Citic Envirotech Ltd (CEL) saw its share price tumbling as much as 26%, from an intraday high of S$1.835 on 14 Jul 15 to an intraday low of S$1.355 on 30 Sep 15; this likely due to the recent tumble in HK-listed water treatment companies like Beijing Enterprise Water, which also saw its P/E fall from a peak of 35x to ~20x currently. But with orders starting to flow in once again, we believe that the valuations for the water industry should start to recover. Hence we maintain HOLD on the stock, albeit with a lower S$1.40 fair value (now based on 23x versus 28x FY16F EPS previously).
26% tumble since mid-Jul 2015
Citic Envirotech Ltd (CEL) saw its share price tumbling as much as 26%, from an intraday high of S$1.835 on 14 Jul 15 to an intraday low of S$1.355 on 30 Sep 15; this despite putting out a relatively decent set of 2Q15 results in Aug. We think that the main reason for the sell-down is probably due to the recent tumble in HK-listed water treatment companies like Beijing Enterprise Water, which also saw its P/E fall from a peak of 35x to ~20x currently (Refer to Exhibit 1).
Limited impact from new 17% VAT from 1 Jul 2015
We believe another reason behind the recent tumble could be due to news that water treatment companies in China would need to pay a 17% VAT from 1 Jul 2015 onwards, which will impact both EPC and treatment income. However, management believes that the impact is likely minimal, given that there is now a system of rebates in place to offset the VAT. For municipal projects, CEL says that the effective tax is less than 5% on tariffs after rebates; CEL adds that there is no impact on industrial projects as the VAT is directly passed on to the end users.
Orders are flowing in again
In any case, management remains upbeat about its prospects in China, now that orders are starting to flow again; this after drying up drastically in the wake of the anti-graft move. In Aug, CEL announced three contract wins worth a total of RMB263m, which it intends to finance using its usual 30/70 mix of internal funds and bank financing. We further understand that CEL has recently tendered for several projects and the results of these tenders would be announced sometime this month. In addition, CEL is upbeat about membrane sales, citing the growing demand for membrane-based water treatment solutions in China.
Lower S$1.40 fair value
Nevertheless, to account for the lower valuation accorded to the water industry, we reduce our peg from 28x to 23x, which in turn lowers our fair value from S$1.71 to S$1.40, still based on FY16F EPS. Maintain HOLD.
Citic Envirotech Ltd (CEL) saw its share price tumbling as much as 26%, from an intraday high of S$1.835 on 14 Jul 15 to an intraday low of S$1.355 on 30 Sep 15; this despite putting out a relatively decent set of 2Q15 results in Aug. We think that the main reason for the sell-down is probably due to the recent tumble in HK-listed water treatment companies like Beijing Enterprise Water, which also saw its P/E fall from a peak of 35x to ~20x currently (Refer to Exhibit 1).
Limited impact from new 17% VAT from 1 Jul 2015
We believe another reason behind the recent tumble could be due to news that water treatment companies in China would need to pay a 17% VAT from 1 Jul 2015 onwards, which will impact both EPC and treatment income. However, management believes that the impact is likely minimal, given that there is now a system of rebates in place to offset the VAT. For municipal projects, CEL says that the effective tax is less than 5% on tariffs after rebates; CEL adds that there is no impact on industrial projects as the VAT is directly passed on to the end users.
Orders are flowing in again
In any case, management remains upbeat about its prospects in China, now that orders are starting to flow again; this after drying up drastically in the wake of the anti-graft move. In Aug, CEL announced three contract wins worth a total of RMB263m, which it intends to finance using its usual 30/70 mix of internal funds and bank financing. We further understand that CEL has recently tendered for several projects and the results of these tenders would be announced sometime this month. In addition, CEL is upbeat about membrane sales, citing the growing demand for membrane-based water treatment solutions in China.
Lower S$1.40 fair value
Nevertheless, to account for the lower valuation accorded to the water industry, we reduce our peg from 28x to 23x, which in turn lowers our fair value from S$1.71 to S$1.40, still based on FY16F EPS. Maintain HOLD.
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