HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

China Conch Venture Holdings / Equity Bottom-Up

<ul>
<li>Following CCEP spin-off and share price decline, <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 (586 HK)</a> is now at more attractive valuations relative to the stub, on sum-of-the-parts and on PER multiple. </li>
<li>Growth profile should improve in next two years and it has an optimistic expectation of of 76% increase in waste treatment and 79% growth in on-grid electricity for FY22.</li>
<li>New business initiatives including anode and cathode materials of lithium iron phosphate and lithium batteries and used lithium batteries treatment may provide potential medium term upside.</li>
</ul>


Following CCEP spin-off and share price decline, China Conch Venture (586 HK) is now at more attractive valuations relative to the stub, on sum-of-the-parts and on PER multiple. 
Growth profile should improve in next two years and it has an optimistic expectation of of 76% increase in waste treatment and 79% growth in on-grid electricity for FY22.
New business initiatives including anode and cathode materials of lithium iron phosphate and lithium batteries and used lithium batteries treatment may provide potential medium term upside.


Conch Venture (586 HK): Improving Risk-Reward Profile

China Everbright Environment / Equity Bottom-Up

<ul>
<li>Share price was off 23% in the last two days, yet we think <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> has posted a set of healthy result, though somewhat behind expectations.</li>
<li>Good new project momentum, further increase in operation revenue and collection of national subsidies are key factors backing earnings growth and improvement in cash flow over the next 2 years.</li>
<li>Longer term, management stays bullish on the industry growth opportunities. Its 14.5% ROE and mid-teens earnings growth both suggest the stock's 3.3x PER, 0.45x P/B and 9.4% yield inexpensive.</li>
</ul>


Share price was off 23% in the last two days, yet we think China Everbright Environment (257 HK) has posted a set of healthy result, though somewhat behind expectations.
Good new project momentum, further increase in operation revenue and collection of national subsidies are key factors backing earnings growth and improvement in cash flow over the next 2 years.
Longer term, management stays bullish on the industry growth opportunities. Its 14.5% ROE and mid-teens earnings growth both suggest the stock's 3.3x PER, 0.45x P/B and 9.4% yield inexpensive.


China Everbright Environment (257 HK): Sell-Down Unwarranted Given Positive Prospects

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

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

Hong Kong

Canvest Environment Protection Group Company Limited focuses on the development, management, and operation of waste-to-energy plants. The Company's plants are located in China.

Canvest Environmental Protection Group (1381 HK)

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Canvest Environmental Protection Group (1381 HK)

Conch Venture (586 HK): Improving Risk-Reward Profile

Following CCEP spin-off and recent share price decline, Conch Venture is now at more attractive valuation level. In the medium term, upside will...

Osbert Tang, CFA

China Everbright Environment (257 HK): Sell-Down Unwarranted Given Positive Prospects

While CEE's FY21 is below expectation, we think that good new project momentum, further increase in operation revenue and collection of national...

Osbert Tang, CFA

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

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