A successful PPP platform has its own value: we believe that Yunnan Water is a unique PPP platform.
The water project of the state-owned Yunnan city and the technology of the private enterprise Biyuan (300070.CH; not rated) have established a solid foundation for Yunnan water to develop its sewage treatment business and make it have excellent growth potential. We believe that the core value of Yunnan Water lies in its expertise in PPP projects and independent research and development of membrane technology, which gives the company a unique advantage in the fierce competition with its domestic counterparts. In the future, we believe that with the strong support of the two major shareholders, Yunnan Water will continue to give full play to the above core values.
Determined to transform into a comprehensive environmental protection company covering the whole country: we believe that Yunnan Water will continue to pursue the development strategy of regional expansion, and in the process of expanding its project portfolio, the company will no longer be limited to water projects. Instead, it will enter the hazardous waste and waste incineration industry, as well as new areas such as Xinjiang, Anhui, Shandong, Jiangsu and Fujian.
This will be a good attempt to diversify the business and more effectively enjoy the considerable growth of the environmental protection industry during the 13th five-year Plan period. We predict that the proportion of waste power generation and hazardous waste will rise from 1.8% in 2015 to 27.5% in 2017.
Profits are on the track of rapid growth: we predict that the net profit of 2015E/16E/17E Yunnan water will increase by 38% over the same period last year, with a compound annual growth rate of 38%. Our forecast is only based on published sewage treatment / water supply / hazardous waste disposal / waste power generation projects to ensure that the forecast of construction revenue is as conservative as possible.
We expect the 2015E-17E net debt ratio to remain at 24-52 per cent. Management said it had planned to buy 20-2.8 billion yuan of new projects in 2016, all of which would be financed by new bank loans.
Growth is ignored; buy rating is given for the first time: Yunnan Water is currently valued at 17.9 2015E/16E 11.4 times earnings, which is still cheap compared with the average of Hong Kong-listed environmental industry peers. We are optimistic about the company's future expansion plans. We believe that the company's current cheap valuation, coupled with strong future growth, will support a gradual upward valuation. If there are any positive surprises, such as major acquisitions, acquisition of projects and strategic cooperation with local governments, it could push the revaluation forward. We offer the target price of HK $5.92, which is based on a price-to-earnings ratio of 16 times 2016E, a discount of about 20 per cent to the historical average price-to-earnings ratio of 371.HK, the industry leader. Cover for the first time to give a buy rating.