AMTD Research - 10 March 2017

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Canvest Environmental Protection Group – Update

New project announcement

On 6 March 2017, Canvest announced that it was awarded a new waste treatment project in Xinyi, Maoming, Guangdong Province. The processing capacity of the Xinyi plant is planned to be 750 tons/day (Phase I: 500 tons/day; Phase II: 250 tons/day). The BOT concession right shall last 30 years. The Xinyi plant represents c9.5% addition to Canvest’s total existing processing capacity.

Strong growth momentum to continue

This affirms our belief that the new-project-winning momentum will continue for Canvest, with the support from its government-backed strategic partners Guangdong Finance Investment International, BOC&UTRUST and 2nd largest shareholder Shanghai Industrial Holdings Limited. According to the 13th Five- Year Plan, China’s municipal waste incineration capacity will increase by c150% from 2015 to 2020, and particularly Guangdong’s planned waste incineration treatment capacity is set to quadruple by 2020.

Environmental investment - contributor to 2017 GDP growth

At the 2017 National People’s Congress, Premier Li Keqiang announced that the 2017 GDP growth target is around 6.5%. With the government’s tightened property market policy stance and reduced tax support for auto sales in 2017, we believe a key driver for GDP growth this year should be infrastructure investment. Environmental protection investment could well be a key area that central and local governments support, because of its positive externality and publicity, apart from the GDP contribution. We believe that the completion rate of the waste incineration investment target in 2017-2020 will be very high, unlike in previous years when the government was still very much focused on the old economy while trying to boost GDP growth.

Reiterate Buy rating; price target HK$5.19, 13% upside

Since our initiation on 20 Feb 2017, the stock price has moved up by 13%. 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.

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. Currently our valuation has not factored in management fee income 2017e onwards for lack of clarity on detailed revenue booking method, which leaves potential upside in our forecast.

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 (excluding the new Xinyi plant); any announcement of new quality projects and management fee income from managed projects (asset-light model) could provide upside surprise.

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