China Everbright Water - More aggressive M&As needed

■ 2Q15 net profit up 10% YoY, driven by HanKore consolidation 

■ CEWL needs to become more aggressive in M&A going forward 

■ Cut EPS by 2-10% due to lower acquisition assumption. Maintain BUY with TP SGD1.06, at 30x FY15E PER

HanKore consolidation drove growth 
2Q15 revenue grew 93% YoY to HKD510m and net profit rose 10% YoY to HKD110m. Since 2Q14 numbers did not consolidate HanKore’s financials as the RTO was only completed in 4Q14, a YoY comparison is not very meaningful. On QoQ basis, revenue and gross profit grew 17% and 4% respectively. GPM dropped 5.6ppt, which might be attributable to higher percentage of construction revenue. Net profit grew 10% QoQ thanks to lower finance cost. Big acquisitions needed 1H15 net profit only accounted for 39% of our full-year forecast. 

Management has set a minimum wastewater treatment capacity acquisition target of 1m tons. Big acquisitions are needed for the rest of the year to achieve that goal given CEWL has not done much M&A YTD. CEWL has completed the SGD113m share placement with IFC in April and obtained USD140m loan facilities from IFC last week. We believe it has a big enough war chest for expansion. Rich cash position and high expectation from Everbright Group could make CEWL more aggressive in M&A going forward. 


Technical Analysis
Daily Chart
Maintain BUY on CEWL as we believe, with strong government background and robust balance sheet, CEWL is well positioned to benefit from industry consolidation. But as its acquisition YTD has fallen behind schedule, we cut our FY15 capacity acquisition assumption to 0.5m tons from 1m tons previously but keep our FY16/17 assumption at 1m tons each year. We also factored in lower financing cost thanks to IFC loan facilities. As such, EPS forecasts were cut 2-10% for the next three years and TP is adjusted to SGD1.06 from SGD1.17, still pegged to 30x FY15 PER. (Read Report) 

Read Related Reports
China Everbright Water - Awaiting M&A
Monday, 3 August 2015
- DBS Group Research
China Everbright Water - Await new projects
Sunday, 2 August 2015
- CIMB Research

Source : Maybank Kim Eng Research

Labels: , ,