China Environment Ltd (CEL) has just announced that it has won several new contracts.

The first contract worth RMB110m is to upgrade two units of existing electrostatic precipitators (ESP) for Nanjing Iron and Steel United (NIS) Co. Ltd. As mentioned in our plant visit report dated 22 Oct 2013, CEL has built up to 15 such machines for NIS since 2004, and we understand that all these machines are due for upgrades to meet the increasingly higher discharge standards over the next few years.

More importantly, CEL will use its newly developed PM2.5 removal technology (in collaboration with Peking University) in these machines. It is also a pioneer ESP project with such technology and given the acute air quality problem in China, management is hopeful that there will be an increasing demand for this sort of machines in the near future.

The second contract worth RMB382.6m is from China Energy Engineering Group Shanxi Province Electric Company (Shanxi Electric); this is for the supply of industrial dust collectors for five projects. According to management, the supply and implementation of a cluster of projects from a single customer is a model that will enable CEL to better plan and allocate its working capital and production capacity.

And speaking of production capacity, the new factory that we visited in Bengbu, Anhui Province can effectively scale up to RBM2b worth of projects. We understand that CEL has an order book of RMB320m as of end Nov 2013, and the factory should be able to comfortably accommodate these two new contracts.

And as CEL has recently raised another S$17m (RMB85m) from a share placement as well as obtained a credit facility of RMB130m from China Construction Bank, it should have ample working capital for these orders. In addition, we understand that these orders also come with better payment terms, which should further improve its working capital needs.

CEL expects these orders to have a positive impact on its FY14 EPS.

We do not have a rating on the stock.

Source: OCBC Research - 21 Jan 2014