China Environment listed on the Singapore Exchange in Aug 2009.
Finansa yesterday (Apr 19) initiated coverge of China Environment with a 50-cent target price, compared to its closing price of 29 cents.
Finansa’s price target is based on 12.5 times its forecast of FY2010 earnings.
China’s pollution is so serious that about 250,000 deaths each year is associated with its poor urban air quality, and a baby with physical defects is born every 30 seconds.
In recent years, the government has asserted its position on pollution, closing many power stations, coal mines and factories that cause pollution.
Businesses are required to retrofit systems to capture dust and toxic gases, or install systems that prevent pollution at the development phase.
Industrial plants failing to meet carbon dioxide emissions standards incur penalties of up to half a million yuan, or are eventually shut down.
Some Rmb 1.4 trillion has been earmarked for investment in environmental protection during 2006-2010 (11th Five Year Plan), up 60% from the previous plan.
EPC provider of waste gas treatment systems, China Environment, last week secured 3 contracts amounting to Rmb 76.2 million to design, construct and install such systems for thermal power projects in Hebei, Jilin and Mongolia.
Thermal power plants are typically coal-fired, and China Environment’s electrostatic precipitators function as heavy-duty air purifiers for industrial coal fumes.
The projects are expected to be completed by June this year and will contribute positively to FY2010 results.
Each power plant has capacity for 200MW to 600MW and China will build 315 such plants this year or more than 3,000 such plants by 2015, according to Finansa.
Between 2009 and 2015, the market size for China Environment’s electrostatic precipitators products is expected to grow at a CAGR of 19% to Rmb 38 billion.
Other than a positive macro outlook, the broker Finansa likes China Environment for the following reasons:
Firstly, its footprint is across a wide territory in China. It has sales service centers in Beijing, Hebei, Henan and Xiamen, and projects spanning from Fujian in the south to Xinjiang in the north.
Secondly, its project size is increasing. In 2009, it completed about 30 projects at an estimated Rmb 16.7 million per contract. Lately, its project size has been as large as Rmb 58 million for the two 660 MW power stations at Maanshan.
Thirdly, in addition to dust removal, it plans to foray into desulphurisation and removal of nitrogen oxides (De-Nox).
However, Finansa warns that prices of steel, which comprises 80% of its cost of goods sold, can be unstable.
China Environment generated FY09 revenues of Rmb 499.6 million and net profit after tax of Rmb 53.8 million.
Excluding the impairment of goodwill arising from its backdoor listing in Aug last year, net profits would have been Rmb 83.2 million.