August 10, 2017

China Everbright Water (CEW) reported a 41% growth in 1HFY17 net profit to HK$255m, in line with our estimate. Turnover growth of 24% to HK$1.6bn was higher than expected. The decent growth was underpinned by construction of the sponge city, the river basin ecological restoration project and the expansion and upgrading of several wastewater treatment (WWT) plants.

During 1HFY17, 80,000m³ daily WWT capacity and 20,000m³ daily reusable water supply capacity became operational. In addition, five WWT projects received approvals for tariff hike, ranging from 19% to 86%. In particular, Beijing Daxing Tiantanghe WWT project could enjoy a 86% hike in treatment tariff as water treatment standard is enhanced to category IV. This is also CEW’s first project to achieve such a high treatment standard. As at 1HFY17, CEW had total water treatment capacity of 4.3m tons per day. We expect tariff hike and new capacity to keep operation revenue growth at mid to high single digits in FY18/19.

New project wins amounted to Rmb4.26bn in 1HFY17. Coupled with the recently won project in Jinan Huashan, YTD project wins increased to Rmb4.38bn. With total order backlog of Rmb6.8bn, we expect construction revenue to remain a major growth driver. In particular, Zhangqui water supply system project (investment of Rmb3.06bn) and Suizhou water environment restoration project (Rmb956m) are yet to commence construction. We expect growth in construction revenue to be at least 26% in FY18/19.

We are pleased that CEW is continuously making breakthroughs in business development. After securing the first sponge city project last year, it has subsequently extended into water environment restoration market and won the first urban-rural integration water supply project this year. The recent win of its first underground WWT project with the adoption of anaerobic-anoxic-oxic membrane bio reactor is also the result of continuous advancement in technology R&D. CEW will continue to advance collaborations with domestic and international institutions and research institutions to drive more breakthrough in core technologies which will allow the company to win more projects in new areas.

Net debt-equity ratio reached 43% in 1HFY17. Given its strong order backlog, CEW issued its first tranche of panda bonds of Rmb1bn with coupon rate of 4.55%. CEW is also exploring more channels to finance its projects, including water industrial fund and asset-based securities. We reckon strong financing ability is one of the key success factors in the water market.

We have fine-tuned our earning forecasts. Our TP is nudged up to S$0.65, which is based on 24x 12-month rolling adjusted PE (stripping out construction revenue). Maintain BUY. –DBS

China Everbright Water closed at: S$0.475