CHINA EVERBRIGHT WATER: Positive reception from European investors

Excerpts from analysts' report

DBS Vickers analysts: Patricia YEUNG & Tony WU

China Everbright Water's water treatment capacity is currently at 4.6 million tons a day. Above: its reservoir for treated water. NextInsight file photoPositive reception from European investors The major takeaway from China Everbright Water’s (CEWL SP) (CEW) NDR in Europe was that CEW is optimistic in earning reasonable and sustainable returns amid the keen competition within China's water sector. This is appreciated by the European investors who are optimistic about the enormous growth potential of China water sector, as well as CEW’s earnings growth outlook. In general, investors were keen to learn more about 1) the competitive landscape; 2) CEW’s growth strategy and return; and 3) stock liquidity.

What is CEW’s development plan? In the medium term, CEW targets to become a top three player in China, in terms of operating scale and efficiency, by expanding its daily total treatment capacity from 4.6m tons to at least 10m tons within the coming three to five years. The new daily capacity target is 1-2m tons for FY16. Management believes that these targets will translate into a top-line growth of 30-50% p.a.

These plans will be achieved through M&A, extension of existing projects, technical upgrade, participation in PPP projects and diversification into new areas, such as watershed treatment, construction of sponge cities and other comprehensive water environmental treatment services.

In terms of geographical coverage, it will gradually extend into coastal regions or nearby regions from existing markets to minimise A/R risk and management cost. New markets include Zhejiang and Guangdong provinces. In the long run, it targets to venture beyond China to become a global player.

Management understands the risks involved. Thus, there is no timetable for its long-term target and the company will be very careful in making its first step. Management is confident of achieving the medium targets because there are enormous opportunities in the water sector.

For instance, the investment amount required under the Water Ten Plan is estimated to be a few trillion Rmb while that of construction of sponge cities to be at least Rmb6tn by 2030. Additional investments are also required to tackle the issue of black and stinky water body which is currently affecting at least 1,860 rivers in China.

Full report here.