China Everbright Water - DBS Research 2020-08-13: Play Catch-up In 2H


China Everbright Water - Play Catch-up In 2H

  • China Everbright Water's 1HFY20 net profit declined 3.8% on the back of 38.2% drop in construction revenue due to COVID-19.
  • Capex to stay flat in FY20 and increase slightly in FY21.
  • Exploring opportunities along Yangtze and Yellow River basins to build up orderbook.
  • Maintain BUY as China Everbright Water is trading at trough valuations with improving 2H growth.

China Everbright Water (CEW) reported a 3.8% drop in net profit to HK$404.5m for 1HFY20.

  • China Everbright Water (SGX:U9E) reported a 3.8% drop in net profit to HK$404.5m on 14.7% decline in total turnover to HK$2.12bn for 1HFY20. Due to COVID-19, many projects suffered from construction delays, leading to a 38.2% decrease in construction revenue.
  • On a positive note, revenue from operating services climbed 13.4% with 11% and 16.8% growth in volume of wastewater treatment and water supply respectively. In addition, operating margin increased 4.7ppts to 35.7%, on the back of lower percentage of construction revenue, lower electricity cost and stringent cost control. Net debt-equity ratio reached 82% in 1HFY20, compared with 73% in FY19.
  • Despite the decline in earnings, interim DPS remained the same as last year at 3.74HKcents (for HKEx) or 3.1% higher at 0.67Scents (for SGX).
  • Due to travel restrictions amid COVID-19, China Everbright Water secured new project wins of only Rmb805m, compared with Rmb3.7bn in 1HFY19. With capacity addition of 200,000 m3/day, China Everbright Water’s capacity is now 6.4m m3/say as of end-1HFY20.
  • Furthermore, only 14 projects with aggregate treatment capacity of 0.47m m3/day are currently in preparatory stage, down from 1.2m m3/day in 1HFY19.
  • Nevertheless, ecological protection for Yangtze and Yellow River basins have been highlighted in the government’s environmental policies. Pollutants from factories of highly polluting industries along these river basins have already caused severe contamination in the ecological system. It has also led to low efficiency of water resource utilisation. Given that the integration of treatment plants, pipeline networks and river basins is an effective way to improve the water environment, there will be many water projects along Yangtze and Yellow River basins. Management is optimistic in securing more projects in 2H20.
  • Trade receivables recovery rate deteriorated from 91% in 1HFY19 to 84% in 1HFY20 as governments were busy in fighting the pandemic. However, as the economic activities are resuming back to normalcy, collection of receivables should improve to the pre-COVID level.
  • Despite a significant delay in construction progress in 1H20, China Everbright Water believes it can catch up in 2H and has revised down its FY20 capex budget by only 10% to HK$2.7bn, which is at a similar level as FY19. Management guided for mild growth in capex for FY21. As such, we have revised down our sales growth assumption for construction revenue by 10ppts and 5ppts for FY20 and FY21 respectively. Thus, our earnings estimates are revised down by 5-8% for FY20/21.
  • After the revision, earnings growth is estimated at low to mid-teens for FY21/22, on the back of 10-13% growth in treatment volume.

Maintain BUY on China Everbright Water

Patricia YEUNG DBS Group Research | https://www.dbsvickers.com/ 2020-08-13
SGX Stock Analyst Report BUY MAINTAIN BUY 0.33 DOWN 0.490