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.

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