20170613-广发证券_香港_-中国光大国际-00257.HK-Scaling_new_heights_with_its_greentech_growth_engine__initiate_at_Buy_19页_1mb

China Everbright International (257 HK) Summary

Core Content

China Everbright International (CEI) is a leading environmental protection company in China, with a strong focus on environmental energy, environmental water, and greentech. The report initiates coverage with a Buy rating and a target price of HK$11.60, implying a ~20% upside from the current valuation. The analysis highlights CEI's growth potential, financial strength, and diversified business segments.

Main Points

• 2016 was a breakthrough year for CEI, marked by record revenue growth of 64% YoY, reaching HK$13.97bn, making it the first solid waste treatment company in China to exceed Rmb10bn in annual revenue.
• The company's core revenue from environmental protection accounted for 96% of total revenue, with greentech emerging as a new growth engine, contributing 23% of core revenue.
• CEI has set an aggressive investment target of Rmb51.9bn for the 2016–2020 period, supported by a strong project pipeline.
• Environmental energy remains the main revenue driver, with planned investment of Rmb26.9bn (53.9% of total investment) and total waste processing capacity expected to increase by 40% / 10% in 2017 and 2018, respectively.
• Greentech is expected to surpass environmental water as the second-largest revenue contributor, driven by agricultural waste processing and hazardous waste treatment.
• CEI's financial position is robust, with cash reserves rising at a CAGR of 30% to HK$7.0bn at the end of 2016, and a gearing ratio of 60%, which is well below the industry average.
• The company is well-positioned to benefit from PPP and entrusted operation models, and plans to expand into new markets both domestically and internationally.
• Spin-off of greentech business is expected to enhance valuation and improve balance sheet by reducing gearing by 4pp.

Key Information

Revenue and Profitability

• 2016 Revenue: HK$13.97bn (up 64% YoY)
• Core Revenue (Environmental Protection): HK$13.4bn (up 60% YoY)
• Greentech Revenue: ~HK$3.0bn (up 157% YoY)
• Environmental Energy Revenue (2017E/2018E/2019E): HK$10.6 / HK$12.6 / HK$13.7bn (up 34.3% / 18.9% / 8.7% YoY)
• Net Profit (2017E/2018E/2019E): HK$3.5 / HK$4.1 / HK$4.5bn
• EPS (2017E/2018E/2019E): HK$0.78 / HK$0.92 / HK$1.01

Project Development

• Projects under construction (2016): 62, with total investment of Rmb19.4bn
• Projects completed (2016): 23, with investment of ~Rmb5bn
• Projects in preparatory stage (2016): 44, with total investment of Rmb14.5bn
• Total projects secured: 213 in 17 provinces and municipalities in China, and in Germany, Poland, and Vietnam
• Expected projects completion (2017–2018): 16 projects, with total processing capacity of over 13,800 tpd

Environmental Energy

• WTE Projects (2016): 60, with total designed capacity of 50,959 tpd
• Operating WTE projects (2016): 5 projects, treating 8.93m tonnes of household waste
• On-grid electricity generated (2016): 3.5bn KWh (up 31.3% YoY)
• Expected capacity increase (2017–2019): 40% / 10% / 9% (to 26 / 28.6 / 31m tonnes)
• Environmental energy revenue growth (2017E/2018E/2019E): 34.3% / 18.9% / 8.7%

Environmental Water

• WWT capacity (2016): 1,538m m³/year (nearly triple from 2011)
• Environmental water revenue (2017E/2018E/2019E): HK$2.8 / HK$3.0 / HK$3.4bn
• Expected revenue contribution decline: from 31% in 2010 to 15% by 2019 due to focus shift to greentech
• EBITDA margin: expected to remain at 35% in 2017

Greentech

• Greentech revenue (2016): ~HK$3.0bn (up 157% YoY)
• Greentech EBITDA (2016): HK$1.0bn (up ~134% YoY)
• Greentech net profit (2016): HK$660m (up 145% YoY)
• Greentech contribution to core EBITDA: 23% (up from 14% in 2015)

Strategic Development

• Three strategic areas of focus:
  1. "One Belt, One Road" initiatives
  2. Ecological and environmental restoration in the Beijing-Tianjin-Hebei area
  3. Yangtze River Economic Belt expansion
• Geographic focus: Jiangsu, Shandong, and Zhejiang are the top provinces for WTE projects, with 48% / 24% / 11% of total capacity, respectively
• New business models: PPP and entrusted operations are being actively explored

Valuation and Investment

• Target price: HK$11.60
• P/E ratio (2017E/2018E): 12.2x / 10.4x
• Sector average P/E (2017E/2018E): 10.1x / 8.5x
• Valuation justification: Based on leading industry position, economies of scale, and three growth engines (environmental energy, environmental water, greentech)

Financial Highlights

Summary of Key Figures

• Major Shareholder: Guildford Ltd (39.22%)
• Market Cap (2016): HK$42.8bn
• 3M Avg. Vol. (2016): 8.76m
• 52W High/Low (2016): 8.05 / 11.14
• Cash on Hand (2016): HK$7.0bn
• Gearing Ratio (2016): 60%
• ROE (2016): 16.1%
• Projected Revenue Growth (2017–2019): 26% / 18% / 11%
• Projected Net Profit Growth (2017–2019): 26% / 18% / 11%

Conclusion

China Everbright International has demonstrated strong performance in 2016, driven by expansion in environmental energy, growth in greentech, and optimization of its business model. The company is well-positioned for continued growth, supported by a strong project pipeline, aggressive investment targets, and a solid financial position. The spin-off of greentech is expected to enhance valuation and improve profitability. With diverse segments, strategic expansion, and strong operating metrics, CEI is a promising investment in the environmental sector.