HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

China Everbright Environment / Equity Bottom-Up

In the latest update by <a href="https://www.smartkarma.com/entities/china-everbright-environment-group-limited" target="_blank" data-smartkarma-citation="entities:15946:1" rel="noopener">China Everbright Environment (257 HK)</a>, the tone is generally bullish for the outlook in the next two years. We think the key drivers include the growth from operational projects, good capacity expansion potential, positive track of receivable collections, upside on waste treatment tariffs and manageable capex to support new projects. We see it to achieve resilient EPS CAGR of 20% but trading on just 4.8x PER and 0.67x P/B, the stock remains deeply undervalued. CEE believes that the efficiency of its waste-to-energy projects can improve as electricity generated per tonne still has good room to rise and it will also look into more M&amp;A opportunities under the 14th 5-year Plan. Meanwhile, CEE seeks to increase the waste treatment tariffs following the central government's policy to increase the share of subsidy responsibility of the local governments. All these should point to better profitability going forward, in our view.

In the latest update by China Everbright Environment (257 HK), the tone is generally bullish for the outlook in the next two years. We think the key drivers include the growth from operational projects, good capacity expansion potential, positive track of receivable collections, upside on waste treatment tariffs and manageable capex to support new projects. We see it to achieve resilient EPS CAGR of 20% but trading on just 4.8x PER and 0.67x P/B, the stock remains deeply undervalued. CEE believes that the efficiency of its waste-to-energy projects can improve as electricity generated per tonne still has good room to rise and it will also look into more M&amp;A opportunities under the 14th 5-year Plan. Meanwhile, CEE seeks to increase the waste treatment tariffs following the central government's policy to increase the share of subsidy responsibility of the local governments. All these should point to better profitability going forward, in our view.

China Everbright Environment (257 HK): Management Updates Suggest Resilience

China Conch Venture Holdings / Equity Bottom-Up

We think that after the spin-off of <a href="https://www.smartkarma.com/entities/china-conch-environment-protection-holdings-limited" target="_blank" data-smartkarma-citation="entities:34405:1" rel="noopener">China Conch Environment Protection Holdings (CEP HK)</a>, the businesses being left with <a href="https://www.smartkarma.com/entities/china-conch-venture-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19943:1" rel="noopener">China Conch Venture Holdings (586 HK)</a> will be even smaller and render it more like a holding company. We think such development is not positive to Conch Venture, and also, based on our sum-of-the-parts valuation; it is trading on 4% premium, suggesting that there is minimal upside from here, in our view.What's left with Conch Venture will mainly be the waste incineration solution business, or waste-to-energy, but its capacity is significantly behind that for <a href="https://www.smartkarma.com/entities/china-everbright-environment-group-limited" target="_blank" data-smartkarma-citation="entities:15946:1" rel="noopener">China Everbright Environment (257 HK)</a> and <a href="https://www.smartkarma.com/entities/canvest-environmental-protection-group-co-ltd" target="_blank" data-smartkarma-citation="entities:100:1" rel="noopener">Canvest Environmental Protection Group (1381 HK)</a>. Also, the remaining assets (excluding <a href="https://www.smartkarma.com/entities/anhui-conch-cement-co-ltd" target="_blank" data-smartkarma-citation="entities:159:1" rel="noopener">Anhui Conch Cement (914 HK)</a>) will see slower earnings growth than with CEP.  The 16% rally in share price since Sep should have reflected most of the news. We have also provided in this Insight a matrix table indicating the SOTP value for different levels of CEP's PER and A-share price of Conch Cement.

We think that after the spin-off of China Conch Environment Protection Holdings (CEP HK), the businesses being left with China Conch Venture Holdings (586 HK) will be even smaller and render it more like a holding company. We think such development is not positive to Conch Venture, and also, based on our sum-of-the-parts valuation; it is trading on 4% premium, suggesting that there is minimal upside from here, in our view.What's left with Conch Venture will mainly be the waste incineration solution business, or waste-to-energy, but its capacity is significantly behind that for China Everbright Environment (257 HK) and Canvest Environmental Protection Group (1381 HK). Also, the remaining assets (excluding Anhui Conch Cement (914 HK)) will see slower earnings growth than with CEP.  The 16% rally in share price since Sep should have reflected most of the news. We have also provided in this Insight a matrix table indicating the SOTP value for different levels of CEP's PER and A-share price of Conch Cement. 

Equity Capital Markets

China Conch Environment Protection Holdings / Equity Capital Markets

China Conch Environment Protection Holdings

We believe the spin-off by introduction of <a href="https://www.smartkarma.com/entities/china-conch-environment-protection-holdings-limited" target="_blank" data-smartkarma-citation="entities:34405:1" rel="noopener">China Conch Environment Protection Holdings (CEP HK)</a> by <a href="https://www.smartkarma.com/entities/china-conch-venture-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19943:1" rel="noopener">China Conch Venture Holdings (586 HK)</a> will leave more clarity to the business of both companies. Fundamentally speaking, we think CEP is a solid company with a focus on cement kiln waste treatment services for solid and hazardous waste in China.The key positives for CEP are a leadership position in the industry, excellent new project pipeline momentum and strong relationship with its partners, in our view. However, the key negatives are declining margins, concentrated business lines and small market capitalisation. We estimate that CEP's market cap will be just HK$4.98bn and HK$6.38bn, based on the average PER of the peers (5.9x) and high-end of peers (7.6x).

