20150702-大和证券-Concerns_over_CEI_s_rising_biomass_project_focus_25页_806kb

China Everbright International (257 HK) Summary

Core Content

China Everbright International (CEI) is a leading waste-to-energy (WTE) investor and operator in China, with a growing focus on biomass projects. Despite a robust pipeline of biomass projects, concerns have been raised about their profitability compared to existing WTE projects.

Main Points

• Biomass Expansion: CEI has secured 15 biomass projects since 2014, expanding its biomass portfolio 7-fold. This has led to a significant increase in the operating revenue contribution from biomass, forecasted to rise from 17% in 2014 to 27% in 2017E.
• Profitability Concerns: Biomass projects have lower gross margins (20-30%) compared to WTE projects (50-60%). The gross operating margin is expected to trend down from 66% in 2014 to 58% in 2017E.
• IRR Analysis: Biomass projects have an estimated IRR of 7-8%, which is below the standard WTE project IRR of 10-12%. The returns on biomass projects are influenced by market competition and fuel prices.
• WTE Projects: CEI has secured 18 WTE projects with a capacity of 13.8ktpd in 2014, with 10 more projects YTD. However, the returns from these projects may be affected by low utilisation rates and waste treatment fees.
• Valuation Adjustment: CEI's valuation premium is diminishing due to the emergence of its newly listed peer, Canvest. The stock is currently trading at a 2016E PER of 21.0x, which is a 30% premium over peers.
• Earnings Revisions: The analyst has revised CEI's 2015-17E EPS forecasts down by 1-8% compared to the Bloomberg consensus, due to conservative assumptions on biomass project profitability.
• Downgrade: The stock has been downgraded from Outperform to Hold, with a new 12-month target price (TP) of HKD14.80, up from HKD12.20.
• Financial Summary:
  • Revenue is projected to grow significantly, with a 68.8% increase in 2016E.
  • Net profit is expected to increase by 9% in 2016E and 16.8% in 2017E.
  • Core EPS is forecasted to rise from 0.488 in 2015E to 0.791 in 2017E.
• Balance Sheet: CEI's cash and short-term investments have fluctuated, with a notable increase in liabilities over time. The net debt-to-equity ratio is expected to rise to 70.7% in 2017E.
• Key Risks: The main risks include a slowdown in securing quality new projects, delays in execution, and the potential for lower returns on biomass projects.
• Opportunities: The main upside risk is the favorable national policies for biomass.

Key Information

• Target Price: HKD14.80 (up from HKD12.20)
• EPS Revisions: 2015E: -4.8%, 2016E: +9%, 2017E: n.a.
• WTE Capacity: CEI is expected to operate 50 WTE projects by end-2017, with a waste-processing capacity of 37.95ktpd.
• Biomass IRR: 7-8%, below the standard WTE IRR of 10-12%.
• Market Cap: 8.21 USD billion
• Share Price Range (12-month): 9.95-15.66 HKD
• Shares Outstanding: 4,484 million
• Major Shareholder: China Everbright Holdings (41.3%)
• WACC Assumption: 6.2% (down from 7.2%)
• Dividend Yield: 1.0% in 2015E, increasing to 1.6% in 2017E.
• ROE: Expected to increase from 12.8% in 2015E to 16.5% in 2017E.
• EV/EBITDA: Expected to decrease from 18.6 in 2015E to 13.3 in 2017E.

Financial Highlights

• Revenue (2015E-2017E): 9,684m, 16,140m, 15,478m
• Operating Profit (2015E-2017E): 3,682m, 5,070m, 6,002m
• Net Profit (2015E-2017E): 2,186m, 3,037m, 3,546m
• Core EPS (2015E-2017E): 0.488, 0.677, 0.791
• EBITDA (2015E-2017E): 3,819m, 5,226m, 6,177m
• Gross Profit Margin (2015E-2017E): 42.2%, 36.2%, 42.6%
• EBITDA Margin (2015E-2017E): 39.4%, 32.4%, 39.9%
• Operating Profit Margin (2015E-2017E): 38.0%, 31.4%, 38.8%
• Net Profit Margin (2015E-2017E): 22.6%, 18.8%, 22.9%

Key Assumptions

• WTE Capacity Growth: CEI's WTE capacity is expected to grow at a 38% CAGR from 2014 to 2017E.
• Biomass Projects: CEI is targeting a 24% CAGR for biomass power generation in 2013-15E.
• Government Targets: The 12th Five-Year Plan (2011-15) targets biomass power generation capacity to reach 13GW and annual generation of 78bn kWh. CEI is expected to contribute significantly to this growth.

Risks

• Downside Risks:
  • Slowdown in securing quality new projects
  • Delays in execution
• Upside Risk: Favorable national policies for biomass

Conclusion

CEI's focus on biomass projects is a significant shift in its business strategy, but the lower profitability of these projects compared to WTE raises concerns about future returns. While the company has a strong track record in WTE, the increasing focus on biomass may dilute its valuation premium. The analyst has revised its forecasts downward for biomass projects and adjusted the target price accordingly. The company's financial performance is expected to improve, with rising revenue and net profit, but the key risks remain in the execution and profitability of the new biomass projects.