• 30-year concession period
• Integrated solution can capture more margins
• But no FY16 impact yet

1st sludge treatment contract

CITIC Envirotech Ltd (CEL) has recently announced that it has won its first BOT (BuildOperate-Transfer) Sludge Treatment Project in Weifang City, Shandong Province in China. The RMB220m (S$48m) project would involve the design, construction and operation of a 700 tons/day sludge treatment plant to treat sludge generated from six municipal waste water treatment plants in that city; when completed by end 2016, it will be the largest sludge treatment plant in Shandong province and will have a concession period of 30 years. Management expects to finance the project with proceeds from its US$175m senior perpetual securities issued in Nov 2015.

Chance to showcase capability/ technologies

And in this instance, the final output of the treated sludge will need to meet the standard of soil conditioner and fertilizer for landscaping. Management also believes the latest project offers an excellent opportunity for CEL to demonstrate its capability and technologies in the “sludge to resource” and “sludge to energy” segment – a segment that it believes is poised to expand, given the more stringent environmental regulations and favourable policy trend.

Environmental experts believe that such plants can provide an important resource – besides generating heat and power for use at the plant, the process massively reduces the volume of sludge to be disposed of, creates a useful byproduct for use as fertilizer and displaces the burning of other fuels.

No material financial impact yet

However, management does not expect the investment to have any material financial impact on its NTA or EPS for FY15. Nevertheless, the move “downstream” to treat sludge is a logical move in our view; this as it allows the company – a veteran in the waste-water treatment industry – to offer a more integrated solution that can capture more margins along the value chain, as well as moving into a new market. Recall that CEL is already producing its membranes for use in its own treatment plants as well as for sale to external parties.

Maintain HOLD with S$1.48 fair value.

While we believe that this is an important development for the company, we would need to see more contract wins before we revise our estimates. Hence, we maintain our HOLD call and S$1.48 fair value (based on 23x FY16F EPS).

Source: OCBC Research - 20 Apr 2016