20181019-招商证券_香港_-中国光大国际-00257.HK-Reserving_for_winter_7页_1mb

China Everbright Intl (257 HK) Summary

Core Content

China Everbright International (CEI) is a leading player in the environmental protection sector, with a strong focus on waste-to-energy (WTE) projects and other green technologies. The report highlights the company's operational expansion, capital reserves, and financial performance, along with the updated investment rating and target price.

Main Points

• WTE Operations:

  • During June–September 2018, four WTE projects commenced, increasing CEI's operational capacity to 46.1ktpd from 43ktpd.
  • The company expects its WTE capacity to grow to 77ktpd by 2020E, with 34 projects under construction and 32 expansion projects.
  • The capex for WTE is set at HK$11.67bn for the period October 2018–September 2019, up from the previous guidance of HK$10bn.

• Capital and Financial Strength:

  • CEI raised HK$15.6bn through a 10:27 right issue, which significantly boosted its cash reserves and reduced its gearing ratio to 54% from 61% in 1H18.
  • The company has HK$12bn headroom if it needs to increase gearing to 60% in the future.
  • Management has committed to no further equity financing in the next 5 years, which helps in maintaining financial flexibility and reducing costs in a rising interest rate environment.

• Financial Performance:

  • Revenue is forecasted to grow from HK$13,971m in 2016 to HK$38,145m in 2020E.
  • Gross profit is expected to increase from HK$5,310m in 2016 to HK$13,214m in 2020E.
  • Recurring net profit is projected to rise from HK$2,825m in 2016 to HK$6,322m in 2020E.
  • The core P/E ratio is decreasing, indicating a more attractive valuation.

• Valuation and Investment Rating:

  • The company is rated BUY, but the target price has been revised down to HK$8.1 from HK$9.5 due to a revised WACC (Weighted Average Cost of Capital) from 7.7% to 8.0%.
  • The current share price is trading at 7.5x 2019E P/E and 0.4x 2019E PEG, which is considered undemanding.

Key Information

Project Pipeline and Expansion

• CEI has a robust project pipeline with a focus on WTE, waste water treatment (WWT), and biomass power.
• The company aims to secure greenfield projects at 20ktpd annually and acquire 10ktpd from the market in the 2018–2020E period.
• For the WWT segment, the company had 5.3mtpd of capacity in the pipeline as of October 2018, exceeding its target, but the growth is expected to be conservative due to potential slowdown in M&A and organic growth.

Greentech Segment

• The biomass power and hazardous waste treatment (HWT) segments are growing rapidly.
• CEI’s biomass capacity increased by 5% to 1,076MW, and HWT capacity increased by 28% to 776ktpa.
• The company has secured 5 soil remediation projects with a total contract value of RMB120mn.
• Revenue from the greentech segment is forecasted to grow from HK$4.6bn to HK$10.5bn, with a CAGR of 32% from 2017–2020E.

Capital Reserves

• Post-right issue, CEI has a cash on hand of >HK$15bn.
• The company has sufficient capital to support expansion over the next 2–3 years.
• The balance sheet has improved, with a reduced gearing ratio and increased headroom for future leverage.

Dividend and Earnings

• Dividend yield is expected to rise from 3.2% in 2016 to 4.9% in 2020E.
• Earnings per share (EPS) are projected to increase from HK$0.63 in 2016 to HK$1.03 in 2020E.
• The company maintains a consistent dividend payout ratio of 31%.

Financial Ratios

• Gross margin is expected to increase slightly, with a forecast of 34.6% in 2020E.
• EBITDA margin and net margin are projected to decline slightly over the period.
• ROE is expected to remain stable, with a forecast of 15.3% in 2020E.
• Net debt/equity ratio is expected to rise from 42.6% in 2018E to 62.1% in 2020E.

Investment Outlook

• Catalysts: More project wins and faster-than-expected M&A activity could drive growth.
• Risks: Fierce market competition, project delays, and higher raw material or subsidy payment costs may impact performance.
• Rating: BUY, with a revised target price of HK$8.1 due to higher WACC and RMB depreciation effects.

Summary Table

Conclusion

CEI is well-positioned for growth in the environmental protection sector, with strong capital reserves and a robust project pipeline. The company is focusing on WTE and greentech segments, which are expected to drive significant revenue and profit growth. Despite a revised target price due to increased WACC and RMB depreciation, the company's valuation remains attractive, and the investment rating is maintained at BUY.