CITIC Envirotech - UOB Kay Hian 2019-06-25: Backed By Healthy Orderbook & Good Project Win Momentum

CITIC ENVIROTECH LTD. (SGX:CEE) | SGinvestors.io CITIC ENVIROTECH LTD. (SGX:CEE)

CITIC Envirotech - Backed By Healthy Orderbook & Good Project Win Momentum

  • With an orderbook of more than Rmb6b as of end-18 and strong projects win momentum of more than Rmb2b ytd, CITIC ENVIROTECH (SGX:CEE) has built a good foundation for growth.
  • CITIC Envirotech is in a good position to tap on China’s commitment to combatting environmental pollution. The weak 1Q19 results were due to a project delay and a more conservative revenue recognition method.
  • CITIC Envirotech trades at 9.3x 2018 PE and 0.7x P/B, 1SD below its long-term mean.



WHAT’S NEW


Healthy orderbook and strong project win momentum.

  • As at end-18, CITIC ENVIROTECH (SGX:CEE) had secured project wins in excess of Rmb6b, which will be progressively delivered over the coming two years, providing growth visibility.
  • In addition, since Jan 19, CITIC Envirotech has secured five more projects with a combined value of more than Rmb2b:
    1. Rmb807m industrial hazardous waste treatment and industrial park development project in Wuji County, Hebei Province,
    2. RMB149m ecological restoration project in three townships in Zhaojue County, Sichuan Province,
    3. Rmb506m Public-Private Partnership project in Dongyuan County, Guangdong Province,
    4. Rmb310m industrial hazardous waste treatment project in Shihezi City, Xinjiang Province, and
    5. Rmb474m industrial hazardous waste treatment project in Linfen City, Shanxi Province.

Environmental protection remains a top priority for Chinese government.

  • CITIC Envirotech is in a good position to reap the benefits of the environmental protection industry. The sector is a top priority for the Chinese government, and the industrial wastewater treatment market is expected to grow 5-10% annually under China’s 13th Five-Year Plan on the back of increasingly stringent environmental protection regulations in China.
  • On the other hand, SUNPOWER GROUP LTD. (SGX:5GD) (Rating: BUY, see Sunpower Group's analyst report) is also a beneficiary of China’s moves to reduce air pollution through targeted policies that eliminate decentralised “dirty” coal-fired boilers.

Weak 1Q19 due to temporary project delay and change in accounting policy.

  • To recap, CITIC Envirotech reported a weak set of results in 1Q19, where its revenue and net profit fell 72% y-o-y and 92% y-o-y respectively. We understand that this was due to a temporary project delay where the Meigu EPC project that is worth RMB2.5b was put on hold for the winter period.
  • In addition, there was a change into a more conservative revenue recognition method based on % of cost incurred that is more back-loaded.

New growth driver from industrial hazardous waste treatment project.

  • CITIC Envirotech has secured more than Rmb1.5b of industrial hazardous waste treatment projects in 1H19. With higher barriers of entry, better margins and better project IRR of around 20%, this could be a new growth driver for CITIC Envirotech.

Consistent dividend payout since 2010 shows commitment to shareholders.

  • CITIC Envirotech has consistently paid out dividends to its shareholders every year since 2010, culminating in its first interim dividend last year. This reflects commitment to shareholders, as well as the confidence CITIC Envirotech has in the direction of the group.


VALUATION/RECOMMENDATION


Trading at 1SD below its long-term PE and P/B band after a huge correction.

  • CITIC Envirotech’s share price has fallen 603% since its 1Q19 results announcement on 29 at 1SD below its long-term mean and P/B at more than 1SD below its long-term mean.

Trading at 9.3x 2018 PE and 0.7x 2018 P/B.

  • CITIC Envirotech reported a soft set of results in 1Q19 due to a project flat for 2019, it will trade at 9.3x. If its net profit grows by 10%, CITIC Envirotech’s 2019 PE will fall to double-digit net profit growth, which it has achieved in the past.





Singapore Research Team UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-06-25
SGX Stock Analyst Report NOT RATED MAINTAIN BUY 99998 SAME 1.060



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