• Revenue was in line with our expectations.
• Net profit marginally exceeded our expectations due to lower FX losses
• As of Mar-17, CEWL operates 61 water projects with another 12 in the pipeline.
• Due to recent price recovery, we downgraded our rating to “Accumulate” recommendation with a higher TP of S$0.57 (previous SG$0.56), based on lower average forward PER of 16.7x (previous 17.4x), together with forecast 3.24 SG cents dividend, implying a potential return of 19.5% from closing price.

Merits of Zhangqiu integration project

End Apr-17, CEWL had secured the Zhangqiu urban-rural integration water supply concession project. The concession contract has three components:

1. Management contact, including maintenance and operation of the water supply assets and restructuring of water supply entities;
2. Build-operate-transfer (BOT) projects, including reservoirs, water plants, and water supply facilities;
3. Transfer-operate-transfer (TOT) projects, including infrastructure and supporting facilities of water supply and water supply services to the general public.

The integrated project authorised CEWL as the sole private partner to operate the whole water system in Zhangqiu district, including facilities construction, plant operation, and water asset management with a concession period of 30 years.

Approximate Rmb2bn out of total RMB3bn investment will be put into BOT sub-projects in 5 years (Rmb400mn to Rmb500mn per annum). According to the management, the return of these projects is estimated to average 5.1% without leverage. Since the funding structure of the whole project will be 2:1 of external financing to internal capital, the rate of return of the BOT sub-projects is expected to be raised to 6%. We think the mid-single digit rate of return is fair given the severe competition in water utilities sector.

Upside from higher water tariffs: Currently, the average water tariff in Zhangqiu district is Rmb2.4/tonne, while Ji’nan City is conducting progressive water tariff scheme with three ladders: Rmb4.2/tonne, Rmb5.6/tonne, and Rmb9.8/tonne. The management aims to adjust upward the water tariff in Zhangqiu, benchmarking Ji’nan city, when TOT sub-projects are commenced operation. Moreover, there is a clawback provision that CEWL will be granted fiscal subsidies if tariff rises fail to reach the scheduled level.

Updates on solutions of receivable issues

As of 1Q17, the overall repayment, measured as a percentage of the actual receivables CEWL collects from contracted repayment due from the government, was 74%, similar to 1Q16. The collection was partially subject to seasonality since receivables are only collected semi-annually rather than quarterly for Ji’nan’s projects which weight in a significant amount. Therefore, it is expected to see the improvement in the half-year and annual results. Management disclosed that the contingent solutions that repayment by assets for Dongda’s projects may not work. At the moment, local government could seek to partially pay back by harnessing the subsidy fund specialising in water treatment granted by central government.

Investment Action

We revised up our FY17 EPS forecast from 3.2 SG cents to 3.4 SG cents, since we expect no substantial FX losses. Due to recent price recovery, we downgraded our rating to “Accumulate” recommendation with a higher TP of S$0.57 (previous SG$0.56), based on lower average forward PER of 16.7x (previous 17.4x), together with forecast 3.24 SG cents dividend, implying a potential return of 19.5% from closing price.

Peer comparison

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