CHINA EVERBRIGHT WATER: Expect stronger deal flow in 2H

Takeaways from results briefing: 

Management targets to achieve 10m tons in its portfolio by FY20, implying around 1m tons of new capacity each year. NextInsight file photo.
A stronger 2H 
The slow project growth in 1H15 was due to the reverse takeover and group restructuring. After a transitional period, we should start to see more business developments in 2H15 and 1H16.

New VAT rule has created pressure for water companies. They expect the VAT to eat into c. 5% of profit. CEW will keep negotiating with the local governments to adjust the water tariff or through other means to alleviate the pressure. 

Adding 1m tons each year 

Although China Everbright Water added just 40,000 tons of daily capacity in 1H, management remains confident that 1m tons of new capacity can be added in FY15 as more projects are expected to come on stream. In addition, management targets to achieve 10m tons in its portfolio by FY20, implying around 1m tons of new capacity each year.

However, the projects will have larger scale with an average daily capacity of at least 50K tons and an minimum IRR of 8%. Note that the IRR has been lowered from 10%, which we believe is an indication of more severe competition.

While management does not rule out the opportunity in industrial parks, we believe its focus remains in municipal projects. 
In additional, management believes that water quality will continue to be upgraded gradually, even after achieving grade 1A standard. This also echoes with our view. 

New Business 

Wang Tian Yi, CEO of China Everbright Water.
NextInsight file photo.Management mentioned about going into a new business which is building and operating environmental friendly washroom using MBR (Membrane Bioreactor) technology. 

The government would like to improve city image by increasing cleanliness in public washrooms and increasing the number of public washrooms. China National Tourism Administration targets to add 33,000 units and upgrade 24,000 units of washrooms at scenic areas in the next three years, of which 13,000 and 9,000 units will be built and upgraded this year respectively. Assuming an investment of Rmb500K per washroom, the total investment required will be less than Rmb11bn this year. While subsidies is expected from the government, fees will be charged to users. 

However, we are skeptical on this new initiative. Firstly, Chinese people are not used to paying for using public washrooms. Secondly, we are not sure where CEW will get the MBR technology from. Given the small scale, we don't expect this to have any major impact on earnings. 

Stay in Singapore Stock Exchange 

Some investors asked about the possibility of listing in Hong Kong.  It will depend on several factors such as investor appetite, trading volume, government policy, etc. But management does not seem to have such a plan, at least in the near term.