CITIC Envirotech - Cleaning up China water pollution
- Industrial WWT player a beneficiary of more stringent water standards in China.
- MBR technology, industrial WWT and sludge treatment give higher project IRRs.
- Improved financials not a constraint for more project acquisitions.
Leading industrial WWT player in China
- One of the leading industrial wastewater treatment (WWT) companies in China, CEL’s business segments consist of: a) engineering works (EPC), b) water treatment, and c) external membrane sales.
- The company currently has 57 WWT plants with designed capacity of over 4.5mt/d and operating capacity of 2.7mt/d. In terms of volume exposure to industry, it is most exposed to textiles in Gaoyang, followed by petrochemicals.
9M16 results within expectations; more EPC in 4Q16
- Engineering activities continue to be the key driver for CEL, accounting for 54% of 9M16 revenue, with the remaining 32% and 14% from treatment income and external membrane sales respectively.
- 3Q16 treatment income grew 43% yoy but fell 11% qoq as a result of disposal of Qitaihe WXL projects. External membrane sales remain project-driven and lumpy, but we saw more WWT projects using the membrane bioreactor (MBR) technology, such as the municipal WWT project in Fuzhou city and Baiyi Industrial project, to meet the stricter water standards in China. There was also greater amortisation of intangible assets relating to the newly acquired concessions.
Strategic focus on membrane technology and sludge treatment
- CEL prides itself as a WWT player with an edge in MBR technology. It recently opened an S$25m innovation centre and membrane production facility in Singapore via its wholly-owned subsidiary, Memstar, which doubled the production capacity of its patented 3rd generation Thermally Induced Phase Separation (3G-TIPS) membranes to 10m sqm p.a.
- The company also capitalised on increasing opportunities in sludge treatment, to secure its first BOT (build-operate-transfer) project (700 tonnes/day) in Weifang city.
- Stronger traction in this area could catalyse the stock.
Cheaper debt costs ahead
- Ability to raise funds at affordable rates is essential in the capital-intensive utilities industry, as most projects require substantial upfront capex investment. We expect the average cost of debt for CEL to trickle down from the existing 7-8% to 5-6% over FY17-18F.
- CEL issued a total of US$355m (5.45%) perpetual securities in Nov 15, a portion of which will be utilised to pare down the more expensive (7.25%) S$100m MTN.
Expansion plans not limited by financing capability
- CEL’s net gearing remains low at 9.3%, with ample leverage potential to improve its annualised ROE of 6.4% as of end 9M16.
- 9M16 operating cashflow was also better at S$206m vs. 9M15’s S$15.4m. The company also has S$263m proceeds remaining from the perpetual securities issuance to finance more investment projects.
Maintain Add with TP of S$1.52 (DCF valuation, 7% WACC)
- We remain positive on the China water treatment industry, and the strong company fundamentals, spurred by its technological expertise, track record of project wins and SOE-backing.
- Downside risk stems from rising competition that may erode IRRs.