China Everbright Water - DBS Research 2019-02-21: Low-Teens Earnings Growth Sustainable

CHINA EVERBRIGHT WATER LIMITED (SGX:U9E) | SGinvestors.io CHINA EVERBRIGHT WATER LIMITED (SGX:U9E)

China Everbright Water - Low-Teens Earnings Growth Sustainable

  • China Everbright Water’s FY18 results in line with our and market estimates. 
  • Higher dividend payout ratio a nice surprise; further increase in payout ratio going forward. 
  • Target to increase total treatment capacity by 18% in FY19; M&A possible. 
  • Maintain BUY with Target Price of S$0.49.



What’s New

  • CHINA EVERBRIGHT WATER LIMITED (SGX:U9E) reported 32% growth in FY18 net profit to HK$676.5m, in line with our and market expectations. A nice surprise was an increase in the total dividend payout ratio from c.13% in FY17 to c.19% in FY18, where total DPS increased from S$0.0049 to S$0.0099. Management intends to gradually increase the payout ratio going forward.
  • During FY18, China Everbright Water won 15 new projects and secured 4 extension projects at a total investment of Rmb3.6bn. Total treatment capacity of its project portfolio reached 5.4m tons/day, of which around 4m tons are operating. Tariff hikes ranging from 1% to 165% were approved for 18 waste treatment plants. In addition, China Everbright Water has successfully ventured into the leachate treatment space.
  • Going forward, we expect low-teens earnings growth to be sustainable, driven by several factors.
    • Firstly, order backlog has reached around 1.4m tons of daily capacity and management targets to add another 1m tons of new projects in FY19. In particular, industry waste water treatment (IWWT) will be one of the key areas for development, such as IWWT for PCB factories and chemical plants. Note that the tight financial liquidity environment in FY18 resulted in cashflow issues for some small players. Although stronger credit support from banks this year could alleviate some pressure, there are still many water plants available as acquisition targets. Acquisitions would lead to upside surprises to our new project wins projection.
    • Secondly, although the treatment standard of > 90% of China Everbright Water’s current project portfolio has already achieved grade 1A standard, there is an increasing trend for the government to enhance the treatment standard further. This is positive for tariff hikes and project returns.
    • Thirdly, a dual listing in Hong Kong is expected to be completed in 1HFY19. We expect China Everbright Water’s net debt-equity ratio could be lowered by at least 10ppts (FY18: 62%). Funds raised could also accelerate business development.
    • The completion of the dual listing exercise could be a share price catalyst.


Recommendation

  • We have only fine-tuned our earnings estimates. Our Target Price is adjusted to S$0.49, based on 15x 12-month rolling PE (adjusted for construction revenue).
  • Maintain BUY.





Patricia YEUNG DBS Group Research | https://www.dbsvickers.com/ 2019-02-21
SGX Stock Analyst Report BUY MAINTAIN BUY 0.49 UP 0.475



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