Homepage
PR Newswire
09-05-2014, 06:11 PM
JPM-pp1
Asia Pacific Equity Research
08 May 2014
China Water Blog
Our thoughts on recent share weakness
Shares of China water stocks fell by 5-7% today, vs HSCEI’s +1%. (Guangdong Investment was the exception, rising by 0.1% today.) We believe this was largely driven by investors taking profit on stocks that outperformed the past year, a similar trend seen in China internet stocks in recent weeks. After today’s sell-down, China Everbright Int’l (CEI) and Beijing Enterprises Water (BEW) are now trading at 16x and 17x FY15E P/E, respectively, below their historic average of 18x (see valuation table below). We recommend buying on dips as the fundamentals remain in tact. Our top pick is CEI.
Other potential reasons for China water stocks’ underperformance:
· Concerns on increasing interest expense. We believe the market may be concerned that China water companies’ earnings would be hurt by rising interest rates and weakening RMB, which would result in higher finance cost for companies that borrow in USD or other foreign currencies.
Sensitivity to interest rate changes: Of our covered China water stocks, Sound Global is most sensitive to interest expenses, with every 1% change in interest rate affecting 5% of its EPS. For CEI and BEW, the impact is 3%.
· News report on China Everbright Group. According to HK newspaper Oriental Daily, China Everbright is one of the five central government state-owned enterprises that are allegedly being investigated for corruption. Click here for the news article in Chinese.
Reasons for our positive stance on the sector:
· 16% CAGR in China incineration treatment capacity during 2016-20. We estimate incineration plants will make up 50% of China’s total urban waste treatment capacity by 2020, up from 35% in 2015. This would translate to a 16% CAGR in incineration capacity during 2015-20. With a current market share of 7%, CEI could get >20k tons/day of new WTE projects in the next five years, on our estimates.
· Revised environmental law leads to stricter enforcement. We continue to see strong government policy support on the China water and waste sector. The latest came from the revision of the Environmental Protection Ordinance, which gave local governments more power to punish polluting industries by suspending their operations and giving them fines until the problem is fixed. This is positive for both wastewater and solid waste treatment operators.
· Defensive earnings against slowing GDP growth in China. The wastewater and solid waste treatment operators under our coverage produce defensive earnings from 25-30 year concessions backed by minimum revenue guarantees. These provide for stable cash flow and earnings for the companies.
· Our stock picks: In the China Water Sector, our order of preference is China Everbright Int’l (OW on growth from waste-to-energy projects), Sound Global (OW on removal of dilution overhang), and Guangdong Investment (OW ahead of HK tariff hike).
Asia Pacific Equity Research
08 May 2014
China Water Blog
Our thoughts on recent share weakness
Shares of China water stocks fell by 5-7% today, vs HSCEI’s +1%. (Guangdong Investment was the exception, rising by 0.1% today.) We believe this was largely driven by investors taking profit on stocks that outperformed the past year, a similar trend seen in China internet stocks in recent weeks. After today’s sell-down, China Everbright Int’l (CEI) and Beijing Enterprises Water (BEW) are now trading at 16x and 17x FY15E P/E, respectively, below their historic average of 18x (see valuation table below). We recommend buying on dips as the fundamentals remain in tact. Our top pick is CEI.
Other potential reasons for China water stocks’ underperformance:
· Concerns on increasing interest expense. We believe the market may be concerned that China water companies’ earnings would be hurt by rising interest rates and weakening RMB, which would result in higher finance cost for companies that borrow in USD or other foreign currencies.
Sensitivity to interest rate changes: Of our covered China water stocks, Sound Global is most sensitive to interest expenses, with every 1% change in interest rate affecting 5% of its EPS. For CEI and BEW, the impact is 3%.
· News report on China Everbright Group. According to HK newspaper Oriental Daily, China Everbright is one of the five central government state-owned enterprises that are allegedly being investigated for corruption. Click here for the news article in Chinese.
Reasons for our positive stance on the sector:
· 16% CAGR in China incineration treatment capacity during 2016-20. We estimate incineration plants will make up 50% of China’s total urban waste treatment capacity by 2020, up from 35% in 2015. This would translate to a 16% CAGR in incineration capacity during 2015-20. With a current market share of 7%, CEI could get >20k tons/day of new WTE projects in the next five years, on our estimates.
· Revised environmental law leads to stricter enforcement. We continue to see strong government policy support on the China water and waste sector. The latest came from the revision of the Environmental Protection Ordinance, which gave local governments more power to punish polluting industries by suspending their operations and giving them fines until the problem is fixed. This is positive for both wastewater and solid waste treatment operators.
· Defensive earnings against slowing GDP growth in China. The wastewater and solid waste treatment operators under our coverage produce defensive earnings from 25-30 year concessions backed by minimum revenue guarantees. These provide for stable cash flow and earnings for the companies.
· Our stock picks: In the China Water Sector, our order of preference is China Everbright Int’l (OW on growth from waste-to-energy projects), Sound Global (OW on removal of dilution overhang), and Guangdong Investment (OW ahead of HK tariff hike).