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

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 Everbright Water / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/china-everbright-water-limited" target="_blank" data-smartkarma-citation="entities:31446:1" rel="noopener">China Everbright Water (1857 HK)</a> (CEW) posted impressive 35.5% rise in 1H21 net profit to HK$548m, driven by strengths across all revenue sources. Besides good increase in construction revenue as more projects are under construction, the 42.4% surge in revenue from operation is a very positive trend. A 4.5pp higher dividend payout ratio YoY suggested that management is confident on 2H21 outlook. CEW has an excellent pipeline of new waste water treatment projects, with 26 of them currently under construction and this should underpin medium-term growth. Moreover, tariff hike will be an added driver for 2H21 bottom line. In our view, there is still huge room to growth through M&amp;As and upgrade of existing projects. At just 0.4x P/B and 3.7x PER for FY21, CEW's valuations have well reflected the concerns of weak cash flow and tight financial position and we believe the current multiples have grossly undervalued the stock.

China Everbright Water (1857 HK) (CEW) posted impressive 35.5% rise in 1H21 net profit to HK$548m, driven by strengths across all revenue sources. Besides good increase in construction revenue as more projects are under construction, the 42.4% surge in revenue from operation is a very positive trend. A 4.5pp higher dividend payout ratio YoY suggested that management is confident on 2H21 outlook. CEW has an excellent pipeline of new waste water treatment projects, with 26 of them currently under construction and this should underpin medium-term growth. Moreover, tariff hike will be an added driver for 2H21 bottom line. In our view, there is still huge room to growth through M&amp;As and upgrade of existing projects. At just 0.4x P/B and 3.7x PER for FY21, CEW's valuations have well reflected the concerns of weak cash flow and tight financial position and we believe the current multiples have grossly undervalued the stock.

China Everbright Water (1857 HK): Post 1H21 Call - Strengths Will Sustain

<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

China Everbright Water Limited offers water environmental services. The Company provides water environment management, sponge city construction, sewage treatment, river-basin ecological restoration, water supply, and other related services. China Everbright Water conducts businesses in Shenzhen, Singapore, and Hong Kong.

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China Everbright Water (1857 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

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