Strong growth from industrial waste treatment; initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Utilities Utilities Company CT Environmental Date 16 September 2015 Initiation of Coverage Strong growth from industrial waste treatment; initiating with Buy Reuters Bloomberg Exchange Ticker 1363.HK 1363 HK HSI 1363 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (HKDm) 485 1,033 1,970 2,532 3,364 EBITDA (HKDm) 287 583 1,096 1,442 1,875 Reported NPAT (HKDm) 224 425 681 856 1,026 Reported EPS FD(HKD) 0.050 0.075 0.111 0.135 0.162 DB EPS FD (HKD) 0.046 0.071 0.112 0.136 0.163 DB EPS growth (%) 4.3 55.2 56.1 21.7 19.8 PER (x) 13.2 21.0 19.9 16.4 13.6 Price/BV (x) 4.7 6.1 3.9 3.2 2.7 EV/EBITDA (x) 9.0 16.3 13.6 11.5 9.4 DPS (net) (HKD) 0.008 0.014 0.017 0.020 0.024 Yield (net) (%) 1.2 0.9 0.8 0.9 1.1 ROE (%) 29.6 28.4 24.9 21.5 21.4 Source: Deutsche Bank estimates, company data Initiating with Buy; the only HK-listed industrial wastewater treatment player ________________________________________________________________________________________________________________ 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) 124/04/2015. Price at 14 Sep 2015 (HKD) 2.22 Price target - 12mth (HKD) 2.70 52-week range (HKD) 2.83 - 1.57 HANG SENG INDEX 21,562 Yuxiao Peng, CFA Research Analyst (+852) 2203 6235 yuxiao.peng@db.com Michael Tong Research Analyst (+852) 2203 6167 michael.tong@db.com Price/price relative 0.01.02.03.09/133/149/143/15CT EnvironmentalHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -16.6 -20.0 29.8 HANG SENG INDEX -10.1 -19.7 -11.5 Source: Deutsche Bank We initiate coverage of CT Environmental Group (CTEG) with a Buy rating and a target price of HK$2.70. Industrial pollution control has become a priority for the Chinese government and centralized treatment by specialized operators is encouraged. CTEG should achieve strong growth with its first-mover advantage in industrial wastewater and hazardous waste treatment and its funding strength as a listed company. Strong earnings growth ahead; higher risk, higher reward CTEG started as a textile industrial wastewater treatment operator but has successfully expanded into sludge, industrial solid waste, and hazardous waste treatment. We expect CTEG to deliver 60% earnings growth in 2015 and a CAGR of 23% in 2015-17, driven by capacity growth in these areas. We have allowed for lower margins and returns for new projects compared to its mature projects, leading to a normalized ROIC of c.15% in 2016-17E (vs. 20-30% in 2011-14), still attractive enough to cover the higher risk of industrial projects. Valuation re-rating not yet done; upside potential from more new projects We expect CTEG’s PE multiple expansion to continue as it establishes more of a track record. CTEG is trading at c.16x 2016E PE, a discount to the c.25x average of its environmental peers (excl. non-cash construction profits) and the 20x implied by our DCF-based target price. We have assumed new potential projects with a total investment of Rmb5.2bn to be operational in 2017-2023 (in addition to those already announced). Every Rmb500m extra investment at a project IRR of 15% implies c.2% upside to our valuation, but up to 10% of earnings in 2015-17E. Any new project wins, or the Soil Pollution Control Plan to be released in early 2016, may help the share price. DCF-based target price of HK$2.7; key downside risks Our DCF valuation is based on an 8.0% WACC, explicit cashflows to 2025E, and 2% terminal growth. Risks: slower-than-expected expansion; counterparty risk from industrial customers; lower-than-expected returns on new projects. 16 September 2015 Utilities CT Environmental Page 2 Deutsche Bank AG/Hong Kong Model updated:15 September 2015 Running the numbers Asia China Utilities CT Environmental Reuters: 1363.HK Bloomberg: 1363 HK Buy Price (14 Sep 15) HKD 2.22 Target Price HKD 2.70 52 Week range HKD 1.57 - 2.83 Market Cap (m) HKDm 13,576 USDm 1,752 Company Profile CT Environmental Group Ltd (CTEG), listed in Hong Kong in September 2013, is committed to providing one-stop environmental services, mainly for industrial customers. It started in the industrial wastewater treatment and water supply businesses, and has now expanded into sludge treatment, industrial solid waste and hazardous waste businesses. Price Performance 0.01.02.03.0Sep 13Dec 13Mar 14Jun 14Sep 14Dec 14Mar 15Jun 15CT EnvironmentalHANG SENG INDEX