Report summary
An integrated environmental service provider for rapidly growing cities. Yunnan Water was established in 2011 and listed on the main board of the Hong Kong Stock Exchange in 2015. The company first entered the water market and was a leading water company in Yunnan Province. It then grasped potential development opportunities in the solid waste sector, adjusted its position as a comprehensive urban environmental service provider, and increased resource investment in the solid waste sector. Currently, the company's business covers sewage treatment, water supply, solid waste treatment, construction and equipment sales. The company started its business in Yunnan Province and has spread across 17 provinces including Shandong, Jiangsu, Zhejiang, Xinjiang, and Heilongjiang, covering the whole country and covering overseas markets such as Thailand and Indonesia. The company's business grew rapidly. In 2014-16, revenue CAGR was 61.4%, and net profit CAGR reached 48.5%.
The unique shareholder background integrates the advantages of state-owned enterprises and private enterprises. The two major controlling shareholders of the company, Yunnan Water and Bishuiyuan, held 30% and 24% of the company's interests respectively. Yunnan Water, the largest shareholder, is a wholly-owned subsidiary of Yunnan City Investment. Yunnan City has invested over 100 billion dollars and belongs to the Yunnan Provincial State-owned Assets Administration Commission, which specializes in urban development and urban water services. Yunnan Water is the only listing platform under its urban water sector. The second largest shareholder, Bishuiyuan, is an A-share listed company with a market capitalization of over 50 billion dollars. It is engaged in the construction and operation of sewage treatment facilities and equipment sales. It is a high-tech enterprise with more than 350 patents. Yunnan Water has unique shareholder background advantages, is supported by the state-owned enterprise Yunnan City Investment, has strong communication capabilities with local governments, and introduced Bishuiyuan's advanced membrane technology treatment capabilities.
Strong ability to expand water business projects. After listing, the company achieved rapid expansion of water business projects through mergers and acquisitions and tendering. At the end of 2016, the company had a total of 149 water projects (including 25 O&M projects), with a design treatment scale of 4.244,000 tons/day, 2.7 times the treatment scale at the time of listing, including 84 sewage treatment projects, with a scale of 2,434 million tons/day; 40 water supply projects, with a scale of 1,571 million tons/day. According to our statistics, by the end of June, the processing scale of the company's water projects had increased to 4.9 million tons/day. The company has grown into an enterprise with leading advantages in the water industry, and has achieved rapid deployment in Shandong, Jiangsu, Xinjiang, Anhui and other provinces outside of Yunnan Province. The company completed the acquisition of all shares in Galaxy NewSpringPte in March. The GNS processing scale reached 1.54 million tons/day, of which 920,000 tons/day has been put into operation, which has contributed greatly to the increase in the company's size. Moreover, after Yunnan Water Service took over, strengthened communication with the government where the special project was located, raised and expanded, and raised water costs, etc., with potential room for profit improvement. In addition, in line with the development trend of the industry, the company has actively obtained PPP projects such as environmental management of the Erhai Lake in Dali, treatment of dark and smelly water bodies in the Jinshui River in Yuxi, construction of “one water, two pollutes”, comprehensive utilization of water resources in Luoyuan, Fujian, and comprehensive treatment of Yanjin Lake in the Renhuai Effluent Basin in Guizhou, with a total investment of about 7 billion yuan. The rapid expansion of the project lays the foundation for the company's future profit release.
Accelerate the expansion of solid waste business and focus on hazardous waste sub-industries. The company repositioned itself as a comprehensive urban environmental service provider to accelerate the expansion of solid waste business. By the end of 2016, the company had obtained 7 solid waste projects with a treatment capacity of 985,000 tons/year, including 4 hazardous waste projects. We believe that solid waste will be the company's key development sector, and the treatment scale is expected to increase by more than 15% each year in the next 1-2 years. The hazardous waste industry is in a development period where supply is in short supply. The gross margin is high and the cash flow is fast. The company expects to seize the opportunity to accelerate the layout of the hazardous waste sub-industry. The company's solid waste business has also been deployed in Southeast Asian markets such as Thailand and Indonesia, and it is expected that it will continue to seize overseas market opportunities in the future.
Investment advice: The company's revenue in 2016 was RMB 2.87 billion, and net profit was RMB 388 million.
We initially estimate that the company's performance is expected to increase 30% in 2017. The current market capitalization is HK$4.34 billion, corresponding to 7.5 times PE in 2017. It is low among environmental stocks listed on the Hong Kong stock market. The company's projects are expanding, and as the number of projects entering the operating period increases, there is room for the stock price to rise.
Risk warning: In an environment where domestic capital is tightly balanced, the company's financial burden is increasing; the risk of impairment of trade and other accounts receivable; the integration of mergers and acquisitions projects is progressing more slowly than expected.