China Everbright International (257 HK)
1H17 results exceed our expectation; raise TP to HK$12.60
Revenue shot up 69% YoY to HK$9.1bn, exceeding our expectation and accounting for 51.8% of our 2017 full-year forecast. The increase was mainly driven by 84% YoY growth in construction revenue. Gross profit grew by 47% YoY to HK$3.3bn while gross margin slid 6bps to 36% due to the rising proportion of construction revenue. Net profit attributable to shareholders rose 49% YoY to HK$4.5bn, implying a net margin of 20% and EPS of HK$0.4006. Notably, management has declared an interim dividend of HK$0.12 per share, 60% more than in 1H16, suggesting an improved dividend payout ratio of 30%.
Strong project pipeline to spur robust earnings growth In the first half, the company had 53 projects under construction with total investment of Rmb17.5bn, among which 13 will start to generate operating income in the second half while the remaining 40, which involve total capex of Rmb14bn, will continue to generate construction revenue. In addition, the company won 21 new projects and signed two supplement agreements with total investment of ~Rmb9bn in 1H17, which should contribute to 2018-20 top line. We estimate total revenue will grow by 41%/19%/11% YoY to HK$19.7/23.3/25.9bn in 2017/18/19, mainly driven by 22.5% and 23.8% CAGRs in construction and operations revenue, respectively. Given the rising proportion of construction revenue, we forecast gross margin will drop to 35% by the end of 2019. Nonetheless, there may be significant upside to our current forecasts given the company’s rich project reserves. According to management, the company had 236 environmental protection projects with total investment of ~Rmb62.1bn on hand in over 100 districts, counties and cities across 17 provinces and municipalities in China, as well as in Germany, Poland and Vietnam.
Technological know-how to improve operating efficiency further The company set up the “Everbright Technology Hub” in Nanjing during 1H17, which will serve as a comprehensive R&D center for the company. We believe the company’s self-developed 850 tonnes/day grate furnace will be put into operation in 2018, which should improve generating efficiency and increase government subsidies. The company received various kinds of financial subsidy from the central government in 1H17, totaling Rmb287m. We therefore forecast a steady increase in electricity generated per tonne of municipal waste.
We raise our 2017/18/19 revenue forecasts by 11.5%/12.1%/12.5% to HK$19.7/23.3/25.9bn to incorporate our 22.5% and 23.8% CAGR forecasts for construction services and operation revenue during these years. We have lowered our GP margin assumption for 2017 to 35% (38% in 2016) given the rising proportion of construction revenue. We raise our net profit estimates for 2017/18/19 to HK$3.6/4.2/4.7bn, implying EPS of HK$0.81/0.94/1.04.
Maintain Buy and raise TP by 8.6% from HK$11.60 to HK$12.60 based on 15.6x/13.5x/12.1x 2017/18/19E P/E. We believe the company deserves to trade at a premium given its 1) attractive earnings outlook, 2) leading position in the industry, and 3) balanced revenue structure. The company is currently trading at 13.0x/11.2x/10.0x 2017/18/19E P/E.
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