• Continues to execute
• But receivables rise significantly
• Gearing creeps up

Results Within Expectations

China Everbright International (CEI) delivered 1H19 net profit of HK$2,630m, up 20% YoY. Its two main subsidiaries, China Everbright Water (72.6% stake) and China Everbright Greentech (69.7% stake), saw 13% and 26% net profit growth over the same period. More projects for the waste-to-energy and Greentech segments commenced operations and demonstrate the group’s healthy project pipeline going forward. However, a concern is the increase in subsidy receivables for renewable power tariff which rose by HK$800m HoH to HK$2.6b. The cash conversion cycle will thus be closely monitored by the market.

Higher Interim Dividend; Focus on Accounts Receivables and Net Gearing

The group has declared an interim dividend of HK$0.13/share, compared to HK$0.12/share in 1H18. There is a healthy pipeline of projects and steady execution should result in earnings growth, but the focus will be on the accounts receivable collection; the group’s gearing ratio (total liabilities/total assets) rose from 42% in end 2014 to 61% in end 2017, and the group then undertook a rights issue in Aug 2018 (10 per 27 ratio with HK$6.00 subscription price). Gearing then went down to 57% in end 2018, but has now crept up to 59%.

Industry Has Bright Long Term Prospects

Pollution control remains a battle that China continues to wage, and a series of key environmental policies including the “Zero-Waster Cities” program and waste sorting initiative have provided a clearer blueprint for China’s drive on ecological conservation. We are positive on the long term prospects of the industry, but as mentioned earlier there are issues that the investor also has to keep in mind. We have HOLD rating with a fair value estimate of HKD 6.40.

Source: OCBC Research - 16 Aug 2019