DBS: China Everbright Water’s growth potential is ‘underappreciated’

China yuan coins

China Everbright Water’s double-digit pace of earnings growth and attractive valuations signal its “robust growth potential” is underappreciated by the market, DBS said in a note last week.

“A jump of 11 percent in its SGX-listed stock price after the announcement of first quarter of 2019 results provides good evidence that investors have underappreciated CEW’s growth potential,” DBS said. “In particular, management has been careful to select projects with good profitability as its project portfolio grows.”

China Everbright Water reported last week its first quarter net profit increased 16 percent on-year to HK$206.35 million (S$35.97 million or US$26.29 million) as construction revenue increased.

DBS said the Hong Kong shares’ valuation at less than nine times 2019 price-to-earnings is “not demanding,” while the Singapore market valuation was even lower at eight times price-to-earnings.

China Everbright Water was also likely to post better profitability for the rest of the year, partly on the absence of professional fees from its dual listing in Hong Kong, DBS said.

In addition, the company should also see a lower effective interest rate after refinancing its borrowings with panda bonds which have a lower coupon rate of less than 4 percent, compared with its average finance cost of 4.0 percent to 4.2 percent in 2018 and the first quarter of 2019, DBS said.

Potential share catalyst

Management has also indicated acquisitions could be on the cards now that the Hong Kong listing has been completed, DBS said.

“The tight financial liquidity environment in 2018 has led to cashflow issues for some smaller players which would be acquisition targets for CEW. Nevertheless, management has been very stringent in project quality,” the note said. “M&As would be a good share price catalyst.”

DBS kept a Buy call on the shares, with a HK$2.80 target for the Hong Kong shares and a S$0.49 target for the Singapore-listed shares.

The Singapore shares ended Friday up 4.05 percent at S$0.39 and the Hong Kong-listed shares were down 3.36 percent at HK$2.30.


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