20140722-新鸿基金融集团-China_Environmental_Services_Sector_12页_769kb

CT Environmental Group (1363.HK) Summary

Core Content

CT Environmental Group (CTEG) is a leading player in China's environmental services sector, specifically in industrial wastewater treatment. The company is highlighted for its unique focus on the Build-Own-Operate (BOO) business model, which provides greater pricing flexibility compared to the more common Build-Operate-Transfer (BOT) model used by many peers. This model allows CTEG to negotiate tariffs directly with end users, enabling it to pass on cost increases and achieve higher returns. Additionally, the company has a robust project pipeline that is expected to significantly boost its capacity and earnings.

Main Points

• BOO Business Model: CTEG operates under the BOO model for industrial wastewater treatment, unlike most peers who use the BOT model for municipal projects. This model offers more pricing flexibility and protection against cost inflation.
• Earnings Growth: CTEG's project pipeline, including new industrial wastewater treatment projects, is expected to drive earnings growth of over 50% in 2014 and over 30% in 2015.
• Financing Capacity: The company raised HK$345 million through a share placement in June 2014, which will help fund new projects. It also anticipates improved cash flows from operations that will support internal expansion and increase debt capacity.

Key Information

Project Pipeline

CTEG has a pipeline of new industrial wastewater treatment projects that will more than triple its current capacity by the end of 2015:

• Completed Projects (2014):

  • Yinglong Project: Acquired additional 49% interest in May 2014, increasing ownership to 95%, with treatment capacity of 100,000 m³/day.
  • Shunde Project: Acquired in March 2014, currently under completion, with treatment capacity of 60,000 m³/day.
  • Yonghe Haitao Phase 3: Completed in April 2014, with treatment capacity of 50,000 m³/day.

• Planned Projects (2015):

  • Sichuan Guangyuan Phase 1: Expected to be completed in Q1 2015, with treatment capacity of 50,000 m³/day and associated water supply capacity of 50,000 m³/day.
  • Guangfozhao Phase 1: Planned for completion in Q1 2015, with treatment capacity of 50,000 m³/day, and potential expansion to 200,000 m³/day.

Sludge Treatment Projects

CTEG also has a pipeline of sludge treatment projects:

• Completed Projects (2014):
  • Qingyuan Project: Acquired in April 2014, with sludge treatment capacity of 555,000 tonnes/year.
• Planned Projects (2015):
  • Longmen Phase 1: Expected to be completed in Q1 2015, with potential expansion to 500,000 tonnes/year.

Financial Highlights

• Revenue: Expected to grow from HK$485 million in 2013 to HK$1,407 million in 2015.
• Earnings: Projected to increase from HK$224 million in 2013 to HK$471 million in 2015.
• EPS (HKD): Expected to rise from 0.20 in 2013 to 0.33 in 2015.
• BVPS (HKD): Projected to reach HK$1.23 in 2014 and HK$1.53 in 2015.
• Valuation: The company is rated as a Buy with a target price of HK$6.75, implying a P/B of 5.5X and a P/E of 28.1X for 2014 and 20.7X for 2015.

Risks

• Delays in projects under construction and planned.
• Cancellation of the acquisition of the Shunde project.
• Expiration of the preferential tax rate for the Guangzhou Xintao project.

Catalysts

• 1H14 results.
• FY14 results.
• New project announcements.

Valuation Analysis

Conclusion

CTEG is positioned well to benefit from the growing demand for environmental services in China. Its BOO model, strong earnings growth from new projects, and improved financing capacity support the Buy rating and HK$6.75 target price. The company's strategic focus on acquisitions and internal expansion is expected to further enhance its market position.