Main points of investment
The scale of urban water affairs has maintained rapid growth, and the potential of stock orders for engineering business is huge. Kangda Environmental Protection increased its urban water BOT target of 800000 tons per day in 2017, a big increase from the 555000 tons per day achieved in 2016, and the growth of urban water business is gradually entering a good situation. After the termination of the last BT project in 2015, the engineering business has entered a new stage of comprehensive treatment of water environment and rural water affairs, and the corresponding contract types have also been changed to PPP and EPC, and the cash flow has more advantages than the BT model. At present, the outstanding project orders are more than 5 billion yuan, which will provide strong support for the growth of construction revenue in 2017.
External partners have strong execution and fully tap Henan market opportunities. Kangda Environmental Protection took a 15% stake in Zhongyuan assets, a local asset management platform in Henan Province, in 2016. In less than a year, Central Plains assets has signed cooperation agreements with a number of city and county-level local governments in Henan Province, showing a strong executive ability. A considerable part of the signed documents are related to areas such as environmental protection water and urban infrastructure construction. It is expected that this part of the PPP project will be led by funds under Central Plains assets, while Kangda Environmental Protection is expected to receive more orders for EPC projects. Cooperation with Central Plains assets will help to obtain more project opportunities in Henan Province for Kangda Environmental Protection from the perspective of top-level co-ordination.
Hong Kong stock market potential stocks, undervalued to the new war investment has a strong attraction. According to our estimates, Kangda Environmental Protection has an average market capitalization of HK $3.741 billion over the past 12 months, which has the potential to enter Hong Kong Stock Connect. Performance growth and valuation repair in 2017 are expected to help the company meet the criteria for inclusion in the Hong Kong Stock Connect. At the same time, because the current valuation level of the company is low, even lower than the purchase price of environmental protection projects in the domestic primary market, it has a strong attraction for industrial capital. Therefore, we believe that the probability of introducing new strategic investors is high in the future, which is expected to bring new vitality to the development of the company.
Investment suggestion: we maintain Kangda Environmental profit Forecast and expect the company to return to its mother in 2017 / 2018 net profit of 4.56 / 582 million yuan, equivalent to the current share price PE7.09/5.57 times, 2017 PB0.79 times, the target price of 2.48 Hong Kong dollars. The company's growth prospects in 2017 are relatively clear, and there is a high probability of valuation repair and inclusion in the Hong Kong Stock Connect. Investors are advised to pay active attention to it.
Risk hint: the rate of return of the PPP project is lower than expected and the RMB depreciates.