• Propose reduction of share premium to set off against accumulated losses
• Allow dividend payment in the future
• Maintain BUY
China Everbright Water (CEWL SP) proposed the reduction of share premium account to set off against the accumulated losses of the company. We reckon that the main reason for the reduction of share premium account or the elimination of accumulated losses is to pave way for dividend payment in the future. Assuming a payout ratio of 30%, dividend yield would be c.1.5%. Although the yield is not high, we view such exercise as positive.
Note that the above transaction will be carried out in the accounts of the holding company, i.e. not the consolidated accounts of the Group. On the Group level (or in the consolidated accounts), share capital will not be affected and total equity remains unchanged. Thus, the exercise will not affect CEWL’s financial ratios and EPS.
In addition, the accumulated losses of HK$4.45bn included an impairment loss of HK$4.70bn which was in connection with the Reverse Takeover (RTO) of HanKore and was recognized in 2014. Note that the impairment loss represented the share price difference between the signing and the conclusion of the deal and did not imply any deterioration in the fair value of the acquired assets. The losses were also recognized in the profit and loss account of the holding company only, but not the consolidated accounts of the Group (due to the application of different accounting standards for the RTO).
Along with the buoyant market sentiment, CEWL’s share price has also rebounded >25% from the trough in the past three weeks. It is also approaching our TP of S$0.80 which is based on 30x FY16 adjusted PE where earnings are adjusted to reflect only operational projects. Nevertheless, we believe there could be further upside as investors are expecting the environmental sector remains one of the key growth areas in the next five-year plan which will be approved in the upcoming 5th Plenum meetings. (Read Report)
Source : DBS Group Research