• Underlying earnings +42% QoQ
• Order flows are back
• No change to FY16 forecast

QoQ improvement in Sep quarter

Citic Envirotech Ltd (CEL) saw its Sep quarter revenue tumble 32.7% YoY to S$70.9m, mainly due to weaker Engineering revenue (down 62.9% versus a year ago); but mitigated by the 28.9% jump in treatment revenue and 96.3% surge in membrane sales. NPATMI declined 16.5% to S$13.9m. But on a sequential basis, revenue was down just 15.5% QoQ while NPATMI actually jumped 318.8% (underlying profit grew 41.6%).

As the company will be changing its year-end from end Mar to end Dec from next year onwards, this FY will consist of just three quarters. For the two quarters, revenue of S$154.7m fell 9.9%, while NPATMI dropped 56.0% to S$17.2m; but underlying net profit (before minority interest) slipped 5.3% to S$25.2m, after adjusting for a one-off S$6.5m fee relating to its general offer in Apr 2015, as well as a S$14.2m one-off gain on the disposal of AFS in the previous year-ago period.

Starting to get VAT rebate

Also included in the results was the rebate of S$1.9m; this is to offset the recent 17% VAT that the China government imposed on water treatment income, and should allay earlier fears that the VAT would drastically affect the profitability of the company. Recall that management previously highlighted that the effective tax is less than 5% on tariffs for municipal treatment after rebates; there is no impact on industrial projects as the VAT is directly passed on to the end users.

One Belt, One Road prospects

Going forward, management continues to remain upbeat about its prospects in China, citing stricter government policies on waste water discharge; the recent award of a RMB400m EPC project in Gansu Province is confirmation that the orders are starting to flow once again. Management also highlighted the opportunity for CEL to participate in the water infrastructure development projects along the One Belt, One Road trade routes; this after CITIC Limited announced in Jun 2015 that it would invest over RMB700b to support the initiative.

Maintain HOLD with unchanged S$1.40 fair value

We have adjusted our FY15 estimates to reflect the shortened FY; but have left our FY16 estimates largely unchanged. As such, our fair value (based on 23x FY16F EPS) remains at S$1.40. Maintain HOLD.

Source: OCBC Research - 30 Oct 2015