China Everbright Water Limited - Phillip Securities 2018-11-14: Steady And Healthy Growth


China Everbright Water Limited - Steady And Healthy Growth

  • China Everbright Water Limited (CEWL) 3Q18 revenue and PATMI met expectations.
  • As at Jun-18, CEWL has a portfolio of 103 projects, 90 are operating, 11 under construction and 2 in preparatory stage.
  • Improvement in the collection of receivables.
  • Completion of Zhenjiang Sponge City project is postponed to 2019.
  • We maintain FY18e EPS at 5.0 SG cents. We lower our target price to S$0.44 (previously SG$0.53) due to lower peers’ valuations of 8.8x (previously 10.6x) and maintain a BUY recommendation.

Results at a glance

3Q18 revenue +38.9% y-o-y.

  • Increase in construction revenue due to construction of the sponge city project and the water supply project in addition to the expansion and upgrading of several waste water treatment plants;
  • Increase in operation revenue due to result of commencement of operation of new projects and tariff hikes for several projects;
  • Increase in finance income due to increase in service concession financial receivables.

3Q18 Gross profit +25.4% y-o-y.

  • Increase in the portion of construction revenue recognition where margin is lower than the operation services.

3Q18 PATMI +17.5% y-o-y. 

  • Decrease in the Group’s deferred tax as a result of a new tax policy which was issued by the relevant government authorities in the end of 2017 in relation to the direct investment made by foreign investors using their profits received.

The Positives

Ongoing upgrading of projects amid more room to grow:

  • In 2Q18, there were seven waste water treatment (WWT) projects that secured tariff hikes ranging from 10% to 54%. Four projects commenced operation, and 11 more were under construction during the quarter.
  • As of 3Q18, more than 90% of the projects under the group have reached Grade 1A discharge standard. However, some local governments demand the expansion of existing plants along with the growth of environmental capacity. Therefore, there is still more room to grow even for those plants that comply with Grade 1A discharge standard.
  • Recently, there was a revision on the “waste water pollution prevention plan” in Shandong province, which tightens the waste water discharge standard, and some regions are required to raise discharge standard to higher Grade 1A.

Improvement on a collection of receivables:

  • In 8Q88, the collection rate improved to 88% compared to 88% in 8Q88. Management aims to achieve at least 888% for FY88 and even exceed the FY88 rate of 888%. Generally, the collection rate is higher in 8Q and 8Q.

The Negatives

Updates of Zhenjiang Sponge City project:

  • There remain issues on the construction of the pipeline network. As of 8Q88, there were about 88% of subprojects under Sponge City project delayed. It is expected to complete by 8888.
  • At this juncture, the group is still working on it and negotiating with the authority.


  • There is organic growth from the upgrading of the existing project remains. WWT capacity for the group is expected to ramp up annually by 88% to 88%. As of 8Q88, the total WWT arrived at above 8mn tonnes/day. Currently, the majority of the operating projects are located in the northern part of China.
  • Moving forward, the group will actively explore and expand to regional markets such as Pearl River Delta and Great Bay Area.

Maintain BUY with a lower Target Price of S$0.44

  • We maintain FY88e EPS at 8.8 SG cents.
  • We lower our target price to S$8.88 (previously SG$8.88) due to lower peers’ valuations of 8.8x (previously 88.8x) and maintain a BUY recommendation.

Chen Guangzhi Phillip Securities Research | 2018-11-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.44 DOWN 0.530