• Core 1Q PATMI met 23% of FY16 forecast
• M&As of 1m m3/day capacity possible
• Maintain HOLD

1Q16 PATMI +60% YoY

CITIC Envirotech Ltd (CEL) saw 1Q16 revenue surging 63% YoY to S$99.5m, meeting 23% of our FY16 forecast; this driven by higher EPC revenue (+100% at S$41.4m); membrane sales also jumped 86% to S$22.1m, while recurring treatment revenue grew 26% to S$36.0m. Despite suffering a forex loss of S$4.5m in the quarter, PATMI jumped 60% to S$12.1m, or about 17% of our FY16 estimate; excluding the forex loss, the number would have met around 23% of our forecast.

Eyeing large-scale M&A acquisitions

Going forward, CEL remains upbeat about its prospects in China’s water sector, noting the government's increased focus on addressing pollution issues. CEL also intends to further expand its asset portfolio by engaging in strategic and large-scale M&A activities.

Currently, CEL’s asset portfolio has a design capacity of 4m m3/day. We understand that CEL is interested in looking at both waste-water as well as drinking water assets with potential capacity of 1m m3 each; this is in line with what most SOEs or SOE-backed water treatment companies are doing currently to aggressively increase their portfolios.

But in this case, management stressed that any assets that they acquire would yield no less than an IRR (internal rate of return) of 12%.

Also keen to acquire new technology

At the same time, CEL said that it would also be interested in strategic M&As like acquiring new technology. Recall that it has recently won a contract to build and operate a “sludge-toresource” treatment plant in Shandong Province.

Apparently, CEL sees this as a complementary business and it is keen to acquire the know-how for processes like “sludge-to-energy” to add to its capabilities. CEL previously acquired Memstar Holdings to in-house its own membrane production and since then, it has been able to generate pretty decent external sales of S$53.7m in FY15 as well.

Maintain HOLD; watching developments closely

For now, we opt to leave our forecasts unchanged as 1Q16 results were still in line with our expectations; hence we are keeping our HOLD rating and S$1.48 fair value (23x FY16F EPS), and will be watching for M&A developments closely.

Source: OCBC Research - 3 May 2016