Excerpts from analysts' report

HSBC analyst: Thomas Zhu

plant3.15China Everbright Water had total water treatment capacities of 4.7mtpd and operating capacities of 3.6mtpd as at end 2015e, ranking it roughly China’s 11th-largest water company. NextInsight file photo

  • Promising growth prospect with 25% earnings CAGR and high percentage of operation earnings

  • Strong synergy with CEI, impressive track record and healthy balance sheet

  • Initiate with Buy; TP SGD0.85

China Everbright Water (Everbright Water) is the water subsidiary of China Everbright International (257 HK, Buy, TP HKD14.50; CEI). CEI completed the reverse take-over of Singapore-listed water company HanKore in Dec 2014, in which CEI injected its water assets into HanKore and changed name of the combined company to Everbright Water.

Promising growth prospects
The Group’s management targets to grow China Everbright Water (Everbright Water) into a top three Chinese water company over the next three to five years, indicating that its capacities should grow from 4.7mtpd by end 2015e to over 10.0mtpd. While the growth may look stunning at first sight, we think this is well achievable given the following.

(1) The growth only indicates capacity addition of 5.3mtpd (close to what Beijing Enterprises Water added in one year in 2012).

(2) There are abundant brownfield and greenfield opportunities driven by PPP and Water Ten Rules.

(3) Its management can leverage on the strong synergy with CEI. As result of the capacity growth, we expect Everbright Water’s earnings growth to reach HKD647m in 2017e, implying CAGR of 25% in 2015-17e.

Everbright Water already acquired Dongda Water with 1.1mtpd capacity in 2015 and management is following another four to five acquisition targets with capacities of over 1.0mtpd. We expect the capacity growth to be driven by M&A going forward.

Everbright Water generates c80% of earnings from operation. Among its peers, Everbright Water’s earnings are better backed by real cash flow and less reliable on the non-cash BOT construction earnings.

Strong synergy with CEI

ThomasZhuWe like Everbright Water for its promising growth prospect, high proportion of earnings from operation, strong synergy with CEI, impressive management track record and healthy balance sheet.

Everbright Water trades only about USD0.8m per day, as result of the concentrated holding by CEI (CEI now holds 74% of Everbright Water).

- Analyst Thomas Zhu (photo)

We expect Everbright Water to benefit from the strong synergy with CEI, in terms of connection, reputation and financing. CEI has project presence in 12 provinces in China, seven of which are provinces where Everbright Water does not yet have presence.

Also, CEI is well regarded in the industry as delivering projects among the highest quality. As it is usually the same local government official in charge of waste treatment and sewage treatment, we think Everbright Water’s project acquisition can benefit from the connection and also good reputation that CEI has already established with various local governments in China.

CEI enjoys very low funding cost with effective interest rate averaging only 4.7% in 2014. On the other hand, Everbright Water was paying very high effective interest rate of 6.9%, as result of the high-cost debt inherited from HanKore. We expect Everbright Water’s funding cost to decline as management replaces historical high-cost debt with new low-cost debt that the company is able to secure after it becomes a subsidiary of CEI.

Impressive management track record

Mr. Chen Xiaoping, Chairman of Everbright Water and Mr. Wang Tianyi, CEO, have also been serving in CEI for a long time, as CEO and General Manager respectively. Management has delivered impressive track record in more than tripling CEI’s capacity from 10,550tpd by 2010 to 32,250tpd by 2014 and also CEI’s market cap from USD1.9bn in 2010 to USD6.7bn in 2014.

Robust balance sheet

Everbright Water has very strong balance sheet with net debt/equity of only 18% by 2014, one of the lowest among its peers. As a result, Everbright Water has much smaller equity placement (i.e. EPS dilution) risk compared to peers and we expect the company’s ROE to improve from 7% in 2014 to 11% in 2017e, partially driven by the company gearing up its balance sheet.

At our fair value target price, China Everbright Water would trade at PE of 23.3x in 2016e and 18.8x in 2017e. Our target price implies a PB of 1.6x in 2016e and 1.5x in 2017e.

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