HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

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 Conch Venture Holdings / Equity Bottom-Up

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

<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

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

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

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)

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

Conch Venture (586 HK): Still Very Well Placed

Conch Venture's core environmental profit will grow by at least 80% in FY21, based on guidances for solid waste and waste incineration volume. Its...

Osbert Tang, CFA

Canvest Env (1381 HK): Setting a Positive Tone for Further Strength

Canvest posted a record earnings for FY20 despite the challenging environment due to COVID-19. Management suggested a robust picture for FY21,...

Osbert Tang, CFA

China Everbright Environment (257 HK): Management Guidance Hinting Sustained Growth into FY21

CEE achieved a remarkable FY20 with accelerated growth in 2H20. This will extend into FY21 given solid pipeline and full-year contribution of...

Osbert Tang, CFA

China Everbright Greentech (1257 HK): Key Takeaways from Post-FY20 Result Call

We expect better outlook for CEGT in FY21, driven by completion of new projects, potentially more national subsidy, improvement in margin and lower...

Osbert Tang, CFA

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52-week Range

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