A green defensive play with improving cashflow
- A defensive play with >6% yield amid jittery market sentiment
- Rising waste treatment fee to offset loss of return from declining subsidy
- Incoming share price catalyst in the upcoming results from improving cashflows
- Market has ignored fundamental improvements, reiterate BUY on trough valuation with TP of HK$6.90
A defensive play with trough valuation of around 6x. The environmental sector is relatively immune from the current Russia-Ukraine border tension and the subsequent potential downside risk in economic slowdown in China. We estimate it can achieve an 11-27% earnings growth in FY21-22, underpinned by a 13-35% growth in treatment volume/output and enhancement of operational efficiencies.
Cashflows to double from FY20. With strong growth in treatment volume, issuance of more asset-backed notes, and stringent cost control, management targets to improve adjusted operating cashflow (on PRC accounting standard) from HK$5.2bn in FY20 to HK$10bn within one to two years.
Climbing waste treatment fee. The average waste treatment fee of new waste-to-energy (WTE) projects is estimated at Rmb90/ton in 2021, up from Rmb77/ton in 2020. We expect that such an uptrend will continue in view of the climbing construction cost and environmental expenses. We believe a higher waste treatment fee can offset part of the shortfall in subsidy.
The stock is trading at an attractive FY22 PE of <5x. Even stripping out construction revenue, adjusted valuation remains undemanding at around 6x. Our target price (TP) is set at HK$6.90, based on our target prices for China Everbright Water (1857 HK, HK$2.10) and China Everbright Greentech (1257 HK, HK$3.50) and 12x the 12-month rolling PE (adjusted for construction revenue) for WTE operations.