[Results analysis]: FY21 net profit climbed 17%, largely in line with our expectation
- FY21 results largely in line with our expectation; final DPS of HK6.83 cents declared with a slightly higher total payout ratio
- New development areas include resources utilization (such as reusable water, rooftop solar, sludge disposal, etc) and water environmental restoration
- Cost management through tariff hike and enhancement in project design / treatment
- Attractive valuation of <6x FY22 PE after stripping out construction revenue; our current rating is BUY with TP of HK$2.10
China Everbright Water (CEW) reported a 17% increase in FY21 net profit to HK$1.2bn, largely in line with our expectation. Turnover growth of 22% to HK$6.9bn was higher than our estimate due to faster progress in construction. Another discrepancy is lower-than-expected gross margin of 40.5%, compared with our expectation of 41.9%. The shortfall was offset by lower-than-expected effective tax rate. Account receivable collection declined 12ppts to 84% in FY21 as the pandemic caused financial pressure on some local governments, leading to delay in payment. With capex of HK$3.4bn, net debt-equity ratio climbed 10ppts to 92%. Final dividend of HK6.83cents was declared with total payout ratio at 30%, slightly higher than 27% in FY20.
During FY21, CEW had new project wins with total investment amount of Rmb3.76bn, compared with Rmb1.19bn in FY20. New capacity amounted to 543,000 tons/day which was less than expected. This was due to slow progress of new project launch by the local governments as focus was put in COVID prevention. Neverthless, CEW explored new areas and secured an overseas O&M project in Mauritius. These new projects brought the total project portfolio to 7m tons /day. With 0.32m tons of daily capacity commencing operation, total operating capacity reached 5.22m tons/day. Nine projects received approal for tariff hikes, ranging from 4% to 58%.
Looking forward, CEW will broaden its revenue stream amid China’s “Dual Carbons” policy, including sales of electricity through rooftop solar power, waste water source heap pump and reusable water. In particular, CEW has also launched pilot programmes in solar energy and sludge treatment in its Zibo water project in Shandong and water projects in Beitang of Tianjin. In addition, 14th Five Year Plan has highlighted urban waste water and waste treatment in the Yellow River Basin where Shandong and Jiangsu provinces are expected to have many projects in water environmental restoration. These will bring be the growth drivers for the topline.
Inflation has inevitably increase operation and construction costs. On one hand, CEW will implement various cost control measures through operation efficiency enhancement and improvement in project designs / treatment technology. On the other hand, CEW will step up efforts in negotiation with local governments with respects to tariff adjustment. These initiatives will alleviate margin pressure.
We expect CEW to maintain FY22 earnings growth at mid-teens. It is trading at an attractive PE <4x. Even after stripping out contribution from construction revenue, the adjusted PE would still be undemanding at <6x. Our current rating is BUY with TP of HK$2.10.