We believe the spin-off by introduction of China Conch Environment Protection Holdings (CEP HK) by China Conch Venture Holdings (586 HK) will leave more clarity to the business of both companies. Fundamentally speaking, we think CEP is a solid company with a focus on cement kiln waste treatment services for solid and hazardous waste in China.The key positives for CEP are a leadership position in the industry, excellent new project pipeline momentum and strong relationship with its partners, in our view. However, the key negatives are declining margins, concentrated business lines and small market capitalisation. We estimate that CEP's market cap will be just HK$4.98bn and HK$6.38bn, based on the average PER of the peers (5.9x) and high-end of peers (7.6x). 

Conch Environment: Initial Thoughts on the Listing by Way of Introduction

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

China Conch Venture Holdings / Equity Capital Markets

<a href="https://www.smartkarma.com/entities/china-conch-venture-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19943:1" rel="noopener">China Conch Venture Holdings (586 HK)</a> (CCV) has <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0928/2021092801185.pdf" target="_blank" rel="noopener">proposed</a> spinning-off and separately listing the shares of Conch Environment Protection (CEEP), a company principally engaged in providing industrial solid and hazardous waste treatment in the PRC. Here is the listing application form (<a href="https://www1.hkexnews.hk/app/sehk/2021/103856/documents/sehk21092801397.pdf" target="_blank" rel="noopener">Form A1</a>).
CEEP comprised ~17% of the unlisted revenue of CCV in FY20 and ~35% of the profit.
The spin-off will be implemented by way of distribution in-specie - CCV will not retain any interest in CEEP. This is a listing by introduction - no IPO proceeds are involved.
Assuming CEEP's listing goes ahead (no shareholder approval is required), the remaining unlisted ops comprise waste incineration projects, energy-saving equipment, and port logistics.
Separately, I see CCV trading at a 6% discount to its NAV, its narrowest inside a year. The implied stub has never been narrower.
More below the fold.

China Conch Venture Holdings (586 HK) (CCV) has proposed spinning-off and separately listing the shares of Conch Environment Protection (CEEP), a company principally engaged in providing industrial solid and hazardous waste treatment in the PRC. Here is the listing application form (Form A1).
CEEP comprised ~17% of the unlisted revenue of CCV in FY20 and ~35% of the profit.
The spin-off will be implemented by way of distribution in-specie - CCV will not retain any interest in CEEP. This is a listing by introduction - no IPO proceeds are involved.
Assuming CEEP's listing goes ahead (no shareholder approval is required), the remaining unlisted ops comprise waste incineration projects, energy-saving equipment, and port logistics.
Separately, I see CCV trading at a 6% discount to its NAV, its narrowest inside a year. The implied stub has never been narrower.
More below the fold.

China Conch Venture (586 HK): Waste Treatment Spin-Off

Canvest Environmental Protection Group / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/canvest-environmental-protection-group-co-ltd" target="_blank" data-smartkarma-citation="entities:100:1" rel="noopener">Canvest Environmental Protection Group (1381 HK)</a> has underperformed <a href="https://www.smartkarma.com/entities/china-everbright-environment-group-limited" target="_blank" data-smartkarma-citation="entities:15946:1" rel="noopener">China Everbright Environment (257 HK)</a> (CEE) by a massive 43.9pp over the last three months, and we think there is room for it to catch up. In fact, we think its financial and operational performance is not inferior to CEE as reflected by its reported 1H21 result. Moreover, at 7.9x and 6.8x for FY21 and FY22, respectively, its PER valuations are not demanding as well.Canvest has a very secured project pipeline, comparable gearing with CEE, solid cash flow from operating projects and encouraging profitability improvement. It earned a high annualised ROE of 16.6%, about the same as CEE. While it is true that Canvest is smaller and does not enjoy CEE's business diversification, we think these factors cannot justify its significant underperformance within just 3 months.

Canvest Environmental Protection Group (1381 HK) has underperformed China Everbright Environment (257 HK) (CEE) by a massive 43.9pp over the last three months, and we think there is room for it to catch up. In fact, we think its financial and operational performance is not inferior to CEE as reflected by its reported 1H21 result. Moreover, at 7.9x and 6.8x for FY21 and FY22, respectively, its PER valuations are not demanding as well.Canvest has a very secured project pipeline, comparable gearing with CEE, solid cash flow from operating projects and encouraging profitability improvement. It earned a high annualised ROE of 16.6%, about the same as CEE. While it is true that Canvest is smaller and does not enjoy CEE's business diversification, we think these factors cannot justify its significant underperformance within just 3 months. 

Canvest Env (1381 HK): We Should Catch Up China Everbright Env (257 HK)

China

China Conch Venture Holdings Limited operates as an investment holding company. The Company, through its subsidiaries, provides energy preservation and environmental protection solutions and offers environment-friendly building materials.

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China Conch Venture Holdings (586 HK)

China Everbright Environment (257 HK): Management Updates Suggest Resilience

CEE sees growth from operational projects, good capacity expansion potential, positive track of receivable collections, upside on waste treatment...

Osbert Tang, CFA

Conch Venture (586 HK): Not Much Left

We see Conch Venture not cheap at the current level, and the spin-off of Conch Environment will make it even more like a holding company. The...

Osbert Tang, CFA

Conch Environment: Initial Thoughts on the Listing by Way of Introduction

Conch Environment's key postives are leadership position, good pipeline and strong partner relations. The key negatives are declining margins,...

Osbert Tang, CFA

China Conch Venture (586 HK): Waste Treatment Spin-Off

CVV's recent price action suggests news leakage ahead of CCEP's spin-off, with shares gaining 14% compared to 5% for Anhui. I'd be inclined to set...

David Blennerhassett

Canvest Env (1381 HK): We Should Catch Up China Everbright Env (257 HK)

We believe there is room for Canvest to catch up its massive 43.9pp underperformance against CEE in the last 3 months. Its operational and...

Osbert Tang, CFA

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