Company profile:
China Everbright Water is China's leading provider of integrated water environment solutions. The scope of business covers sewage treatment, water environment treatment, comprehensive utilization of water resources and water ecological protection. According to Frost Sullivan, the company is the largest central state-owned enterprise engaged in sewage treatment business in China and the third largest sewage treatment service provider in the Bohai Rim economic circle in terms of treatment capacity in 2017. In terms of market share in 2017, the company is one of the top 10 integrated water resources solution providers in China and one of the top 10 companies in the municipal sewage treatment market and water environment treatment market in China.
Sino-Thai point of view:
The rapid growth of water environment treatment, relying on the Everbright brand with a stable and high quality customer base: since 2014, the Chinese government has begun to introduce the PPP model into the water environment treatment market to enhance the initiative of professional social capital focused on the wastewater treatment market, thus carrying out water environment treatment projects. With the emergence of a large number of PPP projects, water environment-related projects have become the main force. Everbright International, as the controlling shareholder of China Everbright Water, has been in a leading position in China's environmental protection industry. As of December 31, 2017, Everbright International has a total of 268 projects in 18 provinces, autonomous regions and municipalities in northeast, northern, eastern, central, southern, southwest and northwest China, as well as overseas countries, including Germany, Poland and Vietnam. Through cooperation with other member companies of China Everbright Group, the company can provide a range of environmental protection services to the local government and customers, resulting in synergy with other member companies of China Everbright Group.
Operating results: from 2016 to 2018, China Everbright Water realized operating income of HK $2.494 billion, HK $3.592 billion and HK $4.768 billion respectively. The increase in revenue is mainly due to the increase in income from sewage treatment business and water environmental treatment business, with the former accounting for 74.6% in 2018 and the latter accounting for 13.1%. The gross profit margin remained stable at 36.3%, 34.3% and 34.1% respectively, mainly due to the steady increase in operating income from the sewage treatment business line, construction income from projects under construction of sewage treatment and water supply, and revenue from the provision of EPC construction, consulting work and other services. The vast majority of the company's projects come from the service franchise model, including BOT and TOT projects. Under the franchise model, the company's business is asset-heavy and has a long investment cycle, and a large amount of cash outflow will be generated at the beginning of the project, so there is a big difference in cash flow between the construction or acquisition project stage and the operation stage. The cash flow of operating activities changed from positive to negative in 2016 and continued to expand, with an outflow of HK $1.016 billion in 2018.
In terms of valuation: based on 2.78 billion shares after the global public offering, the company's market capitalization is HK $83.1-12.09 billion, which is higher than that of its Hong Kong counterparts; the company's corresponding price-to-earnings ratio is about 11.3-16.4 times, slightly higher than the industry average; and the price-to-book ratio is about 1.52-2.15 times. Slightly higher than the industry average. In terms of profitability, the 18-year ROE and ROA were 8.6% and 3.9% respectively, lower than the industry average. Combining the company's industry status, performance and valuation, we give it a score of 68, with a rating of "neutral".
Risk hints: (1) national policy risk (2) market competition risk