HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

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> witnessed a good comeback in 2H20 as its BOT construction segment regained pace after the disruption by the pandemic in 1H20. The company finished the year with an 18.1% YoY growth in profit to a record HK$1.05bn, accelerated from 12.7% in 1H20.Thanks to another 10,090 tonnes/day waste-to-energy capacity which will come on stream in FY21, there will be a 47% increase in operational capacity. Adding to this is better gross margin as new plants achieve higher utilisation levels. Hence, management guides for an encouraging outlook, and we expect healthy double-digit EPS growth over the next two years. Its low valuations of 6.8x PER and 1.1x P/B (ROE of 16.5%) have sufficiently discounted the concerns on high leverage, in our view.

Canvest Environmental Protection Group (1381 HK) witnessed a good comeback in 2H20 as its BOT construction segment regained pace after the disruption by the pandemic in 1H20. The company finished the year with an 18.1% YoY growth in profit to a record HK$1.05bn, accelerated from 12.7% in 1H20.Thanks to another 10,090 tonnes/day waste-to-energy capacity which will come on stream in FY21, there will be a 47% increase in operational capacity. Adding to this is better gross margin as new plants achieve higher utilisation levels. Hence, management guides for an encouraging outlook, and we expect healthy double-digit EPS growth over the next two years. Its low valuations of 6.8x PER and 1.1x P/B (ROE of 16.5%) have sufficiently discounted the concerns on high leverage, in our view.  

Canvest Env (1381 HK): Setting a Positive Tone for Further Strength

China Everbright Environment / Equity Bottom-Up

<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) has not disappointed us - its net profit grew 15.6% in FY20, accelerating from a 15.1% growth in 1H20. In fact, this is distorted by impairment at its 69.7%-owned <a href="https://www.smartkarma.com/entities/china-everbright-greentech-0377b31c-5401-466f-987e-9a176b05fb52" target="_blank" data-smartkarma-citation="entities:24085:1" rel="noopener">China Everbright Greentech (1257 HK)</a>. Excluding such impact, earnings would have grown by 24% by our estimate - a truly commendable result in a COVID-19 impacted year.CEE's core environmental energy business stayed as its bread and butter, and will still drive growth in FY21 - its projects under construction reached 60% of its operational capacity at end-2020. CEE is also taking steps in alleviating its stretched leverage level. In our view, its mere 4x PER and 0.6x P/B have well reflected the risks related to high gearing, heavy contract assets and concern on outstanding subsidies.

China Everbright Environment (257 HK) (CEE) has not disappointed us - its net profit grew 15.6% in FY20, accelerating from a 15.1% growth in 1H20. In fact, this is distorted by impairment at its 69.7%-owned China Everbright Greentech (1257 HK). Excluding such impact, earnings would have grown by 24% by our estimate - a truly commendable result in a COVID-19 impacted year.CEE's core environmental energy business stayed as its bread and butter, and will still drive growth in FY21 - its projects under construction reached 60% of its operational capacity at end-2020. CEE is also taking steps in alleviating its stretched leverage level. In our view, its mere 4x PER and 0.6x P/B have well reflected the risks related to high gearing, heavy contract assets and concern on outstanding subsidies.

China Everbright Environment (257 HK): Management Guidance Hinting Sustained Growth into FY21

China Everbright Greentech / Equity Bottom-Up

The weaker-than-expected FY20 result of <a href="https://www.smartkarma.com/entities/china-everbright-greentech-0377b31c-5401-466f-987e-9a176b05fb52" target="_blank" data-smartkarma-citation="entities:24085:1" rel="noopener">China Everbright Greentech (1257 HK)</a> is primarily due to a one-time impairment charge on its intangible assets at the biomass segment. Without this factor, its net profit would have increased by 2.7%, and EBITDA margin expanded by 2.3pp YoY.<a href="https://www.smartkarma.com/entities/china-everbright-ltd" target="_blank" data-smartkarma-citation="entities:167:1" rel="noopener"></a>We see better earnings outlook for FY21, with a projected EPS growth of 15%, driven by increase operational income from new projects recently/to be completed, potentially more national subsidy, improvement in margin and lower finance cost on reduced leverage. The plan to securitise its national subsidy through asset-backed securities (ABN) will be positive to its financial position. We still think CEGT inexpensive, but prefer its parent <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> due to its more diversified project mix.

