Environment services group China Everbright Water will “play catch-up in 2H2020”, says DBS Group Research analyst Patricia Yeung, following a dip in earnings of close to 4% y-o-y and a 15% y-o-y decline in revenue for 1H2020 announced on August 12. 

See: China Everbright posts 4% dip in 1H20 earnings to $71.6 mil

Yeung is maintaining her “buy” recommendation on the company with a lowered target price of 33 cents (previously 49 cents), as the stock is trading at trough valuations with improving 2H2020 growth.

China Everbright Water (CEW) reported a 3.8% drop in net profit y-o-y to HK$404.5 million ($71.54 million) on a 14.7% y-o-y decline in total turnover to HK$2.12 billion for 1H2020. 

“Due to Covid-19, many projects suffered from construction delays, leading to a 38.2% decrease in construction revenue,” says Yeung in an August 13 note. 

“On a positive note, revenue from operating services climbed 13.4% with 11% and 16.8% growth in volume of wastewater treatment and water supply respectively.” Despite the decline in earnings, the board declared an interim dividend of 3.74 HK cents (0.67 Singapore cents) for 1H2020, unchanged from last year for HKex but 3.1% higher on SGX. 

“Due to travel restrictions amid Covid-19, CEW secured new project wins of only RMB 805 million, compared with RMB 3.7 billion in 1H2019,” says Yeung. 

That said, the management is optimistic in securing more projects in 2H2020, particularly along the Yangtze and Yellow River basins. “Ecological protection for Yangtze and Yellow River basins have been highlighted in the government’s environmental policies. Pollutants from factories of highly polluting industries along these river basins have already caused severe contamination in the ecological system,” writes Yeung.

On July 27, the company entered into a concession agreement with the Housing and Urban-Rural Development Bureau of Dandong City in Liaoning Province where it will invest, construct, and operate based on a build-operate-transfer (BOT) model for a concession period of 30 years.

The plant will have an aggregate designed daily wastewater treatment capacity of some 200,000 cubic metres.

Trade receivables recovery rate deteriorated from 91% in 1H2019 to 84% in 1H2020 as governments were busy in fighting the pandemic. However, as the economic activities are resuming back to normalcy, collection of receivables should improve to the pre-Covid-19 level. 

Despite a significant delay in construction progress in 1H2020, CEW believes it can catch up in 2H2020 and has revised down its FY2020 capex budget by only 10% to HK$2.7 billion, which is at a similar level as FY2019. Management guided for mild growth in capex for FY21. 

“As such, we have revised down our sales growth assumption for construction revenue by 10ppts and 5ppts for FY20 and FY21 respectively. Thus, our earnings estimates are revised down by 5-8% for FY2020/21. After the revision, earnings growth is estimated at low to mid-teens for FY2021/22, on the back of 10-13% growth in treatment volume,” says Yeung. 

As at 11.35am, shares in China Everbright are trading 0.5 HK cents higher, or 2.13% up, at 24 HK cents.