Tuesday, November 15, 2016

China Everbright Water

China Everbright Water's (CEW) 3Q16 net profit crept up 3% to HK$91.1m, bringing 9M16 net profit to HK$271.7m (-9%), or 61% of full year street forecast.

For the quarter, revenue of HK$553.5m (+35%) was boosted by the expansion and upgrading of several BOT projects under construction.

Gross margin fell 7ppt to 40% due to higher construction mix.

There was a five-fold jump in other income to HK$38.2m, mainly from VAT refund. However, this was negated by 1) admin expenses of HK$64m (+28%) due to business expansion and FX loss of HK$7m on USD borrowings, and 2) finance costs of HK$57.9m (+300%), due to higher borrowing balances.

Operating cash flow was still a negative HK$75m (9M16: -HK$180.8m) but is a marked improvement from the HK$190.3m outflow in 3Q15. Nevertheless, net gearing was stable at 43% (-0.1ppt q/q)

CEW secured eight environmental water projects in Shandong and Jiangsu in 9M16. Looking ahead, it plans to expand into other areas, including integrated environmental water services, industrial waste water treatment, river-basin ecological repair, and river training.

CEW is currently trading at 16.8x FY16e consensus P/E.

The street has 5 Buy and 1 Hold calls on CEW with mean TP of $0.67. CEW is a constituent of the Market Insight Growth portfolio.

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