New SOE leader benefiting from Shenzhen Connect; initiating with Buy

Deutsche Bank Markets Research Asia Hong Kong Utilities Utilities Industry Dongjiang Environmental Date 30 November 2016 Initiation of Coverage New SOE leader benefiting from Shenzhen Connect; initiating with Buy New SOE leader in hazardous waste treatment ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Thomas Zhu, CFA Research Analyst (+852 ) 2203 6235 thomas.zhu@db.com Michael Tong, CFA Research Analyst (+852 ) 2203 6167 michael.tong@db.com Top picks Dongjiang Environmental (0895.HK),HKD13.30 Buy Dongjiang Environmental (002672.SZ),CNY19.09 Sell Source: Deutsche Bank We initiate coverage of Dongjiang (895 HK) with Buy and an HKD15.5 target price. We like Dongjiang on the strong capacity growth outlook for China’s hazardous waste treatment market, its leading market position and potential to consolidate the fragmented market, and the company’s transformation into an SOE with an employee share incentive scheme. We expect the Shenzhen-Hong Kong Stock Connect to be a share price catalyst. We also initiate on Dongjiang-A (002672 CH) with an RMB14.8 target price and Sell, on valuation. Leader to benefit from market growth, consolidation, and its new SOE identity China’s hazardous waste treatment capacity should post a 17% CAGR, driven by the Soil Pollution Control Plan. Dongjiang is well-positioned to capture the growth, as a leader in capacity, geographic presence, treatment qualifications and its track record. The company should also benefit as the market, with ~1,500 players, consolidates. Dongjiang’s announced share issue to a company under Guangdong SASAC will turn it into an SOE and we expect it to benefit from its new SOE status in new project wins, project ramp-ups and finance cost. Strong earnings growth; employee share incentive scheme should help We expect Dongjiang to deliver a recurring earnings CAGR of 26% in 2016-18e, driven by capacity growth and a rise in the utilization rate in industrial hazardous waste treatment. We believe the recently-issued employee share incentive scheme should help drive Dongjiang’s earnings growth, as it requires the company to deliver a recurring earnings CAGR similar to our forecast. DCF-based target price of HKD15.5/RMB14.8; key downside risks Our DCF valuation is based on a 7.3% WACC, explicit cash flow to 2026E and 2% terminal growth. Major risks: fluctuations in China’s industrial activities, slower/faster-than-expected capacity ramp-ups, lower/higher-than-expected metal prices, lower/higher-than-expected margins, and changes in China’s policies. Forecasts And Ratios - Dongjiang Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 2,048 2,403 2,544 3,172 3,743 EBITDA (CNYm) 426 605 827 1,021 1,195 Reported NPAT (CNYm) 252 333 478 459 596 Reported EPS FD(CNY) 0.300 0.382 0.550 0.493 0.599 DB EPS FD (CNY) 0.285 0.342 0.414 0.493 0.599 DB EPS growth (%) 29.9 20.3 20.8 19.2 21.6 PER (x) 27.0 31.4 28.7 24.1 19.8 Price/BV (x) 3.0 3.3 3.3 2.1 1.9 EV/EBITDA (x) 25.1 20.0 16.0 12.3 12.2 DPS (net) (CNY) 0.150 0.080 0.115 0.107 0.125 Yield (net) (%) 1.9 0.7 1.0 0.9 1.1 ROE (%) 10.7 12.8 16.2 10.4 10.0 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Distributed on: 29/11/2016 22:06:30 GMT 30 November 2016 Utilities Dongjiang Environmental Page 2 Deutsche Bank AG/Hong Kong Model updated:28 November 2016 Running the numbers Asia China Utilities Dongjiang Environmental Reuters: 0895.HK Bloomberg: 0895 HK Buy Price (25 Nov 16) HKD 13.30 Target Price HKD 15.50 52 Week range HKD 8.70 - 14.06 Market Cap (m) HKDm 16,990 USDm 2,191 Company Profile Dongjiang Environmental Company Ltd is primarily focused on industrial waste treatment and recycling, with small business exposure to municipal waste treatment. The company is a leader in industrial hazardous waste treatment in China and holds permits to treat more than 40 different types of hazardous wastes. The company is dual-listed in Hong Kong and mainland China. Price Performance 8121620Nov 14Feb 15May 15Aug 15Nov 15Feb 16May 16Aug 16Dongjiang EnvironmentalHANG SENG INDEX (Rebased) Margin Trends 1216202428323613141516E17E1