HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

China Everbright Environment Group / Equity Bottom-Up

China Everbright Environment Group (257 HK)

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 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

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

We take the FY21 guidances 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> positively and believe they are more important than the FY20 result. In fact, despite a slowdown from 40-50% YoY growth in the previous two years, Conch Venture's 24.6% growth in its core environmental business in FY20 is still a very decent show under a COVID-19 impacted situation.Conch Venture is expecting 76% growth in solid waste treatment volume and a 65% growth in municipal waste treated in its waste incineration business in FY21, on the back of capacity completion. We believe such volume growth should easily support over 80% surge in core environment profit in this year. Its solid project pipeline will further ensure growth beyond FY21. Adding low gearing and undemanding valuation multiples, Conch Venture is well placed in China's environment sector.

We take the FY21 guidances for China Conch Venture Holdings (586 HK) positively and believe they are more important than the FY20 result. In fact, despite a slowdown from 40-50% YoY growth in the previous two years, Conch Venture's 24.6% growth in its core environmental business in FY20 is still a very decent show under a COVID-19 impacted situation.Conch Venture is expecting 76% growth in solid waste treatment volume and a 65% growth in municipal waste treated in its waste incineration business in FY21, on the back of capacity completion. We believe such volume growth should easily support over 80% surge in core environment profit in this year. Its solid project pipeline will further ensure growth beyond FY21. Adding low gearing and undemanding valuation multiples, Conch Venture is well placed in China's environment sector. 

Conch Venture (586 HK): Still Very Well Placed

Canvest Environmental Protection Group / Equity Bottom-Up

Canvest Environmental Protection Group (0XC SW)

<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

Hong Kong

China Everbright Greentech Ltd. is an investment holding company that provides environmental protection services. Its core business activities include integrated biomass utilization, hazardous and solid waste treatment, environmental remediation, and solar and wind power projects. The company was founded in 2006 and is headquartered in Hong Kong.

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China Everbright Greentech (1257 HK)

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

After posting solid 1H21 net profit, China Everbright Water will continue to see good prospects into 2H21. New project completion, higher tariff...

Osbert Tang, CFA