China Everbright Water (CEW): 2Q15 net profit rose to HK$110.4m (+12% y/y, +9.5% q/q), while revenue spiked to HK$509.8m (+93% y/y, +16.8% q/q), post-RTO of HanKore.
Top-line growth was mainly boosted by the construction segment from the expansion and upgrading of several water treatment projects, operation services income and finance income.
Gross margin, however, compressed to 44.3% (-22.4ppt) due to higher contribution from the lower margin construction segment.
Bottom line was dragged by higher admin expenses (+308%) and increased bank borrowings (+72%), both due to the consolidation of HanKore Group.
However, the drop was mitigated by a government grant (HK$4.9m) and FX gain (HK$5.7m), as well as other sundry income (HK$2.5m).
Management guided that since the new environmental protection law in China went effective in 1H15, a series of policies have been issued to support the wastewater treatment industry.
It is generally expected that investment in China's water sector will increase significantly, supported by favourable government policies, for instance, the public-private partnership model, which would provide new opportunities to the private sector water players.
Nonetheless, Maybank-KE is cutting CEW's FY15 capacity acquisition assumption to 0.5m tons from management's guidance of 1m, given that CEW has only achieved 4% of that target to-date. As such, the house has shaved its earnings estimates by 2-10% for the next three years.
Latest broker ratings:
Maybank-KE maintains Buy but cuts TP to $1.06 from $1.17
Deutsche maintains Buy with TP of $1.32
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