The PPP policy continues to increase, and the discourse power of private capital continues to rise. Recently, the Ministry of Finance has issued a series of policy documents to promote the PPP model and encourage private capital to participate in PPP project investment, which will play a better role in promoting the development of private environmental protection companies such as Kangda Environmental Protection in the PPP market.
Kangda Environmental Protection has sprung up abruptly based on its accumulated strength in the field of PPP, and the new policy accelerates the fulfillment of new orders. The company has actively participated in the PPP project and has obtained three projects this year, with a cumulative amount of 3.151 billion yuan. under the background of the new policy encouraging private capital to participate in PPP projects, the realization of the company's potential orders is expected to accelerate and will become a catalyst for future performance growth.
If the traditional business is not very successful, the fundamentals are expected to be fully reversed. The company's traditional BOT/TOT waterworks business began to grow again this year, completing 157,000 tons / day of new orders as of September, and is expected to achieve its target of 600,000 tons / day for the whole year, much better than in previous years.
The profit cashing time point moves backward, the short-term performance decline risk does not change the long-term growth trend. Driven by the revival of PPP orders and traditional business growth, Kangda Environmental Protection is expected to see high growth in 2017, while we downgrade its 2016 net profit forecast to 285 million yuan, mainly based on: 1) the limited contribution of PPP order performance to this year; 2) the risk of decline in BT business revenue; and 3) the impact of donation fees.
Share prices are still undervalued and there is plenty of room for future valuation repair. In 2016 and 2017, the company's PE was 11.8 and PB1.00 times, respectively, which is still the lowest level among the environmental protection stocks in Hong Kong. As the fundamentals usher in a reversal, there is plenty of room for future valuation repair.
Investment suggestion: we estimate that the net profit of the company belonging to the shareholders of the listed company from 2016 to 2018 will be 28550,000,000 yuan, equivalent to EPS0.14/0.20/0.28 yuan, which corresponds to PE11.8/8.0/5.8 times the current stock price. The target price was adjusted to HK $2.10 and adjusted to the "overweight" rating.
Risk hint: the financial ability to pay is declining, the rate of return of the PPP project is lower than expected, and the RMB depreciates.
Core point of view: under the favorable policy, Kangda Environmental Protection actively participates in the PPP project, and the recent new PPP orders and traditional business orders indicate that the company's fundamentals are expected to return to the growth track. Considering that the focus of the new PPP order performance will be after 2017, we expect the time for the concentrated release of the company's profits to shift backward, and we do not rule out the possibility of early cash brought about by further improvement in the external environment. From the current point of view, Kangda Environmental Protection is still one of the cheapest environmental protection targets in Hong Kong stocks, as the fundamentals begin to reverse, there is a lot of room for future valuation repair. Taking into account the risk of short-term performance decline caused by new orders, we adjust the company's target price to HK $2.10 and give it an "overweight" rating.
The PPP policy continues to increase, and the discourse power of private capital continues to rise. Recently, the Ministry of Finance has continuously issued the document Caijin [2016] 90-91-92 to continue to strengthen the promotion of the PPP model. The list of the third batch of PPP demonstration projects just announced includes 516 projects with a total planned investment of 1.17 trillion yuan, and the number of projects and the amount of money involved are far higher than the first two batches of PPP demonstration projects, indicating that the PPP policy has been further strengthened. In accordance with the spirit of vigorously promoting the standardized implementation of PPP demonstration projects, the procurement of these PPP demonstration projects should in principle be completed by the end of September 2017, including Kangda Environmental Protection's recent bid for "domestic sewage treatment bundled PPP Project of the whole County of Yunan County".
Two major changes can be seen from the new round of policy: 1) mandatory principle, the policy proposes that in order to further strengthen the promotion and application of PPP model, explore and carry out two "mandatory" pilot projects in garbage treatment and sewage treatment areas to "force" the application of PPP model. 2) based on the principle of fairness and efficiency, private enterprises and state-owned holding enterprises are encouraged to participate in PPP projects according to the same standards and treatment, so as to stimulate and promote private investment and improve the efficiency of capital utilization. Among them, Article 92 proposes that the PPP project initiated by social capital shall, after being examined and approved by the competent department of the industry, be implemented by social capital. It further ensures the right of private enterprises to speak in the PPP project.
