• Underlying earnings +21%
• CITIC benefits showing up
• China, overseas prospects beckon

Decent Dec 2015 quarter

CITIC Envirotech Ltd (CEL) ended the Dec quarter on a pretty strong note, with revenue +3.4% YoY and +69.3% QoQ at S$120.0m, likely boosted by strong EPC contribution of S$48.6m and also membrane sales of SS$33.6m. We estimate that underlying net profit probably jumped 87.5% YoY and 69.0% QoQ to S$23.5m. However, owing to a soft start, CEL posted revenue of S$274.8m for 2015 (9M ended 31 Dec 2015), down 4.5%, and a reported net profit of S$40.8m, down 21.2%; but core earnings would have come in around S$47m, +21% instead. CEL declared a final dividend of 0.36 S cent/share, versus 0.5 S cent a year ago.

Positive about China water industry

Going forward, management continues to remain upbeat about its prospects in China, citing stricter government policies on waste water discharge. CEL is particularly hopeful that the upcoming 13th 5-Year Plan (due out in Mar 2016) will see substantial investment in the environmental sector and bring about more Public-Private Partnerships projects. And because of its ties with the CITIC Group, as well as the financial backing, CEL believes that it is well placed to tender for more of these projects, especially the higher value ones. Leveraging on the CITIC connection, we also understand that CEL has been able to gradually reduce its effective cost of borrowing as it replaces expiring loans with less expensive ones.

Also eyeing overseas market

Besides China, CEL has also been looking to expand overseas. One way that it is doing this is by tagging along with CITIC on the “One Belt, One Road” initiative, where the SOE has said it would invest over RMB700b to support the initiative; some of the countries that CEL will be looking at include Kazakhstan and Pakistan. Separately, CEL has also recently won its first water treatment project in Indonesia; and CEL is looking forward to more contracts there.

Raising FV to S$1.48

Incorporating the recent results and updates from management, we have raised our estimates for FY16 revenue by 3% and earnings by 28%; this in turn increases our fair value from S$1.40 to S$1.48 (still based on 23x FY16F EPS). Maintain HOLD.

Source: OCBC Research - 25 Feb 2016