The weaker-than-expected FY20 result of China Everbright Greentech (1257 HK) is primarily due to a one-time impairment charge on its intangible assets at the biomass segment. Without this factor, its net profit would have increased by 2.7%, and EBITDA margin expanded by 2.3pp YoY.We see better earnings outlook for FY21, with a projected EPS growth of 15%, driven by increase operational income from new projects recently/to be completed, potentially more national subsidy, improvement in margin and lower finance cost on reduced leverage. The plan to securitise its national subsidy through asset-backed securities (ABN) will be positive to its financial position. We still think CEGT inexpensive, but prefer its parent China Everbright Environment (257 HK) due to its more diversified project mix.

China Everbright Greentech (1257 HK): Key Takeaways from Post-FY20 Result Call

We believe there will be more positive policy measures to support the waste treatment industry, especially after China's "Two Meetings" to be held in Mar and <a href="https://www.smartkarma.com/entities/china-everbright-international-limited" target="_blank" data-smartkarma-citation="entities:15946:1" rel="noopener">China Everbright Environment (257 HK)</a> (CEE) is in a good position to benefit. Although its share price has increased by 12.9% YTD, with an undemanding PER of 4.1x for FY21F, there is still more room to go.CEE's project momentum has stayed encouraging, with over Rmb1.5bn of new waste and water treatment projects secured over the last few months. The recent grant of approval to its subsidiary <a href="https://www.smartkarma.com/entities/china-everbright-greentech-0377b31c-5401-466f-987e-9a176b05fb52" target="_blank" data-smartkarma-citation="entities:24085:1" rel="noopener">China Everbright Greentech (1257 HK)</a> to issue asset-backed notes (ABN) represents another major step towards asset securitisation. We also see CEE a prime beneficiary of public infrastructure REIT, which when issues, will both improve its valuation and capital structure.

We believe there will be more positive policy measures to support the waste treatment industry, especially after China's "Two Meetings" to be held in Mar and China Everbright Environment (257 HK) (CEE) is in a good position to benefit. Although its share price has increased by 12.9% YTD, with an undemanding PER of 4.1x for FY21F, there is still more room to go.CEE's project momentum has stayed encouraging, with over Rmb1.5bn of new waste and water treatment projects secured over the last few months. The recent grant of approval to its subsidiary China Everbright Greentech (1257 HK) to issue asset-backed notes (ABN) represents another major step towards asset securitisation. We also see CEE a prime beneficiary of public infrastructure REIT, which when issues, will both improve its valuation and capital structure.  

China Everbright Environment (257 HK): Compelling Story yet to Fully Appreciate

China Conch Venture Holdings / Equity Bottom-Up

In our view, <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> is well positioned to capture the opportunities posed by both the rise in environment protection and increase in infrastructure investment in China. Its energy preservation and environmental protection business has experienced encouraging growth while through its 17.8% holding in <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 Co Ltd H (914 HK)</a>, it can benefit from higher cement demand driven by China's escalating infrastructure investments.After posting a 30.1% YoY growth in 1H20, we expect outlook for its environmental business to stay promising due to: 1.) completion of pipeline projects, 2.) excellent capability to secure projects, 3.) good execution strength, 4.) positive margin outlook and 5.) solid financial position. At 7x PER and 1.3x P/B on a 12-month forward basis, we see Conch Venture inexpensive. Its average annual ROE of 20.8% for the next three years also affirms that valuations are attractive.

In our view, China Conch Venture Holdings (586 HK) is well positioned to capture the opportunities posed by both the rise in environment protection and increase in infrastructure investment in China. Its energy preservation and environmental protection business has experienced encouraging growth while through its 17.8% holding in Anhui Conch Cement Co Ltd H (914 HK), it can benefit from higher cement demand driven by China's escalating infrastructure investments.After posting a 30.1% YoY growth in 1H20, we expect outlook for its environmental business to stay promising due to: 1.) completion of pipeline projects, 2.) excellent capability to secure projects, 3.) good execution strength, 4.) positive margin outlook and 5.) solid financial position. At 7x PER and 1.3x P/B on a 12-month forward basis, we see Conch Venture inexpensive. Its average annual ROE of 20.8% for the next three years also affirms that valuations are attractive.

Conch Venture (586 HK): The Best of Both Worlds

Hong Kong

China Everbright International Limited provides environmental protection project management and consultancy services. The Company's operations are broken up into environmental energy, environmental water, environmental construction and environmental technology.

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China Everbright Environment (257 HK)

Canvest Env (1381 HK): Setting a Positive Tone for Further Strength

Canvest posted a record earnings for FY20 despite the challenging environment due to COVID-19. Management suggested a robust picture for FY21,...

Osbert Tang, CFA