China Everbright Water - DBS Research 2019-05-16: Double Digit Earnings Growth

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

China Everbright Water - Double Digit Earnings Growth

  • China Everbright Water's 1QFY19 earnings up 16%, largely in line.
  • Added 245,000 tons of daily capacity to portfolio YTD, on track with its 1m tons target.
  • M&A as possible share price catalyst.
  • Maintain BUY with Target Price of HK$2.80 (HKSE) and S$0.49 (SGX).



Attractive valuation.

  • We maintain our BUY rating on CHINA EVERBRIGHT WATER LIMITED (SGX:U9E).
  • China Everbright Water is progressing well in securing more projects and pursuing its asset light strategy. It also benefits from the increasingly stringent requirements in water treatment standards by the China government and is getting more project extensions for capacity expansion and upgrade of treatment standards, which would lead to higher tariffs. In addition, it is extending into new business areas such as leachate treatment.
  • With earnings growth in the low-to-mid-teens, its current valuation at < 9x FY19 PE is not demanding. The valuation in the Singapore market (SGX) is even lower at just 8x PE.


Robust growth potential unnoticed by the market.

  • A jump of 11% in its SGX-listed China Everbright Water's share price after the announcement of 1QFY19 results provides good evidence that investors have underappreciated China Everbright Water’s growth potential. In particular, management has been careful to select projects with good profitability as its project portfolio grows.


M&A possible.

  • After a dual listing in Hong Kong, management is putting the focus back to M&As for capacity expansion. Management reckons there are a lot of candidates for acquisition as many smaller players have cashflow issues.
  • Nevertheless, management is very stringent in project selection, and requires a double digit return.


Valuation:

  • Our Target Price is set at HK$2.80 (HKSE) and S$0.49 (SGX), based on 15x 12-month rolling adjusted PE (stripping out construction revenue).


Key Risks to Our View:

  • Delay in construction progress, slow deal flow and depreciation in Rmb would result in slower-than-expected earnings growth.


WHAT’S NEW - Progressing well


1Q19 results largely in line.

  • China Everbright Water reported 16% and 26% growth in net profit and turnover in 1QFY19 to HK$206.4m and HK$1,313.5m respectively. 1Q19 results accounted for c.27% of our full year forecast, largely in line with expectations.
  • Nevertheless, the jump in finance costs was slightly higher-than-expected, which was the result of an increase in average balance of borrowings. Net debt-equity ratio reached 65%, up slightly from 62% in FY18.

More project wins and tariff hikes.

  • During the period, China Everbright Water won a water project in each of Jiangsu and Shandong provinces. In particular, the Zhenjiang Shengrunzhou waste water project in Jiangsu is an O&M project, in line with its asset light strategy. In addition, seven water projects were approved for tariff hikes, ranging from 21% to 56%.

On track to achieve capacity target.

  • China Everbright Water subsequently won three more projects in April / May, bringing total project wins to 245,000 tons of daily capacity. CEW is on track to achieve its target of 1m tons or 18% growth in total capacity for FY19. In addition, China Everbright Water has clinched an EPC project, further improving its cashflow with its asset light strategy.
  • We also expect tariff hikes will continue as more projects are required to enhance treatment standards to be above grade 1A. This should lead to at least double-digit growth in operating revenue.

Better profitability for the rest of the year.

  • Apart from topline growth, we also expect better profitability for the rest of the year, given
    1. absence of professional fees from its dual listing;
    2. lower effective interest rate after refinancing from panda bonds which have lower coupon rate of < 4%, compared with average finance cost of 4.0-4.2% in FY18 and 1QFY19.

Upside surprises in new project wins from M&A.

  • After the completion of its dual listing in HK, China Everbright Water plans to accelerate the progress in M&A. The tight financial liquidity environment in FY18 has led to cashflow issues for some smaller players which would be acquisition targets for China Everbright Water. Nevertheless, management has been very stringent in project quality and all targets must meet its required IRR of at least 10%. M&As would be a good share price catalyst.

Maintain BUY.

  • Our earnings forecasts are fine tuned. Our Target Price for China Everbright Water is set at HK$2.80 (HKSE) and S$0.49 (SGX), based on 15x 12- month rolling PE (adjusted for construction revenue).
  • We maintain our BUY rating as the current high single digit PE is undemanding in light of China Everbright Water’s double digit earnings growth.





Patricia YEUNG DBS Group Research | https://www.dbsvickers.com/ 2019-05-16
SGX Stock Analyst Report BUY MAINTAIN BUY 0.490 SAME 0.490



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