20180403-招商证券_香港_-中滔环保-01363.HK-Guiding_a_positive_2018_9页_1014kb

CT Environmental Group (1363 HK) Summary

Core Content

CT Environmental Group (CTEG) reported a FY17 core profit drop of 12% YoY to HK$604 million, slightly below the consensus. The company guided a ~30% YoY growth in NP for 2018. The report suggests that it will take time for investors to regain confidence due to the qualified audit opinion on HK$62 million of sludge and solid waste revenue in 2017.

Main Points

• FY17 Performance:

  • Revenue decreased by 3.6% YoY to HK$2,099 million.
  • Gross profit fell by 19.5% YoY to HK$800 million.
  • Core profit dropped by 12% YoY to HK$604 million, mainly due to the loss status of the newly commenced Fumian project and lower-than-expected utilization in sludge and hazardous waste treatment businesses.

• 2018 Guidance:

  • The company is accelerating the development of Fumian Project Phase I & II and Bobai Project Phase I & II.
  • With the commencement of these projects in 2018-19, and increased tenders for sludge and solid waste treatment, management expects ~30% YoY NP growth in 2018.

• Valuation and Target Price:

  • The DCF-based target price (TP) was slightly adjusted to HK$1.52, a 2% decrease from the previous HK$1.55.
  • The 2018E P/E ratio is 11.8x, with a 20% recurring EPS CAGR in 2017-19E.
  • The company's BVPS (2018E) is HK$0.79, and the 2018E net debt/equity ratio is 67.0%.

• Dividend Yield and ROE:

  • The dividend yield for 2018 is 2.2%.
  • The ROE for 2018 is 15.7%, with a slight increase from the previous year.

Key Financials

Key Risks

• Upside Risks:

  • Gaining more sludge and hazardous waste treatment tenders than expected.
  • Better improvement in utilization.
  • Higher returns from new projects.

• Downside Risks:

  • More industrial customers closing down due to stricter pollutant control or economic slowdown.
  • Delay in the commencement of new projects.
  • Inability to pass on increased costs to end-users.
  • Prolonged A/R days.

Project Pipelines

• Industrial Water Supply:

  • Capacity is expected to increase significantly in 2018E and 2019E.
  • Key projects include Yulin Fumian Phase I, Sichuan Guangyuan Phase I, and Bobai Project Phase I.

• Industrial Wastewater Treatment:

  • Capacity is expected to increase by 34% in 2019E.
  • Key projects include Yulin Fumian Phase II, Bobai Project Phase II, and Yinghong Park Phase I.

• Sludge Treatment:

  • Capacity is expected to increase by 21% in 2019E.
  • Key projects include Yulin Fumian, Longmen Industrial Base, and Foshan Haoying.

• General Industrial Solid Waste:

  • Capacity is expected to increase by 150% in 2018E.
  • Key projects include Longmen Industrial Base and Bobai Project Phase I.

• Hazardous Waste Treatment:

  • Capacity is expected to remain stable in 2018E and 2019E.
  • Key projects include Guangzhou Lyou, Nansha Marine Conservation Centre, and Kangxiang Metal.

Conclusion

The report maintains a NEUTRAL rating for CTEG, citing the need for time to regain investor confidence. The target price is slightly adjusted to HK$1.52, reflecting the qualified audit opinion on sludge and solid waste revenue. The company is expected to see growth in NP for 2018, driven by the commencement of new projects and increased tenders. However, there are several risks that could impact the company's performance, including the potential for more industrial customers to close down, delays in new projects, and the inability to pass on increased costs to end-users.