• Both revenue and PATMI are in line with expectations.
• As at Mar-18, CEWL has a portfolio of 95 projects, 77 are operating, 12 under construction and 6 in preparatory
• Ongoing organic growth through tariff hikes and better receivable collections. However, Zhenjiang Sponge City project facing some delays.
• The clean-up of the PPP project initiated by the government had limited impact on CEWL.
• We maintain FY18e EPS at 4.8 SG cents and our BUY recommendation. We have lowered our target price to S$0.55 (previously SG$0.60), due to lower peers’ valuations of 11.4x (previously 12.5x).

The Positives

+ Organic growth and better cash collection. In 1Q18, there were two projects where each secured tariff hikes of 13%. Meanwhile, the Qingdao WWT project received a one-off HK$55.1mn retrospective tariff adjustment for the past 7 years. This was after local government finances improved. It is expected the full year GPM will be maintained at 1Q18’s level which is 35%.

The Negatives

– Zhenjiang Sponge City project behind schedule. The project was scheduled to complete by the end of 2017, but it is postponed for one more year. This is their maiden project with integrated infrastructure such as pipeline networks, river restoration and reparation, and rainwater reusable systems. The learning curve was steeper than expected. Currently, the group is rectifying the issues. Meanwhile, the process of inspection and approval from the authorities will take some time.

Outlook

In Nov-17, the Ministry of Finance (MOF) issued the “Notice Concerning Standardisation of Public-Private Partnership Integrated Information Platform Project Library Management” which mandated a “clean-up” of the PPP project library by local governments by the end of March 2018. As of Mar-18, MOF’s PPP Center indicated that the Integrated Information Platform showed removal of 1,160 projects from the library, for a reduction in the total investment of RMB1.2tn.

The clean-up move had limited impact on CEWL’s project companies. Management guided that some projects are required to rectify their terms following incomplete documentation and filling. None of the projects were suspended. In fact, the clean-up mandate is expected to benefit the industry and CEWL in the long run. Because the quality projects will survive and thrive while the unstainable projects (overleverage, low return, and falsified reporting) will be eliminated from the market. CEWL has been maintaining good quality control in project acquisitions and operations.

Maintain BUY with a lower TP of S$0.55

We maintain FY18e EPS at 4.8 SG cents and our BUY recommendation. We have lowered  our target price to S$0.55 (previously SG$0.60), due to lower peers’ valuations of 11.4x (previously 12.5x).