20151126-大和证券-中滔环保-01363.HK-Flush_with_cash_for_2016_expansion_12页_1mb_1mb

CT Environmental Group (1363 HK) Summary

Core Content

CT Environmental Group (CTE) is a company primarily engaged in industrial wastewater treatment (IWWT), sludge treatment, and industrial/hazardous solid waste treatment services. It has recently expanded its geographical presence to Guangxi Province, marking its fourth province of operation after Guangdong, Hunan, and Sichuan. CTE's expansion is supported by significant equity placements that have added HKD1.2bn to its balance sheet, enabling it to invest between HKD2-2.5bn in 2016 for capacity expansion and greenfield development.

Main Points

• Geographical Expansion: CTE secured a build-own-operate (BOO) project in Yilin, Guangxi, in 2H15, which includes an industrial wastewater treatment plant, water supply, sludge treatment, and heat supply.
• Diversification: The company has shifted its customer focus from 86% exposure to textiles in 1H14 to 68% in 1H15, diversifying its business from industrial to municipal-based. It also provides a complete solution for industrial waste treatment, including IWWT, water supply, sludge treatment, and solid waste treatment.
• Capital Raising: In 2H15, CTE completed two equity placements totaling HKD1.2bn, with additional placements in 1H15. The total equity financing in 2015 amounted to HKD1.85bn, leading to a 13.27% equity dilution.
• Financial Health: CTE's net debt-to-equity ratio improved to 49% for 2016E, positioning it well for further M&A opportunities.
• Target Price: The target price remains at HKD3.00, representing a fair 22x 2016E PER. The current share price is HKD2.63, with a +14.0% upside.
• Outperform Rating: The rating remains Outperform, despite a forward PER of 19.6x, which is 0.7 SD above its average since its IPO in September 2013.

Key Information

• Equity Placement Details:
  • GIC Private: HKD614m
  • Ex-owner of Guangzhou Lvyou: HKD514m
  • Guo Kai Jin Tai (GKJT): HKD722m
• Capex for 2016: HKD2-2.5bn
• Net Profit Growth (2015-17E):
  • 2015E: 35.9%
  • 2016E: 26.3%
  • 2017E: 34.7%
• EPS (Fully Diluted):
  • 2015E: HKD0.107
  • 2016E: HKD0.134
  • 2017E: HKD0.172
• PER (2016E): 19.6x
• Dividend Yield (2016E): 1.0%
• PBR (2016E): 4.6x
• EV/EBITDA (2016E): 17.6x
• ROE (2016E): 26.1%
• Share Price Performance:
  • 12-month range: 1.77-2.83
  • Market cap: USD2.17bn
  • Shares outstanding: 6,409m
  • Major shareholder: Mr. Tsui Cham To (55.0%)

Financial Highlights

• Revenue Growth:
  • 2015E: +74.4% YoY
  • 2016E: +82.1% YoY
  • 2017E: -3.1% YoY
• Net Profit Growth:
  • 2015E: +51.4% YoY
  • 2016E: +33.5% YoY
  • 2017E: +28.0% YoY
• EBITDA Margin:
  • 2015E: 45.4%
  • 2016E: 32.1%
  • 2017E: 42.2%
• Operating Profit Margin:
  • 2015E: 45.4%
  • 2016E: 32.1%
  • 2017E: 42.2%

Valuation

• DCF Valuation:
  • WACC: 8.0%
  • Terminal Growth Rate: 2.00%
  • Target Price: HKD3.00
  • Target PER: 22x (2016E)
• Peer Comparison:
  • Average sector PER (2016E): 15.7x
  • CTE's PER (2016E): 19.6x
  • CTE's target price is in line with its peer, Beijing Enterprises Water (BEW), which has a 371 HKD share price and a Buy rating.

Risk and Outlook

• Main Risk: Increased competition from major state-owned enterprises (SOEs).
• Growth Outlook:
  • Net profit CAGR (2014-17E): 37%
  • Consolidated WWT capacity CAGR (2014-17E): 24%
  • Sludge treatment capacity (2017E): 5,031tpd
  • WTE capacity (2017E): 600tpd
  • Non-IWWT business gross profit contribution (2017E): 51%
• Forecast Revisions:
  • Revenue change (2015E): -24.3%
  • Revenue change (2016E): +5.3%
  • Revenue change (2017E): -6.3%
  • Net profit change (2015E): +3.9%
  • Net profit change (2016E): +1.8%
  • Net profit change (2017E): +6.0%
  • Core EPS (FD) change (2015E): +5.3%
  • Core EPS (FD) change (2016E): -2.8%
  • Core EPS (FD) change (2017E): +1.2%
• Daiwa vs Consensus:
  • 2015E: -1.5%
  • 2016E: -5.3%
  • 2017E: -3.3%

Company Profile

• Primary Services: IWWT, sludge treatment, and industrial/hazardous solid waste treatment.
• Capacity (as of end-2014):
  • IWWT: 515ktpd
  • Sludge Treatment: 2,442tpd
• Business Model: BOO model, in contrast to its peer Beijing Enterprises Water, which uses a BOT model.

Recent Site Visit

• Shunde IWWT Facility: A TOT project for discharge upgrade, with a 20-year concession period. The plant's WWT capacity was upgraded from 60ktpd to 60ktpd, with a fee increase from CNY0.8/ton to CNY1.8/ton. CTE is entitled to 70% of the tariff increment, leading to a current tariff of CNY1.5/tonne. The project currently serves low-end textile industrial WWT with a COD of ~600mg/L, compared to the Xinzhou project which treats wastewater with a COD of ~3,000mg/L.

Equity Placement to GKJT

• Purpose: To support long-term expansion into under-penetrated provinces and increase penetration in sludge and hazardous waste treatment.
• Impact: Improved net debt-to-equity ratio to 49% (from 59%) and enabled CTE to proceed with its HKD2.0-2.5bn capex for 2016.

DCF Valuation

• Terminal Value (as at 30 Jun 2021): 26,444 HKDm
• NPV of Forecasts (HKDm): 4,432
• NPV of Terminal Value (HKDm): 16,549
• DCF Valuation (HKDm): 20,981
• Equity Value (HKDm): 19,201
• Per Share Equity Value: HKD3.00

Conclusion

CTE is well-positioned for growth with its recent equity placements and geographical expansion. Despite a higher PER compared to the sector average, its strong cash flow and diversification strategy support its Outperform rating and target price. The company's financial health and operational performance are positive, and its valuation remains aligned with its peers.