China Environment
SIAS maintains ‘Increase Exposure’ rating on China Environment n DMG Buy call
SIAS maintains ‘Increase Exposure’ rating on China Environment with intrinsic value of 37 cents
Analyst: Liu Jinshu
We visited China Environment Ltd’s headquarters at Longyan City, Fujian Province. We saw firsthand the complexity of building waste gas treatment systems, which involves design, steel fabrication, electronic and electrical engineering, construction and testing.
A typical gas treatment solution consists of both mechanical and electronic/electrical sub-modules. As the company produces both parts itself, it enjoys a cost advantage over peers that have to make up for technical capabilities they do not posses by outsourcing to contractors.
It has also been allocated a 200,000 square meter plot of land that it has yet to purchase. This allotment gives it the option to expand and take on more projects in the future.
Value Catalysts
China Environment is currently in talks with a partner to build a system that comprises of dust, NOx and sulphur removal modules.
To finance such large-scale projects, it is considering various funding options, which may include dual listing plans.
We see the realization of these events as value catalysts. In the long run, it intends to expand its capabilities to include technologies for water and noise pollution. Given China’s growing market for environmental protection equipment, we maintain our bullish outlook on China Environment.
Acid rain distribtion in China is most severe where most heavy industries are located. Source: Ministry of Environmental Protection.DMG-OSK initiates coverage on China Environment with BUY, target price 32 cts
Analysts: Terence Wong and Tan Chee How
China Environment manufactures industrial waste gas equipments (IWE) – a market segment which is set to grow in the next few years driven by government policies and regulations.
We believe China Environment is well-positioned to seize the industry-wide growth opportunity with its range of products, particularly the newly patented Electrostatic Lentoid Precipitator (ESLP).
In addition, China Environment is considering on venturing into other Asian countries where profitability could be higher.
Given the potential, we value China Environment at TP of S$0.320 based on blended FY10F/FY11F PATMI, which is a 67% discount to HKEx-listed peers’ P/E.
According to Frost and Sullivan, the IWE maker market size is slated to grow at 15% CAGR between 2009 and 2013 to hit US$9.6b.
It is expanding its product offerings to include Desulphurification system, DeNOx system, and Electrostatic Lentoid Precipitator.
In particular, ESLP shows great potential as preliminary findings illustrate that the product has better capability and is cheaper to build compared to ESP.
Price war the biggest risk
Key risks to our call on China Environment are:
1) increasing competition within the IWE manufacturing sector, and
2) consistently high receivable days which will drain the cash as its business expands.
DMG & Partners Securities in an Oct 22 research report says: "Following the reverse takeover of Gates Electronics, the former electronics components trader is now known as China Environment which is based in Longyan Economic Development District, China.
"The company has since ventured into manufacturing of industrial waste gas equipments (IWE) – a market segment which is set to grow in the next few years driven by government policies and regulations. We believe China Environment is well-positioned to seize the industry-wide growth opportunity with its range of products, particularly the newly patented Electrostatic Lentoid Precipitator (ESLP). In addition, China Environment is considering on venturing into other Asian countries where profitability could be higher.
"Given the potential, we value China Environment at target price of 32 cents based on blended FY10F/FY11F PATMI, which is a 67% discount to HKEx-listed peers’ P/E. BUY (initiating coverage)."
It's just been approved as high-technology company, which means tax rate reduced from 25% to 15%. This will translate to more than 12% increase in profit.
" ...An environmental services provider like CENV can also be categorised as a high-technology company, which enjoys tax breaks. The company’s application has been approved, which means it is now taxed at 15%, down from the 25% rate of other corporates in China...."
China Environment Ltd. is a provider of waste gas treatment systems in the People's Republic of China, with headquarters in Longyan City, Fujian Province. The company designs and constructs waste gas treatment systems and its key products consist of Electrostatic Precipitators or ESPs including Electrostatic Lentoid Precipitators or ESLPs, baghouses and hybrid dust collectors. The Group conforms strictly to international quality standards. China Environment Ltd's commitment to excellence has won it many awards and accreditations including the ISO9001:2000 Quality Management System certification, ISO14001:2004 Environment Management System certification and OHSAS18001:1999 Occupational Health and Safety Management System authentication. Its Quality Control Department has a staff strength of more than 30 people. Mr Huang Min, the Group's Executive Chairman and Chief Executive Officer, is the "Standing Committee Member" of the China Environmental Protection Industry Association (ESP Committee). Its wholly-owned subsidiary, Fujian Dongyuan, is currently certified and included in the manufacturers recommended list for 200MW and 300MW thermal power projects. In April 2010, the Group's capability in designing, producing and constructing ESPs for 600MW thermal power projects was certified by the National Electric Power Planning and Design Institute and China Power Complete Equipment Co., Ltd., paving the way for its entry into a higher value market segment and enabling it to reach a larger customer base in the thermal power plant construction industry for projects of various sizes. With this certification, it will soon be included in the manufacturers recommended list to provide auxiliary equipment for 600MW thermal power projects. The Company was upgraded to a listing on the SGX-ST Mainboard on 27 August 2009 via a reverse takeover of Gates Electronics Limited.
