20161026-招商证券_香港_-云南水务-06839.HK-Growing_beyond_the_boundary_of_Yunnan_25页_1mb_1mb

Yunnan Water (6839 HK) Summary

Core Content

Yunnan Water is a wastewater treatment operator with a unique public-private partnership (PPP) shareholding structure, which gives it a competitive edge in securing new projects. The company is a subsidiary of Yunnan SASAC, a strong state-owned enterprise (SOE) background, and has acquired advanced membrane technology from Beijing OriginWater. This combination allows Yunnan Water to meet stricter wastewater discharge standards in China, enhancing its position in the market.

Main Points

• Unique PPP Shareholding Structure: Yunnan Water's ownership by Yunnan SASAC (30.1%) and Beijing OriginWater (24.0%) positions it as a PPP entity, providing access to new projects and leveraging both SOE advantages and advanced technology.
• Capacity Expansion: The company's wastewater treatment capacity is expected to grow from 0.8mn tonnes/day in 2015 to 2.8mn tonnes/day in 2018E, representing a CAGR of 54%.
• Expansion Beyond Yunnan: As of 1H16, 46% of its water supply capacity and 40% of its wastewater treatment capacity are located outside Yunnan. It has also acquired solid waste treatment projects in Thailand and Indonesia.
• MBR and CMF Technology: These advanced technologies enable Yunnan Water to meet stringent discharge standards, including Surface Water Quality Standard Class IV (GB 3838-2002), which is tougher than Class I Standard A (GB 18918-2012). This positions the company well for future growth as standards tighten.
• Investment Thesis: The company is initiated with a BUY rating and a DCF-based target price of HK$5.2/share, representing a 12.5x 2017E P/E ratio, close to the average level of HK-listed counterparts.
• Financial Growth: Net profit is expected to grow at a CAGR of 28% from 2015 to 2018E, driven by expansion in wastewater treatment and water supply segments.

Key Financial Information

Investment Highlights

• Target Price: HK$5.2/share, representing a 12.5x 2017E P/E ratio.
• Market Valuation: The company is undervalued compared to its SOE background and technological capabilities, despite being comparable to Kangda Environmental (6136 HK) in terms of market size and profitability.
• Growth Drivers: The expansion of wastewater treatment capacity and the adoption of advanced MBR and CMF technologies are the main drivers of growth.
• Segment Revenue Breakdown:
  • Wastewater Treatment: Expected to grow at a 54% CAGR from 2015 to 2018E.
  • Water Supply: Expected to grow at a 16% CAGR.
  • Solid Waste Treatment: Expected to grow at a 241% CAGR, due to the ramp-up of projects in Thailand and Indonesia.

Key Risks and Opportunities

• Market Competition: Traditional technology still dominates the market, but MBR is gaining traction as discharge standards tighten.
• Project Acquisition: The company's strong SOE background and technology will help it secure more projects, especially in Yunnan and beyond.
• Valuation Discount: The current valuation is lower than that of BEW (371 HK), which is a market leader with higher capacity and ROE.

Expansion and Projects

• Projects Outside Yunnan: Yunnan Water has projects in Shandong, Jiangsu, Anhui, Xinjiang, and others.
• Solid Waste Projects: The company has acquired projects in Thailand and Indonesia, with a total processing capacity of 0.6mn tonnes/year.
• Five-Year Plan: Yunnan province is expected to add 0.85mn tonnes/day of wastewater treatment capacity by 2020E, increasing the treatment rate to 85%.

Strategic Positioning

• Technology Edge: MBR and CMF technologies allow the company to meet stricter discharge standards.
• Project Diversification: The company is not only expanding within Yunnan but also across other provinces and overseas, demonstrating its capability to secure projects in diverse markets.
• Valuation: The target price is based on a three-stage DCF model with a WACC of 9.3%, and it is expected to be close to the average valuation of HK-listed wastewater treatment operators.

Conclusion

Yunnan Water is a fast-growing wastewater treatment company with a unique PPP shareholding structure and advanced technologies that enable it to meet stringent discharge standards. The company's expansion beyond Yunnan and its strong SOE background position it well for future growth. Despite a current P/E of 10.5x, the company is expected to grow its net profit at a 28% CAGR from 2015 to 2018E. The initiation with a BUY rating and a target price of HK$5.2/share reflects confidence in its growth potential and strategic advantages.