Switching top pick to China Everbright Greentech; FY17 results preview

26 February 2018UtilitiesChina EnvironmentalUtilitiesUtilitiesIndustry UpdateAsiaChinaIndustryChina EnvironmentalDate26 February 2018Deutsche BankMarkets ResearchSwitching top pick to China EverbrightGreentech; FY17 results previewFY17 result previewWe review our earnings forecasts for the sector ahead of the FY17 resultsreporting season. Among the major stocks under our coverage, our revisedearnings are mostly in line with consensus for 2017e, except Beijing EnterprisesWater, where we are 5% below. We take a more conservative approach inrecognizing PPP construction earnings in 2017e as a result of: 1) potentially slowerconstruction progress due to project inspection/database cleanup required by theMoF and 2) potentially lower profitability due to a tightened monetary market inChina. Apart from earnings, other factors that investors should look out for duringthe results season include receivables, gearing, project construction progress,finance costs and funding plans, and dividend outlook.Top pick: China Everbright Greentech on strong project pipeline and low gearingWe switch our sector top pick from China Everbright International to ChinaEverbright Greentech. We like CEG on its strong project pipeline (secured projects3.6x of operating projects), excellent project management (raw materials costsstable at RMB0.36-0.37/kWh), low gearing and potential earnings upside surprisefrom biomass cogeneration conversion and expansion into soil remediation.Thanks to its IPO last year, CEG should have the lowest gearing among majorpeers in 2018-19e, making it the least vulnerable to potential monetary markettightening in China. NEA and NDRC recently issued a guideline on promotingpower/heat cogeneration for biomass, and cogeneration projects would enjoypriority power subsidies distribution, as well as capex subsidies. CEG plans togradually convert its power-only projects to cogeneration projects, which shouldboost project profitability, according to management. In addition, CEG plansto expand into soil remediation and this, together with biomass cogenerationconversion, pose earnings upside risk for CEG, as consensus has not properlyfactored these in. We raise our TP to HKD8.4 driven by earnings upgrades from2018e.Buy China Everbright International on potential earnings beat in 2018eDespite CEI's recent strong performance, we maintain Buy on a potential earningsbeat in 2018e. Our revised earnings are 11% above the consensus for 2018e, aswe note that construction commencement and completion for several projectstook place earlier than we previously expected, as CEI shortened the averagepreparation stage to nine months and the average construction stage to 14months for recent projects. We believe this is driven by a simplified governmentThomas Zhu, CFAResearch Analyst+852-2203 6235Michael Tong, CFAResearch Analyst+852-2203 6167Key ChangesCompanyTarget PriceRating0371.HK7.40 to 7.00-0257.HK13.50 to 13.90-1257.HK7.90 to 8.40-CEWL.SI0.54 to 0.55-002672.SZ12.00 to 11.50-0895.HK13.60 to 13.00-0270.HK13.20 to 13.00-SIIC.SI0.61 to 0.64-Source: Deutsche BankTop picksDongjiang Environmental(0895.HK),HKD10.74BuySource: Deutsche BankCompanies featuredBeijingEnterprises Water(0371.HK),HKD5.15BuyChina Everbright Int'l(0257.HK),HKD11.82BuyDongjiangEnvironmental(0895.HK),HKD10.74BuyChina EverbrightGreentech(1257.HK),HKD6.91BuyChina Everbright Water(CEWL.SI),SGD0.45BuySIIC Environment (SIIC.SI),SGD0.51BuyDongjiangEnvironmental(002672.SZ),CNY14.51SellSource: Deutsche BankDeutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should considerthis report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONSARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.THE CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE ’ SREPUBLIC OF CHINA (“THE PRC”) (EXCEPT IN COMPLIANCE WITH THE APPLICABLE LAWS AND REGULATIONS OFPRC), EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAUDistributed on: 25/02/2018 21:09:10 GMT7T2se3r0Ot6kwoPa 26 February 2018UtilitiesChina Environmentalapproval process for construction commencement, and also by CEI shorteningits construction period as a result of experience accumulation. In addition,CEI's earnings quality should gradually improve over the next few years as thepercentage of earnings from operations gradually grows, driven by a higherproportion of capacities entering the operation stage. We raise our TP to HKD13.9driven by earnings upgrades from 2018e.Value in Beijing Enterprises Water, but waiting for catalyst to unlock itOur revised earnings for BEW in 2017-19e are ~5% below consensus, andour revision is driven by us factoring our latest environmental PPP mar