HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

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

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> generated a resilient earnings performance of 12.7% YoY growth in 1H20, despite the negative impact of COVID-19 on its BOT construction revenue. We also like the good 3pp expansion in gross margin to 33.8% amid the tough operating environment, thanks to higher project utilisation and good cost control. Over the next 12 months, Canvest will complete 9 new projects, driving a solid earnings stream. Moreover, based on outstanding pipeline, its operational waste-to-energy capacity will grow by a CAGR of 23% CAGR for 2019-2024. We consider its 7.6x 12-month forward P/E inexpensive relative to the historical range of 7.2-17.6x. While high gearing is a concern, the guidance of focusing on execution of existing projects suggests slower new project growth and this give us comfort that the balance sheet will not get too stretched further.

Canvest Environmental Protection Group (1381 HK) generated a resilient earnings performance of 12.7% YoY growth in 1H20, despite the negative impact of COVID-19 on its BOT construction revenue. We also like the good 3pp expansion in gross margin to 33.8% amid the tough operating environment, thanks to higher project utilisation and good cost control. Over the next 12 months, Canvest will complete 9 new projects, driving a solid earnings stream. Moreover, based on outstanding pipeline, its operational waste-to-energy capacity will grow by a CAGR of 23% CAGR for 2019-2024. We consider its 7.6x 12-month forward P/E inexpensive relative to the historical range of 7.2-17.6x. While high gearing is a concern, the guidance of focusing on execution of existing projects suggests slower new project growth and this give us comfort that the balance sheet will not get too stretched further.

Canvest Env (1381 HK): Positive Takeaways from Post-1H20 Result Investor Call

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)