We maintain FY18e EPS at 5.0 SG cents. We lower our target price to S$0.44 (previously SG$0.53) due to lower peers’ valuations of 8.8x (previously 10.6x) and maintain a BUY recommendation.
The Positives
+ Ongoing upgrading of projects amid more room to grow: In 2Q18, there were seven waste water treatment (WWT) projects that secured tariff hikes ranging from 10% to 54%. Four projects commenced operation, and 11 more were under construction during the quarter. As of 3Q18, more than 90% of the projects under the group have reached Grade 1A discharge standard. However, some local governments demand the expansion of existing plants along with the growth of environmental capacity. Therefore, there is still more room to grow even for those plants that comply with Grade 1A discharge standard. Recently, there was a revision on the “waste water pollution prevention plan” in Shandong province, which tightens the waste water discharge standard, and some regions are required to raise discharge standard to higher Grade 1A.
+ Improvement on a collection of receivables: In 3Q18, the collection rate improved to 87% compared to 85% in 3Q17. Management aims to achieve at least 100% for FY18 and even exceed the FY17 rate of 104%. Generally, the collection rate is higher in 2Q and 4Q.
The Negatives
– Updates of Zhenjiang Sponge City project: There remain issues on the construction of the pipeline network. As of 3Q18, there were about 40% of subprojects under Sponge City project delayed. It is expected to complete by 2019. At this juncture, the group is still working on it and negotiating with the authority.
Outlook
There is organic growth from the upgrading of the existing project remains. WWT capacity for the group is expected to ramp up annually by 10% to 20%. As of 3Q18, the total WWT arrived at above 5mn tonnes/day. Currently, the majority of the operating projects are located in the northern part of China. Moving forward, the group will actively explore and expand to regional markets such as Pearl River Delta and Great Bay Area.
Maintain BUY with a lower TP of S$0.44
We maintain FY18e EPS at 5.0 SG cents. We lower our target price to S$0.44 (previously SG$0.53) due to lower peers’ valuations of 8.8x (previously 10.6x) and maintain a BUY recommendation.
Guangzhi graduated from Singapore Management University with a Master degree in Applied Finance and from South China University of Technology with a Bachelor degree in Electronic Commerce.
The current sector coverages include Energy, Utilities, and Mining sectors. He has 3 years experience in equity research in both Hong Kong and Singapore market. He is the mandarin spokesperson for Phillip Securities Research in relation to China-related projects and all mandarin seminars and client events.
