February 12, 2018

Management reiterated their strong confidence in the company’s outlook as the Chinese government increases its emphasis on environmental protection. China is demanding higher standards for wastewater and decides on the positions that government officials should have (and their future prospects) based on how well they meet these hard targets.

Conventional technology cannot fulfil long-term guidelines of achieving standard IV and above (by 2025/2030) and the only viable technology available is membrane technology. Thus, with management bidding for multiple mega projects and being confident of winning some, we believe CEL can deliver at least another S$1b in project wins in 2018, sustaining its project wins momentum.

With a review of macro conditions, we believe there is a low probability of any major negative changes for CEL in 2018. Furthermore, we expect water treatment revenue to catch up with the engineering segment’s, growing by 60% in 2018. As such, we share management’s confidence in CEL’s outlook.

As one of the best industrial water treatment companies in China, CEL enjoys top valuation multiples and is one of the most expensive in terms of PE (currently trading at 13.6x 2017F PE). With CEL moving into 2018 and with superb profit growth on the horizon, CEL looks very attractive at 2018F PE valuations (currently trading at 9.3x 2018F PE vs 18.2x for peers). If CEL maintains its 2017 valuation multiple of 13.6x into 2018, CEL could trade as high as S$1.02. Maintain BUY with DCF-based target price raised to S$1.11 by UOB Kay Hian. Share price closed at S$0.710