Visible growth with decent profitability; initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Utilities Utilities Company China Everbright Greentech Date 2 June 2017 Initiation of Coverage Visible growth with decent profitability; initiating with Buy Reuters Bloomberg Exchange Ticker 1257.HK 1257 HK HSI 1257 Forecasts And Ratios Year End Dec 31 2015A 2016A 2017E 2018E 2019E Sales (HKDm) 1,203 3,000 4,373 6,426 8,008 EBITDA (HKDm) 442 983 1,346 1,776 2,212 Reported NPAT (HKDm) 272 629 862 1,097 1,259 Reported EPS FD(HKD) 0.132 0.305 0.417 0.531 0.609 DB EPS FD (HKD) 0.136 0.313 0.417 0.531 0.609 DB EPS growth (%) 40.6 130.2 33.2 27.3 14.8 PER (x) – – 13.3 10.5 9.1 Price/BV (x) 0.0 0.0 1.4 1.3 1.1 EV/EBITDA (x) – – 8.3 7.8 8.2 DPS (net) (HKD) 0.000 0.000 0.083 0.106 0.122 ROE (%) 15.5 17.7 14.0 12.8 13.2 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 Visible growth with decent profitability ________________________________________________________________________________________________________________ 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) 083/04/2017. Price at 31 May 2017 (HKD) 5.55 Price target - 12mth (HKD) 6.40 52-week range (HKD) 5.79 - 5.30 HANG SENG INDEX 25,661 Thomas Zhu, CFA Research Analyst (+852 ) 2203 6235 thomas.zhu@db.com Michael Tong, CFA Research Analyst (+852 ) 2203 6167 michael.tong@db.com Price/price relative 5.25.35.45.55.65.75.85/17China Everbright GreHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute – – – HANG SENG INDEX 4.2 8.1 23.3 Source: Deutsche Bank We initiate coverage of China Everbright Greentech (CEG) with a Buy rating and HKD6.4 target price. We like CEG on its strong project pipeline, excellent project management, decent project returns and potential synergy with its parent company China Everbright Int'l (257 HK, Buy). We expect CEG’s share price to be driven by the company’s earnings growth. Strong project pipeline, excellent project management and decent profitability CEG has biomass power contracted capacity of ~5.0x its operating capacity. The strong project pipeline, and potential new project wins, should result in very strong 68% operating capacity CAGR 2016-19E. Thanks to the excellent location selection and project management, CEG biomass plants achieve utilisation of ~8,000 hours for its biomass plants, well above industry average. We expect CEG to generate project IRR of 14% for biomass power projects and 15% for integrated biomass/waste-to-energy projects, much higher than the 6-10% returns for environmental players in the municipal area. Robust earnings growth; sophisticated raw materials management We expect CEG to deliver recurring earnings CAGR of 25% in 2016-19E, driven by biomass construction and operations. CEG has established a sophisticated system for the management of biomass raw materials costs (representing more than 80% of operation costs) by: 1) sourcing from a large number of brokers/farmers; 2) signing annual contracts to partially lock down volume and pricing; 3) paying cash to attract suppliers; 4) building strategic reserve centres; and 5) adding non-agricultural wastes. DCF-based target price of HKD6.4; key downside risks Our DCF valuation is based on a 7.1% WACC, explicit cash flow to 2051E and no terminal value. Key risks: 1) poor raw material price control; 2) rising competition for new projects; 3) delay in construction progress of new projects; 4) lower-than-expected utilisation rate; 5) changes in China’s policies. Distributed on: 01/06/2017 21:00:00 GMT0bed7b6cf11c 2 June 2017 Utilities China Everbright Greentech Page 2 Deutsche Bank AG/Hong Kong Model updated:01 June 2017 Running the numbers Asia China Utilities China Everbright Greentech Reuters: 1257.HK Bloomberg: 1257 HK Buy Price (31 May 17) HKD 5.55 Target Price HKD 6.40 52 Week range HKD 5.30 - 5.79 Market Cap (m) HKDm 11,467 USDm 1,471 Company Profile China Everbright Greentech (CEG) is a leading environmental protection service provider in China. It focuses on biomass treatment with exposures also in hazardous waste treatment and wind/solar power. The company successfully completed its spin-off