20180524-招商证券_香港_-China_Water_Sector__Uncertainties_of_environmental_PPP_are_being_removed_6页_1mb

China Water Sector Industry Report Summary

Core Content

This report from China Merchants Securities (HK) Co., Ltd. focuses on the China Water Sector and evaluates the impact of the PPP (Public-Private Partnership) audit process on two key companies: BEW (371 HK) and CTEG (1363 HK). It also provides an overview of the sector's performance and investment ratings.

Main Points

• Environmental PPP Uncertainties are Being Removed:

  • The Ministry of Finance (MOF) announced the removal of 1,695 PPP projects totaling RMB1.8tn and the alteration of 2,005 PPP projects worth RMB3.1tn from the management list.
  • Less than 10% of these projects are related to water and environmental sectors.
  • President Xi Jinping emphasized the importance of environmental protection and urged support for environmental PPPs at the National Ecological Environmental Protection Conference.

• BEW (371 HK) - Minimum Impact from PPP Audit:

  • BEW's three operating PPP projects are subject to removal or alteration, but they have already secured bank loans and generated cash flow since 2014.
  • The audit has limited impact on BEW's operations.
  • The company is expected to gain more high-quality PPP projects, which could provide mid-to-long term earnings upside potential.
  • BEW's valuation is considered attractive with a 2019E P/E of 9.2x, which is 31% below the 3-year historical average of 13.3x.
  • The target price (TP) remains at HK$6.1, and the rating is BUY.

• CTEG (1363 HK) - Downgrade TP Due to Corporate Governance Concerns:

  • CTEG's auditor, KPMG, issued a qualified opinion on HK$62mn of the company's sludge and general solid waste revenue in 2017, which affected investor confidence.
  • The company's shares fell by 23% after the result announcement.
  • CTEG announced a change in auditors, which is seen as a negative signal.
  • The target price is downgraded to HK$1.22 with a 20% discount from the DCF-based TP, and the rating is NEUTRAL.

Key Information

• Investment Amount Breakdown of Unqualified PPP Projects by Industries:

  • The report includes a breakdown showing the distribution of investment across different industries, highlighting the ecological construction and environmental protection (EC&EP) sector.

• Investment Amount Breakdown of PPP Projects for Alteration by Industries:

  • Another breakdown is provided for projects that are pending alteration, further emphasizing the focus on the environmental sector.

• PPP Demonstration Projects:

  • The 4th batch of PPP demonstration projects is analyzed, showing the distribution of investments.

• Earnings Growth Comparison:

  • A comparison of earnings growth between BEW and CTEG highlights BEW's stronger growth trajectory.

• Valuation Metrics:

  • BEW has a 2019E P/E of 9.2x, a 31% discount to the 3-year historical average.
  • CTEG has a 2019E P/E of 8.3x, a 20% discount to the previous target price.

Financial Highlights

BEW (371 HK)

• Earnings Growth: Expected to increase from HK$0.42 in 2017 to HK$0.53 in 2019 and HK$0.63 in 2020.
• P/E Ratio: 10.7x (FY18E), 9.2x (FY19E).
• P/B Ratio: 2.0x (FY18E), 1.7x (FY19E).
• ROE: 19.7% (FY18E), 20.4% (FY19E).
• Core Profit: Expected to grow from HK$2,707 in 2017 to HK$5,939 in 2020.
• EBITDA: Expected to increase from HK$5,249 in 2017 to HK$8,965 in 2020.

CTEG (1363 HK)

• Earnings Growth: Expected to increase from HK$0.12 in 2018 to HK$0.14 in 2019 and HK$0.16 in 2020.
• P/E Ratio: 9.7x (FY18E), 8.3x (FY19E).
• P/B Ratio: 1.4x (FY18E), 1.3x (FY19E).
• ROE: 15.7% (FY18E), 16.4% (FY19E).
• Core Profit: Expected to grow from HK$688 in 2017 to HK$1,013 in 2020.
• EBITDA: Expected to increase from HK$1,123 in 2017 to HK$1,937 in 2020.

Investment Ratings

Analyst Disclosure

• The analysts involved in the report certify that the views expressed accurately reflect their personal opinions on the subject securities and issuers.
• No part of their compensation is directly or indirectly related to the recommendations or views expressed in the report.

Regulatory and Disclaimer

• The report is prepared by China Merchants Securities (HK) Co., Ltd., a licensed corporation under the Securities and Futures Ordinance (Chapter 571).
• The report is for informational purposes only and does not constitute investment advice.
• The securities and strategies discussed may not be suitable for all investors.
• CMS HK is not registered as a broker-dealer in the United States and its products and services are not available to U.S. persons except as permitted under SEC Rule 15a-6.