• 9M17 revenue and net profit were in line with our expectations.
• The 9M17 ramp-up of new daily designed capacity registered at 500k+ tonnes (c.10% of total capacity) and the group level water tariff hiked by 11% YTD.
• We maintain our FY17e and FY18e EPS forecast at 3.4 SG cents and 4.5 SG cents, respectively. We maintain our call BUY with a higher TP of S$0.59 (previous SG$0.54), based on a higher average 12-month forward PER of 17.4x (previous 15.9x) – in line with regional peers.

The Positives

+ Accelerating project acquisitions and construction. In 3Q17, CEWL secured 6 new projects with total investment of Rmb1.8bn+ with a designed daily water treatment capacity of 130k tonnes. The group tapped into the southern part of China for the first time by securing Nanning Shuitang River Integrated Restoration project which is valued at Rmb1.47bn. Among the newly-secured projects, three projects commenced construction immediately within this quarter. The 9M17 ramp-up of daily designed capacity registered arrived at 500k+ tonnes. Along with 7 more projects adjusting water tariff in 3Q17, the group level tariff hiked by 11% YTD.

Outlook

Currently the prevailing public private partnership (PPP) model in utility sector bears some risks in China. Firstly, quite a few projects sealed previously have yet to be implemented. Secondly, some local governments’ ability to meet their obligations is weaker due to poorer fiscal conditions. 

As of Sep-17, CEWL operates three industrial WWT projects. Though the rate of return is higher than household WWT, they bear higher risks including the technical and the operational. Technically, the composition of industrial waste water is so complicated that requires complex processing techniques. Operationally, industrial wastewater discharge volume is subject to sector cyclical development. Hence WWT volume is volatile.

The 19th National Congress of the Communist Party reinforced the establishment of ecological civilisation and environmental protection, which was in accord with the guidelines stated in the 13^th Five Year Plan. We believe that the macro conditions in the next five year will continue to favour CEWL. The group expect to achieve the target of 1,000mn tonnes daily designed capacity within the period of the 13^th Five Year Plan. Meanwhile, it will strengthen the technology development and tap into WWT market in rural areas in the foreseeable future.

Investment Action

As of Sep-17, CEWL has 93 projects, of which 77 are under operation, 10 under construction, 5 in the preparatory stage, and 1 was completed to be operational soon.

We maintain our FY17e and FY18e EPS forecast at 3.4 SG cents and 4.5 SG cents, respectively. We maintain our call  BUY with a higher TP of S$0.59 (previous SG$0.54), based on a higher average 12-month forward PER of 17.4x (previous 15.9x) – in line with regional peers, together with forecast 0.5 SG cents dividend, implying a potential return of 33.8%.

Peer Comparison