Incidents:
On May 14, the first batch of 9 public infrastructure REITs projects were approved by the Shanghai and Shenzhen Stock Exchange. On May 17, the first batch of public REITs was officially approved, marking the official implementation of infrastructure public REITs. The strategic placement ratio of Phu Quoc's first water REIT reached 76%, showing institutional investors' full confidence in the project. According to the latest inquiry results, it was determined that the subscription price of Fuguo Pioneer Water REIT was 3.7 yuan/copy, with a total distribution share of 500 million copies, of which 24 million were distributed to the public. The distribution period was May 31 to June 2.
Commentary:
Wells Fargo pioneered water REITs. They are the only infrastructure public REITs in the sewage treatment franchise category among the first batch of public REITs. The profits and cash flow conditions for corresponding infrastructure projects are good. The infrastructure projects corresponding to the fund are sewage treatment infrastructure projects of Pioneer Co., Ltd. in Shenzhen and Hefei, including the Shenzhen Fuyong, Songgang, Gongming Water Purification Plant BOT Franchise Project and the Hefei ShiWuli Sewage Treatment Plant PPP project. Among them, the total scale of the three water plants in Shenzhen was 375,000 tons/day, and the fourth phase of the Hefei project totaled 300,000 tons/day. The projects are distributed in the Guangdong-Hong Kong-Macao Greater Bay Area and the Yangtze River Economic Belt, and are infrastructure shortfall repair projects supported by the country on priority basis in line with relevant policy provisions. At the same time, the revenue and profit of the project continued to increase year-on-year in 2018-2020. The Shenzhen project benefited from upgrading and water price adjustments. The gross margin also continued to increase, and the project's profitability and cash flow conditions were good.
The amount that can be distributed for infrastructure projects is rising steadily every year, and the fund's cash dividend ratio is high. It is estimated that from 2021 to 2022, the total revenue of the infrastructure project company will be 294 million yuan and 300 million yuan respectively, and net profit of 65.535 million yuan and 70289 million yuan respectively. The amounts that can be distributed are 159.924 million yuan and 167.642 million yuan respectively. According to an estimate of the total issuance scale of 1.85 billion yuan, the corresponding cash dividend ratio of the allocable amount in 2021 and 2022 was 8.6% and 9.1% respectively, which is a high level among the first batch of projects.
The sewage treatment industry has stable returns, good cash flow, and a high degree of compatibility with REITs. REITs can help water companies revitalize their existing assets and bring more new possibilities for future development. Sewage treatment projects are often priced based on the principle of reasonable return, project profitability and return are stable, and the cash flow is strong, and the compatibility with REITs is high. A reasonable price adjustment mechanism also further guarantees the stable return of the project. At the same time, sewage treatment fees are included in residents' water bills, and the cash flow is sufficient, which is conducive to stable dividends on sewage treatment REITs. However, the greatest significance of REITs for environmental protection companies is that the weight and weight of environmental assets are no longer antagonistic and contradictory. An enterprise with more assets is equivalent to also having more capital potential.
Profit forecast and rating: The company is expected to achieve net profit attributable to it in 2021-2023 of 1.78 billion yuan, 2.08 billion yuan and 2.37 billion yuan respectively, up 21%, 17% and 14% respectively over the previous year. Currently, the stock price corresponds to the 2021 PE valuation 12 times, which is a low valuation. By the end of 2020, Capital Co., Ltd. had a total water treatment capacity of over 30.47 million tons/day, and the total design scale of its solid waste treatment projects was about 13.82 million tons of garbage per year. These stock assets all have the potential to be revitalized in the future, maintain the “Highly Recommended - A” rating, and give a target price of 3.64 yuan/share at 15 times PE in 2021.
Risk warning: risk of policy changes, risk of changes in profitability due to untimely adjustment of water prices, etc.