Canvest Environmental Protection Group – 2016 Earnings Review

Maintain Buy: 2016 net profit increased 47% YoY, margin beat

Canvest reported a strong set of results for 2016. Net profit increased 47% YoY to HK$400 million, consistent with the recently issued positive profit alert. Revenue increased by 40% YoY to HK$1,654 million. Gross profit margin was 35.6%, higher than our estimated 33.9% mainly due to better than expected gross margin for waste treatment operations after favorable terms were negotiated with suppliers in 2H16. We maintain Buy on the stock and see the strong growth momentum to continue for Canvest, as the cooperation deepens with its government-backed shareholder Shanghai Industrial Holdings Limited and strategic partners Guangdong Finance Investment International and BOC&UTRUST.

Price target upgraded to HK$5.21, 14% upside

We revise up our 2017e/2018e/2019e earnings by 6%/10%/6%, after factoring in (1) management fee income from the Zhongshan plant; (2) revenue and earnings contribution from the newly announced Xinyi WTE project; (3) margin improvement for waste treatment operations. Our price target is revised up to HK$5.21, derived with the DCF method, assuming 7.58% WACC, and 3% long-term growth rate. This implies 21.1x/16.1x 2017e/2018e PE.

Management confident to achieve over 30% capacity growth in 2017

At the annual results investor meeting, the chairlady confirmed that Canvest should deepen cooperation with its 2nd largest shareholder Shanghai Industrial Holdings Limited to expand WTE operations. The management guided that the 2017 planned capacity should grow to 26,000+ tons/day, up by over 30% from the current 19,090 tons/day level. Together with the support from its government-backed strategic partners Guangdong Finance Investment International and BOC&UTRUST, we believe Canvest will continue its strong growth momentum in the 2017-2020 golden period. According to the 13th Five-Year Plan, China’s municipal waste incineration capacity will increase by c150% from 2015 to 2020; particularly Guangdong’s planned waste incineration treatment capacity is set to quadruple by 2020.

Catalysts: Strong reported earnings expected for 2017e-2019e; potential new project announcements affirm future earnings

We estimate Canvest will complete construction for 5 WTE projects by 2017e, and another 6 by 2019e. With the funding and new project acquisition support from its government-backed shareholder and strategic partners, Canvest could potentially achieve better than expected growth and become a national top player in the WTE field. We await more detailed announcement of new quality projects in 2017; and any additional announcement regarding business expansion could provide upside surprise.

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