HK/China Equity Long-Short

Osbert Tang, CFA

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

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> 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 Conch Venture Holdings / Equity Bottom-Up

We think the secured project pipeline for <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> should drive encouraging double-digit growth in its core environmental business profit in the next three years. It expects a CAGR of 52.8% in completed waste incineration capacity and 30.2% in completed solid waste and hazardous waste capacity, which in our view, should underpin remarkable earnings outlook.The flat 1H21 profit is masked by a 5% drop in contribution from <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>. which, in flat, core earnings have surged 31.4% YoY. It solid new project win is an excellent demonstration of its competitiveness. Even for Anhui Conch, the 2H21 outlook is getting more positive than 1H21. We believe that at just 5.9x PER (ex-Anhui Conch) for FY21, the market has sharply undervalued Conch Venture's environmental operations, especially given its lower-than-peers gearing of 19.4% only.

We think the secured project pipeline for China Conch Venture Holdings (586 HK) should drive encouraging double-digit growth in its core environmental business profit in the next three years. It expects a CAGR of 52.8% in completed waste incineration capacity and 30.2% in completed solid waste and hazardous waste capacity, which in our view, should underpin remarkable earnings outlook.The flat 1H21 profit is masked by a 5% drop in contribution from Anhui Conch Cement (914 HK). which, in flat, core earnings have surged 31.4% YoY. It solid new project win is an excellent demonstration of its competitiveness. Even for Anhui Conch, the 2H21 outlook is getting more positive than 1H21. We believe that at just 5.9x PER (ex-Anhui Conch) for FY21, the market has sharply undervalued Conch Venture's environmental operations, especially given its lower-than-peers gearing of 19.4% only.

Conch Venture (586 HK): Better Fortunes Going Forward

China Everbright Environment / Equity Bottom-Up

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> (CEE) is the best-performing environment company within the China Everbright Group, as evidenced by the 38.8% YoY growth in 1H21 earnings (ex-consolidated subsidiaries <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> and <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>). Management's indication in the post-1H21 call that operating cash flow rose 77% YoY in the period is also a good sign.Excellent new project momentum and secured project pipeline should drive CEE's earnings in the next two years. The trend of increase in operation service revenue is also positive as this should support the growth in recurrent income and operating cash flow. We continue to see encouraging outlook for its waste-to-energy business, and with 21 projects under construction, this segment will underpin its profit outlook.  In our view, CEE's valuations of 4.1x PER and 0.61x P/B for FY21 are very appealing.  <a href="https://www.smartkarma.com/entities/china-environment-ltd" target="_blank" data-smartkarma-citation="entities:2832:1" rel="noopener"></a>

We think China Everbright Environment (257 HK) (CEE) is the best-performing environment company within the China Everbright Group, as evidenced by the 38.8% YoY growth in 1H21 earnings (ex-consolidated subsidiaries China Everbright Water (1857 HK) and China Everbright Greentech (1257 HK)). Management's indication in the post-1H21 call that operating cash flow rose 77% YoY in the period is also a good sign.Excellent new project momentum and secured project pipeline should drive CEE's earnings in the next two years. The trend of increase in operation service revenue is also positive as this should support the growth in recurrent income and operating cash flow. We continue to see encouraging outlook for its waste-to-energy business, and with 21 projects under construction, this segment will underpin its profit outlook.  In our view, CEE's valuations of 4.1x PER and 0.61x P/B for FY21 are very appealing.  

China Everbright Environment (257 HK): The Most Impressive of All

China Everbright Greentech / Equity Bottom-Up

Due to weaker construction revenue for biomass projects and higher finance costs, <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> realised a 15% YoY decline in net profit in 1H21. But on HoH basis, this has still increased 3.2%. Except biomass construction, all business segments witnessed good growth. It is encouraging to see operational projects contributed 70% of revenue in 1H21, up massively from 56% a year ago. We believe this trend will improve its earnings quality and financial position over the medium term. Management expects good growth for hazardous and waste treatment segment, both in construction and operational revenue given the project pipeline. Lower capex, collection of subsidies and securitisation will further lift its financial position. At 3.9x PER for FY21, CEGT is not expensive but we still prefer <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>. Alternatively, we cannot rule out the possibility that CEGT will be privatise some time in the future, given its undemanding 0.4x P/B and the reducing need for such a separately-listed vehicle within the China Everbright Group.

Due to weaker construction revenue for biomass projects and higher finance costs, China Everbright Greentech (1257 HK) realised a 15% YoY decline in net profit in 1H21. But on HoH basis, this has still increased 3.2%. Except biomass construction, all business segments witnessed good growth. It is encouraging to see operational projects contributed 70% of revenue in 1H21, up massively from 56% a year ago. We believe this trend will improve its earnings quality and financial position over the medium term. Management expects good growth for hazardous and waste treatment segment, both in construction and operational revenue given the project pipeline. Lower capex, collection of subsidies and securitisation will further lift its financial position. At 3.9x PER for FY21, CEGT is not expensive but we still prefer China Everbright Environment (257 HK). Alternatively, we cannot rule out the possibility that CEGT will be privatise some time in the future, given its undemanding 0.4x P/B and the reducing need for such a separately-listed vehicle within the China Everbright Group.

China Everbright Greentech (1257 HK): Updates from Post-1H21 Call

China

Zhejiang Weiming Environmental Protection Co., Ltd. provides solid waste disposal services. The Company provides services in garbage disposal projects' technical development, equipment manufacturing, project investment, project construction, and operation management.

Zhejiang Weiming Environment Protection Co Ltd (603568 CH)

Zhejiang Weiming Environment Protection Co Ltd

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Zhejiang Weiming Environment Protection Co Ltd (603568 CH)

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

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

Conch Venture (586 HK): Better Fortunes Going Forward

Good secured pipeline of waste incineration and solid and hazardous waste treatment capacity should underpin very solid outlook for the core...

Osbert Tang, CFA

China Everbright Environment (257 HK): The Most Impressive of All

CEE recorded impressive 1H21 earnings growth, and with higher tariff, solid new project momentum, continued strong pipeline and improving cash...

Osbert Tang, CFA

China Everbright Greentech (1257 HK): Updates from Post-1H21 Call

1H21 net profit is behind expectation but the good news is that earnings quality has improved with slowdown in the rise in gearing. We still prefer...

Osbert Tang, CFA

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