China Everbright Water - DBS Research 2018-11-13: More Opportunities From Upgrading Projects


China Everbright Water - More Opportunities From Upgrading Projects

  • China Everbright Water (CEW)'s 3QFY18 earnings climbed 17.5% on more construction work and tariff hike.
  • More upgrading projects ahead to meet the government’s higher environmental standards.
  • Raised FY18/19F earnings by 19-20% to reflect change in gross margin assumptions.
  • Target Price is lowered to S$0.475 to reflect investors’ weaker risk appetite on high debt companies; maintain BUY.

What’s New

China Everbright Water (CEW) reported 17.5% growth in 3QFY18 earnings to HK$144.3m.

  • The net profit in 9MFY18 grew 36% to HK$515.0m. The growth drivers in 3Q were the increase in construction revenue and tariff hike (ranging between 10% and 54%) for seven projects. Gross margin of 35.9% was higher due to higher percentage of contribution from operation services. Net debt-equity ratio was up from 45% in FY17 to 61% in 3QFY18, still reasonable.
  • YTD new project wins is estimated at Rmb2.7bn, compared with around Rmb3.4bn in FY17. Order backlog is estimated at Rmb5bn, providing good earnings visibility.
  • Although government’s regulations on the PPP market has some negative impact on deal flows, there is ample opportunity from upgrades of existing projects because of the stricter environmental requirements by the government and the general public. For instance, the Shandong government has just announced a new standard for water treatment, which is higher than grade 1A and will be implemented starting in 2019. This implies that all sewage treatment plants in Shandong will require upgrades.
  • Currently, CEW has total operating capacity of municipal sewage treatment of 1.9m tons/day in Shandong or 50% of total operating capacity of municipal sewage treatment. We expect more upgrade contracts from these projects going forward.
  • In addition, the government has recently issued documents to seek opinions on strengthening the ecological system in Yangtze River to further protect the water resources. There are suggestions to forbid any increase in the number of discharge points along the river. This implies that the water discharge volume has to decline with the higher water quality standard. Thus, there are more opportunities for project upgrades.
  • FY18 capex is estimated at HK$2.9bn and at a similar level in FY19. We estimate net debt-equity ratio to be around 60% for FY18 but this is projected to climb further to c.74% in FY19. This ratio will decline after dual listing in Hong Kong.

  • As our FY18 gross margin assumption of 31.3% was too conservative (9MFY18: 34%), we have raised it to 33.5%, leading to a 19-20% upward revision to our FY18/19F earnings. After the revision, we expect FY18F and FY19F earnings to grow 33% and 10% respectively.
  • Despite our upward earnings revisions, we have lowered our adjusted target PE (excluding construction revenue) from 24x to 15x to reflect investors’ weaker appetite on high debt companies.
  • Our new Target Price is now S$0.475. Maintain BUY.

Patricia YEUNG DBS Group Research | 2018-11-13
SGX Stock Analyst Report BUY MAINTAIN BUY 0.475 DOWN 0.650