China Everbright Water’s (“CEWL”) has tumbled after hitting an intraday high of $1.270 on 30 May 2014 to an intraday low of $0.410 on 21 Jan 2016 (all time low post share price consolidation since May 2014) before closing at $0.480 on 24 Mar 2016. This was despite the positives which we have seen in the water industry in China and CEWL.

Is market overly pessimistic on CEWL, or is there something we do not know?

 

Background of CEWL

CEWL share price has not performed well after touching an intraday high of $1.270 on 30 May 2014. At that time, CEWL is in the midst of completing the reverse takeover of China Everbright International’s water assets with the issuance of 1.94b shares at $0.703. Upon completion, CEWL will have a total daily designed capacity of over 3.4 million tons. This acquisition was completed in end 2014. Subsequently, CEWL placed out 120.7m new ordinary shares to International Finance Corporation (“IFC”) and Dalvey Asset Holding Ltd (“Dalvey”) at an issue price of $0.940 in Jan 2015. As of end Dec 2015, CEWL has a total daily designed capacity of over 4.6m tons. Despite the developments, CEWL share price has continued to slide to an intraday low of $0.410 on 21 Jan 2016 (all time low post share price consolidation since May 2014) before closing at $0.480 on 24 Mar 2016. This was even lower than its NAV per share of $0.495.

 

Industry prospects remain sanguine

According to the Water Pollution Prevention and Control Plan issued by the State Council of China, China targets at least 70% and 75% of the seven key regions’ water quality to achieve, or exceed the level of Category III by 2020 and 2030, respectively. Furthermore, according to DBS Research, there are more Public-Private Partnership (“PPP”) being released with the cumulative investment size of around RMB300b. CEWL is cognizant of the aforementioned vast industry prospects and plans to expand into integrated environmental water business, such as the construction of sponge cities and integrated watershed management etc.

 

Targets 1.0-1.5mt/d in FY16F; to reach 10mt/d by 2020

According to the latest various analyst reports, CEWL targets an increase of 1.0-1.5mt/d in their total daily designed capacity in FY16F and is on track to reach 10mt/d by 2020. Although it is premature to say whether CEWL can reach its objectives, it is assuring that firstly, CEWL managed to increase its capacity by 1.1mt/d in FY15. Secondly, its net gearing ratio is at a comfortable level of 41.8% where it has sufficient headroom to gear up for more acquisitions. It is noteworthy that its US$140m loan with IFC announced on 29 Jul 2015 has not been drawn down yet.

 

FY16F likely to be a better year

FY16F is likely to be better than FY15F as FY15’s earnings per share was pulled down by share issuance to IFC and Dalvey. FY16F should see better performance on a full year contribution from Dalian Dongda; an improvement in water tariffs, especially from Dalian Tongda with the improvement in discharge standards and operational efficiencies after streamlining Hankore and Dalian Tongda’s acquisitions.

 

1^st dividend in five years, coupled with share buybacks

CEWL has announced its final dividend of S$0.0035 / share, the first dividend in five years. Furthermore, CEWL has launched three rounds of share buybacks with a cumulative 7.8m share buyback bought at an average price of $0.493. These actions likely underscore management’s confidence in CEWL’s business prospects going forward. (See Table 1 below)

Table 1: CEWL’s share buyback

Source: Company

 

Valuations remain relatively attractive

Based on Table 2 below, CEWL trades at 13.9x FY16F PE and 1.0x FY15 P/BV vis-à-vis the average 15.5x FY16F PE and 1.9x P/BV. If I exclude CT Env due to its extremely high P/BV, average FY16F and P/BV are 14.4x and 1.4x respectively. CEWL’s valuations seem to be relatively attractive, especially if we take into account of its quasi state owned ownership, good financials, ample debt headroom.

Table 2: CEWL’s metrics vs other water stocks

Source: Bloomberg & Ernest’s compilations as of 24 Mar 2016

 

Chart analysis

Based on Chart 1 below, CEWL is entrenched in a medium to long term downtrend as evidenced by the declining exponential moving averages (“EMAs”) and the downward sloping trend line. Significant resistance is around $0.485 – 0.510. In the short term, there is a possibility of a potential bullish flag formation being formed. It will be positive if CEWL can break $0.485 – 0.510 with volume expansion and on a sustained basis. If CEWL can break $0.485 – 0.510 with volume expansion and on a sustained basis, it points to an eventual measured technical target of around $0.590. A break below $0.410 with volume expansion and on a sustained basis is negative for the chart.

Near term supports: $0.470 / 0.455 / 0.430

Near term resistances: $0.485 / 0.500 / 0.510

Chart 1: CEWL mired in a medium to long term downtrend

Source: CIMB complimentary chart as of 24 Mar 2016

 

Risks

Sharp share price decline may portend some negative developments

The sharp 62% share price decline from an intraday high of $1.270 since 30 May 2014 may portend some negative developments which is unknown to me, but (perhaps) known to the market. Readers should exercise their independent judgement and do their own research in this stock before arriving at any investment decision.

Lower than expected additions in CEWL’s total daily designed capacity

Lower than expected additions in CEWL will have an adverse impact in CEWL’s future earnings and their goal of reaching 10mt/d by 2020.

 

Conclusion

In conclusion, CEWL seems interesting based on positive industry prospects; relatively attractive valuations; quasi state owned with strong financials and ample debt headroom and the possibility of expanding into integrated environmental water business, such as the construction of sponge cities and integrated watershed management etc. However, the sharp share price decline, possibility of lower than expected additions in CEWL’s total daily designed capacity are some of the noteworthy risks to consider. Readers who are interested to know more should refer to the various analyst reports, company financial results and annual reports etc for more information.

 

Disclaimer

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