20150519-大和证券-Downgrading__strong_hazardous_waste_project_pipeline_14页_725kb

CT Environmental Group (1363 HK) Summary

Core Content

CT Environmental Group (1363 HK) is a company primarily engaged in industrial wastewater treatment (IWWT), sludge treatment, and industrial and hazardous solid waste treatment services. The report highlights the company's recent share price performance, project pipeline, and financial outlook.

Main Points

• Share Price Performance: CTE's share price rose by 33% since 23 March, driven by its new hazardous waste (HWT) and sludge treatment projects.
• Downgrade to Outperform: The company was downgraded from Buy to Outperform, with a new DCF-based target price of HKD11.7, up from HKD10.2.
• EPS and Revenue Growth: The company's EPS is expected to grow at a 29% CAGR over 2014–2017, and its WWT capacity is forecasted to grow at a 23% CAGR over the same period.
• Project Focus: Recent projects are focused on hazardous waste and sludge treatment, especially in Nansha, Guangzhou, with a 500ktpa WWT facility and a 150tpa biodiesel production unit.
• Gross Margin Trends: The gross margin for the non-IWWT business is expected to increase from 30% in 2014 to 64% in 2017, while the IWWT business is expected to see a decline in gross margin due to lower margins and economic impact.
• Acquisition of Guangzhou Lvyou: Expected to be completed by end of May, and will contribute to earnings starting from April 2015.
• Market Share: CTE is projected to have around 50% market share in copper etching fluid treatment in Guangzhou, with a guaranteed minimum treatment volume and increasing fees.

Key Information

• Target Price: HKD11.7 (up from HKD10.2)
• Upside: 6.6%
• 18 May 2015 Price: HKD10.98
• Financial Forecast (2015–2017):
  • Revenue (HKDm): 1,780 → 2,483 → 3,171
  • Net Profit (HKDm): 582 → 797 → 987
  • Core EPS (HKD): 0.382 → 0.521 → 0.645
  • Gross Profit Margin: 30% (2014) → 64% (2017)
  • Operating Profit Margin: 46.4% (2015) → 44.5% (2016) → 42.6% (2017)
  • Net Profit Margin: 32.7% (2015) → 32.1% (2016) → 31.1% (2017)
  • ROE: 24.4% (2015) → 24.8% (2016) → 25.1% (2017)
  • EV/EBITDA: 22.4 (2015) → 16.9 (2016) → 13.4 (2017)
  • PER (2016E): 21x (current) vs. 19x (average sector)
  • Cash Flow from Operations (HKDm): 745 → 905 → 1,154
  • Free Cash Flow Yield (2017E): 3.9%

Key Projects and Acquisitions

• Nansha Port & Vessel WWT Facility:
  • Capacity: 500ktpa WWT, 150tpa biodiesel production
  • Wastewater type: HW08 (mineral oil) and oily water
  • Expected to start operations in 2016
• Guangzhou Lvyou Acquisition:
  • Capacity: 260ktpa HWT
  • Expected to be completed by end of May 2015
  • Profit or loss to be incurred from April 2015
• Copper Etching Fluid Treatment Facility (Zengcheng):
  • Capacity: 40ktpa
  • Market share: 50% in Guangzhou (including Dongguan)
  • Operation fee: CNY750/tonne (with 10% increase YoY)
  • Net profit margin: 50%
  • Expected operating earnings: CNY13m (2015), CNY14m (2016), CNY16m (2017)
  • Project owner: Menghui Technology
  • Resale of copper sulphate crystals: CNY2,100/tonne

Financial Summary

Key Ratios

Risks and Outlook

• Main Risk: Greater-than-expected competition from major municipal players
• Growth Outlook:
  • Net profit CAGR: 32% (2014–2017)
  • Sludge treatment capacity: 2,442tpd (2014) → 4,831tpd (2017)
  • Industrial solid waste capacity: 2,278–4,083tpd (2015–2017)
  • HWT capacity: 518–768ktpa (2015–2017)
• Valuation:
  • Current PER (2016E): 21x
  • PEG (2014–2017): 0.9x
  • The company is expected to trade at a higher PER due to cash-based earnings and less economic sensitivity

Project Pipeline

• Copper Waste Treatment:
  • Capacity: 40ktpa
  • Location: Zengcheng, Guangdong
  • Expected to start operations in 2015
• Industrial Solid Waste Treatment:
  • Capacity: 120m piece p.a. of green-bricks and 100ktpa of lightweight ceramsite
  • Location: Shaoguan, Guangdong
• Vessel & Port WWT:
  • Capacity: 500ktpa WWT and 150tpa biodiesel
  • Location: Nansha, Guangzhou
  • Expected to start operations in 2016

Conclusion

The report concludes that CTE's recent focus on HWT and sludge treatment, along with its strong project pipeline, supports the upgrade in its target price and the downgrade from Buy to Outperform. Despite economic delays in IWWT projects, the non-IWWT business is expected to grow and contribute more to gross profit and earnings. The company's financials show positive trends in revenue, net profit, and EPS growth, with a projected 29% CAGR in EPS and 21x PER as of 2016E.