20180829-招商证券_香港_-北控水务集团-00371.HK-Eye_on_M_A_opportunities_7页_1mb

Summary of BJ ENT WATER (371 HK) Company Report

Core Content

BJ ENT WATER (371 HK) reported its 1H18 results in line with expectations, with a core profit of HK$2.3bn, representing a 22% YoY increase. The company is focusing on M&A opportunities due to the tightening credit environment, and the management has reissued a BUY rating with a target price of HK$6.1.

Main Points

• Revenue Growth: Strong revenue growth was driven by the construction of BOT water projects (+17% YoY), technical services (+90% YoY), and sales of machinery. The construction services for comprehensive renovation projects saw a revenue decline of 15% YoY, but this was offset by the growth in other segments.
• Gross Profit: Gross profit increased by 25.4% YoY to HK$3.834bn, primarily due to margin improvement in construction services and a shift in revenue mix towards high-margin technical services.
• Net Profit: Net profit rose by 23.6% YoY to HK$2.366bn, with a net margin of 23.6%. The company declared an interim DPS of HK$0.095, resulting in a payout ratio of 37%.
• Capacity Expansion: BEW added 3.3mtpd of water treatment capacity in 1H18, and the management maintains its full year guidance of adding 4mtpd. As of now, the company is involved in 121 projects with a total capacity of 13.2mtpd.
• PPP Projects: The company secured RMB17.7bn in PPP projects, achieving 59% of its full year target of RMB30bn. The gross margin for PPP projects rebounded from 15% in 1H17 to 26% in 1H18 due to a more stringent risk-reward approach and reduced construction costs.
• Balance Sheet: The net gearing ratio decreased from 103% in 2017 to 95% in 1H18, thanks to an equity financing of HK$3.7bn in January 2018. The company has HK$13.6bn in cash as of 30 Jun 2018.
• M&A Strategy: The improved balance sheet allows BEW to pursue M&A opportunities and increase its market share from 7.3% to 15–20% in the mid to long term.
• Valuation: The company is currently trading at a 2019E PEG of 0.5x, lower than the sector average of 0.9x, suggesting an undemanding valuation. The analysts maintain their BUY rating and target price of HK$6.1, based on a DCF model.

Key Financial Highlights

• Revenue (HK$ mn): 17,355 (2016), 21,192 (2017), 24,504 (2018E), 27,681 (2019E), 30,792 (2020E)
• Gross Profit (HK$ mn): 5,785 (2016), 6,465 (2017), 7,493 (2018E), 8,526 (2019E), 9,676 (2020E)
• Net Profit (HK$ mn): 3,227 (2016), 3,717 (2017), 4,375 (2018E), 5,114 (2019E), 5,939 (2020E)
• Recurring Net Profit (HK$ mn): 2,707 (2016), 3,582 (2017), 4,375 (2018E), 5,114 (2019E), 5,939 (2020E)
• Recurring EPS (HK$): 0.30 (2016), 0.40 (2017), 0.46 (2018E), 0.53 (2019E), 0.62 (2020E)
• Core P/E (x): 13.8 (2016), 10.5 (2017), 9.2 (2018E), 7.9 (2019E), 6.8 (2020E)
• P/B (x): 2.2 (2016), 1.8 (2017), 1.7 (2018E), 1.5 (2019E), 1.3 (2020E)
• Dividend Yield (%): 2.8 (2016), 3.7 (2017), 4.3 (2018E), 5.0 (2019E), 5.8 (2020E)
• ROE (%): 19.7 (2016), 19.9 (2017), 19.7 (2018E), 20.4 (2019E), 20.9 (2020E)
• Net Debt / Equity (%): 93.8 (2016), 102.8 (2017), 95.5 (2018E), 100.1 (2019E), 100.4 (2020E)

Key Risks

• Upside Risks:
  • BEW securing more PPP projects than management guidance.
  • Stricter pollutant control leading to WWT plant upgrades and tariff hikes.
  • Higher returns from new projects, especially PPP.
• Downside Risks:
  • Increased market competition leading to slower capacity expansion and lower project returns.
  • Slower progress in investment fund.
  • Higher execution risk for PPP projects.
  • Inability to pass on increased costs to end-users in water distribution services.

Investment Ratings

• Industry Rating: OVERWEIGHT (expect sector to outperform the market over the next 12 months)
• Company Rating: BUY (expect stock to generate 10%+ return over the next 12 months)

Shareholding Structure

• Beijing Enterprises Group: 42.4%
• Min Zhou: 3.3%
• Pictet Funds: 2.4%
• BNP Paribas: 2.4%
• No. of shares outstanding (mn): 9,413
• Free float (mn): 5,109

Market Performance

• 1m: -4.5%
• 6m: -16.2%
• 12m: -32.4%
• HSI: -1.3%, -7.9%, +2.3% for 1m, 6m, 12m respectively

Key Financial Data

• 52-week range (HK$): 3.61–6.645
• Market Cap (HK$ mn): 39,627
• Avg. Daily Volume (mn): 17.05
• BVPS (HK$) (2018E): 2.51

Conclusion

BJ ENT WATER (371 HK) is well-positioned for potential M&A opportunities due to its strong balance sheet and conservative guidance. The company's focus on high-margin technical services and its strategic shift in project selection have contributed to improved profitability. The BUY rating and target price of HK$6.1 reflect the analysts' confidence in the company's ability to capitalize on market conditions and expand its market share. However, the company faces key risks related to market competition, execution, and cost pass-through in its water distribution services.