Kangda Environmental Protection has sprung up abruptly based on its accumulated strength in the PPP field, and the new policy accelerates the fulfillment of potential orders. Kangda Environmental Protection, as a leading private water company in China, has actively participated in the new business opportunities brought about by the PPP model in recent years.
The company has won three PPP contracts since August 2016, with a cumulative amount of 3.151 billion yuan. At the same time, the company invested 450 million yuan to participate in the Central Plains assets of Henan local asset management platform, and established a strategic cooperation relationship with Jiangxi Water Conservancy Investment Group, laid out the local water infrastructure market, and locked potential PPP orders in advance.
Considering that the pre-PPP project often takes a long time to prepare, we believe that the potential PPP project that the company is closely following and is expected to form an order is already on a certain scale. Driven by the new policy to encourage private capital to participate in PPP projects, the progress of the company's potential orders is expected to accelerate and will become a catalyst for future performance growth.
If the traditional business is not very successful, the fundamentals are expected to be fully reversed. In addition to the PPP project, Kangda's traditional environmental protection business has also begun to make efforts recently. Up to September this year, the company has added 157,000 tons / day of sewage treatment contracts, far higher than the new scale of 80,000 tons / day in the same period last year. Taking into account that the number of new contracts signed in the second half of the year is usually higher than that in the first half of the year, and the acquisition of Wenzhou Chuangyuan which has been in operation for a long time (BOT project of Wenzhou West sewage treatment Plant, 250,000 tons / day) is expected to be formally delivered before the end of this year, the traditional BOT/TOT business is also expected to reach an additional 600,000 tons per day this year, which will be much better than in previous years.
The profit cashing time point moves backward, the short-term performance decline risk does not change the long-term growth trend. Based on the drive of PPP orders and the resumption of traditional business growth, we believe that Kangda Environmental Protection's performance is expected to see high growth in 2017. At the same time, we appropriately lowered the company's annual performance forecast for 2016, mainly considering that: 1) the newly signed PPP contracts signed by Kangda Environmental Protection this year were all landed in the third quarter, with a short construction period during the year, limited revenue that can be identified according to project progress, and little contribution to this year's incremental performance; 2) BT business revenue is facing a downward risk, the company's revenue from BT business reached 261 million yuan in 2015, but the company has terminated the new BT project when it went public. We estimate that BT business revenue will decline for the whole of this year, which will be a drag on construction service revenue and profits. 3) the impact of donation expenses in the first half of the year. Considering the above factors, we reduce Kangda's 2016 net profit forecast to 285 million yuan, but we are still optimistic about the company's performance after 2017.
Share prices are still undervalued and there is plenty of room for future valuation repair. After we revised Kangda's environmental performance, the company's PE in 2016 and 2017 was 11.8 and PB1.00 times, respectively, which is still at the lowest level in Hong Kong environmental stocks and has a high margin of safety. As the fundamentals of the company usher in a reversal, performance returns to the growth track, the situation of long-term low valuation will be gradually repaired, and the stock price has more room to rise. Investors are advised to keep active attention.
Investment suggestion: we estimate that the net profit of Kangda Environmental Protection, which belongs to the shareholders of the listed company from 2016 to 2018, will be 2.85 trillion yuan, equivalent to EPS0.14/0.20/0.28 yuan, which corresponds to PE11.8/8.0/5.8 times the current share price. Considering that the future growth reflected in the new orders will have a valuation repair effect on the company, it will be given a "overweight" rating of 9 times PE in 2017, with a target price adjusted to HK $2.10.
Risk hint: the financial ability to pay is declining, the rate of return of the PPP project is lower than expected, and the RMB depreciates.