AMTD Research - 21 February 2017

Canvest Environmental Protection Group – Star on the rise

Initiate with Buy rating: Star on the rise, with ROE expansion

Canvest Environmental Protection Group is the largest non-state-owned waste-to-energy (WTE) incineration treatment provider in Guangdong Province, by municipal solid waste (MSW) treatment capacity. It is one of the fastest rising players in China’s WTE space, with revenue and net income growing at 67%/61% CAGR respectively during 2011-2015; we forecast a further 23%/28% CAGR in adjusted revenue/ adjusted earnings in 2016e-2019e, as operational capacity rises from 7,900 to 15,740 tons/day. We estimate Canvest’s adjusted ROE will expand to 12.4% in 2019e (up from 7.5% in 2015) due to the commencement of operations of its new WTE plants, with more advanced technology and superior operating efficiency.

Exponential sector growth in 2016-2020

According to targets set in the 13th Five-Year Plan, Guangdong’s waste incineration treatment capacity will quadruple in size by the end of 2020, compared to the 2015 year end level. With its strong track record and partnership in Guangdong, we believe Canvest will be a key beneficiary.

Additional funding and business development support from government-backed shareholder and strategic partners

On 17 Feb 2017, Canvest entered into a conditional new shares subscription agreement with Shanghai Industrial Holdings Limited (SIHL), a company controlled by the Shanghai Municipal government. If this completes successfully, SIHL would become Canvest’s 2nd largest shareholder with a 15.3% stake. Together with the recently formed strategic partnership with government-backed strategic partners Guangdong Finance Investment International and BOC&UTRUST, Canvest is set to gain strong funding and new project acquisition support in and outside of Guangdong.

Price target HK$5.19, 27% upside

Our PT of HK$5.19 is derived with the DCF method, assuming 7.58% WACC, and 3% long-term growth rate. This implies 22.2x/17.6x 2017e/2018e PE. The stock is currently trading at 17.4x/13.8x 2017e/2018e PE, which is undemanding given the strong growth prospect, in our view.

Catalysts: Strong reported earnings expected for 2016e-2019e; potential new project announcements would provide upside surprise

We estimate Canvest will complete construction for 5 WTE projects by 2017e, and another 5 by 2019e. Our project forecast is conservative and currently only includes the ones already announced, as illustrated in Figure 7; any announcement of new quality projects and management fee income from managed projects (asset-light model) could provide upside surprise.

2016 results: Positive profit alert; new asset-light operating model

Canvest will report full year results for 2016 in late March 2017. On 16 Feb 2017, the company issued a positive profit alert of 45% yoy increase in 2016 earnings, due to expanded waste treatment capacity, increasing construction revenue and income from managed project. This beats the consensus estimate by 9%, and we expect the upward revision of consensus estimates.

Legal Disclosures

This article is only a summary (the “Summary”) of a published research report (the “Report”). It only includes part of the comments and views stated in the Report, which has been issued by Research Department of AMTD. The mentioned comments and views such as target price, company profit forecast, industry trend forecast, etc. are based on a series of preconditions and assumptions. Readers should study the full version of the Report issued in details so as to form a thorough understanding on the expressed comments and views.

The Summary is solely for AMTD clients’ information. A person will not be regarded by AMTD as its client solely because he or she receives this Summary. The contents of the Summary will not constitute investment recommendations to any person in any event. AMTD will not assume any legal responsibilities regarding any consequences or losses arising from the direct or indirect use of the Summary, or investment made accordingly.

The extracted valuations, forecasts and ratings in the Summary represents the judgments or opinions formed on the issuance date of the Report. The contents of the Summary may become inaccurate or invalid as a result of changes in circumstances or other factors subsequent to the issuance of the Report. AMTD is not obliged to update inaccurate or outdated information subsequently. Meanwhile, AMTD will not separately inform the readers of the Summary after updates have been made.

AMTD reserves the copyrights of the contents of the Summary. No part of the Report shall be forwarded, modified, quoted, copied or reproduced in any form by any mean to any other person without the prior written consent of AMTD. The Company retains all legal rights in this Report.