong Hi-speed and China Everbright as its shareholders with the completion of the placement) and its significant technological advantage. Currently, conventional technology cannot fulfill long term guidelines and the only viable technology available is membrane technology.
  • Recurring revenue growth from water treatment segment catching up with engineering segment’s revenue growth, but with a time lag. As expected, recurring water treatment revenue continues to grow and is starting its catch up with the engineering segment’s revenue growth. However, the time lag between an engineering project’s start and completion will continue to mean that a time lag will be present between the two.
  • Trade wars have no significant impact on CEL. While there have been worries of a trade war between the US and China, we believe that CEL represents an excellent method to bank on China without having to worry about trade war issues. Given its focus on providing for domestic demand that will not be easily affected, we see no significant impact to CEL even if a trade war takes place.


EARNINGS REVISION/RISK

  • No change to forecasts.
  • Key risks include a delay in project construction and a weakening renminbi.


VALUATION/RECOMMENDATION


Maintain BUY and our DCF-based target price of S$1.06.

  • Our new DCF-based target price is S$1.06, implying a 2019F PE of 11.6x, mirroring SG/HK peer average of 11.2x. 
  • The stock remains the cheapest on 2018 valuations vs its Singapore peers such as SIIC Environment and China Everbright Water with a 2018 forward dividend yield of ~3% looking attractive.


SHARE PRICE CATALYST

  • Further project wins.
  • Share buybacks from CEL.





Edison Chen UOB Kay Hian | Nicholas Leow UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-26
SGX Stock Analyst Report BUY Maintain BUY 1.060 Same 1.060



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