• Revenue and net profit were in line with our expectations.
• CEWL currently operates 66 water project with another 8 more in the pipeline.
• We revised up our FY17 EPS forecast from 3.4 SG cents to 3.6 SG cents since CEWL is expected to commence more projects. We upgrade our call from ACCUMULATE to BUY with a higher TP of S$0.61 (previous S$0.57), based on a higher average 12-month forward PER of 17.1x (previous7x), implying a potential return of 25.8% from the closing price.

The Positives

+ Expanding designed waste water treatment (WWT) capacity with water tariff hike: There were seven projects which commenced operation in 1H17. It increased daily designed WWT capacity to c.5.0mn m³. The increment was due mainly to upgrading and expansion of some existing projects. There were 5 projects which received tariff hike ranging from 19% to 86%. Besides, upon the completion of another four upgrading projects, the percentage of projects complying with national 1GA discharge standard will rise from current 78% to 88% moving forward. The water tariffs for 1GA standard average from Rmb1.1 to 1.6/tonne (1GB standard: Rmb0.8 to Rmb1.0/tonne).

+ Abundant funding support from various sources: In Jul-17, the Group raised Rmb1bn through the issuance of RMB-denominated corporate bonds (“Panda bonds”) with 4.55% coupon and 5 years maturity, of which Rmb600mn of which was to repay existing debts, and the remaining would be funded ongoing upgrading and expansion of projects. The Group’s average borrowing rose modestly from 4.04% to 4.2%. Previously, management mentioned it was setting up a water affair fund targeting to raise Rmb10bn to invest in water-related businesses. The process is still ongoing.

The Negatives

– Still facing pressures from collecting receivables: As of Jun-17, financial receivables was HK$1bn. The 12.5% YoY growth of receivables was due to new projects as well as slow progress in collecting water tariff, especially from Dongda’s projects. CEWL has 14 projects in Liaoning Province. The situation could remain challenging as Liaoning economy remained weak (1H17 GDP: -19.6% YoY). Thus, CEWL could continue to face deferred payback of receivables in the near term due to the local weak macro environment.

Outlook

We believe CEWL to register a stable growth on the back of water tariff hikes and capacity expansion. CEWL currently operates 66 water project with another 8 more in the pipeline. There are ongoing R&D efforts on WWT new processes such as AAO-MBR (Anaerobic-Anoxic-Oxic-Membrane Bio-Reactor). It is meant to be a more cost effective solution in the future.

Investment Action

We revise up our FY17 EPS forecast from 3.4 SG cents to 3.6 SG cents since CEWL is expected to commence more projects. We upgrade our call from ACCUMULATE to BUY with a higher TP of S$0.61 (previous S$0.57), based on a higher average 12-month forward PER of 17.1x (previous 16.7x), implying a potential return of 25.8% from the closing price.

Peer Comparison