• With Trump announcing new tariff measures on China, China’s swift counter looks like the beginning of a trade war. While Chinese export-oriented firms may suffer, CITIC Envirotech (CEL) is a different story with its defensive environmental business and government contracts with new order wins pushing to Rmb2.7b YTD.
• Its share buyback is a vote of confidence as its low PE and high dividend yield make it an attractive play on China’s war on pollution.
• Maintain BUY and target price of S$1.06.

WHAT’S NEW

Trade war back on the horizon but defensive CEL has no reason to worry

US President Trump said last Friday that the US will impose tariffs of US$50b on Chinese imports, with the first wave of duties to cover US$34b of goods starting 6 July. China countered swiftly with a list of goods slated for tariffs and moved to null previous negotiations, ignoring Trump’s threat to raise the total tariff by another US$100b if China retaliates. This looks to be the beginning of a trade war and while there remains room and time for more negotiations, this increases the uncertainty in US-China trade relations and the related risks for export-oriented Chinese firms.

On the other hand, defensive firms with government contracts like CITIC Envirotech (CEL) should be sheltered from any trade war fallouts and experience minimal impact from such worries.

Order wins of Rmb2.7b YTD; financing for all projects secured

With CITIC Envirotech’s latest Rmb680m order wins for two industrial hazardous waste treatment projects, its order wins have reached a high of Rmb2.7b ytd. The latest win also recognises CITIC Envirotech’s capability and technologies beyond water waste treatment and in the hazardous waste management sector.

In line with China’s environmental focus, we believe CITIC Envirotech’s order win momentum will continue. Management has shared that financing for all projects has been secured either through its robust internal cash flow or external bank loans.

STOCK IMPACT

Share buyback is testament to CITIC Envirotech (CEL)’s confidence and bright future

CITIC Envirotech recently conducted its first share buyback in 2018, showing investors that the state-owned enterprise will not hesitate to buy back shares if price levels are too low.

CITIC Envirotech’s future remains bright amid a favourable macro backdrop as Chinese President Xi reaffirmed China’s war on pollution. We believe 2018 should be a year of stellar results for CITIC Envirotech.

Low PE and high dividend yield make CITIC Envirotech (CEL) a favourable China proxy amid trade war worries

While prospects for other China-related stocks may have been hammered by recent trade war worries, CITIC Envirotech is a different story. Its prospects remain bright with new order wins coming in amid China’s environmental focus while its balance sheet remains adequate to finance these projects.

The current low PE of 8.2x 2018F PE and attractive dividend yield of 3.7% should make this stock attractive to investors who wish to find a safe China proxy amid trade war uncertainties.

EARNINGS REVISION/RISK

• No change to our forecasts.
• Key risks include a delay in project construction and a weakening of the renminbi.

VALUATION/RECOMMENDATION

• Maintain BUY and DCF-based target price of S$1.06
• Our target price is S$1.06, implying 11.6x 2019F PE, mirroring Singapore and Hong Kong peers’ average of 11.2x.
• The stock remains the cheapest on 2018 valuations vs Singapore peers such as SIIC Enviroment and China Everbright Water with an attractive 2018 yield of about 4%.

SHARE PRICE CATALYST

• Further project wins.
• Share buybacks.

Source: UOB Kay Hian Research - 20 Jun 2018