China Environment Ltd - Green profit

Written By Stock Fanatic on Thursday, November 7, 2013

We recently visited China Environment?s (CEL) new plants in Bengbu, Anhui and its customer, Nanjing Iron & Steel Group and feel positive on the company. China Environment is a comprehensive provider of industrial waste gas treatment solutions in the People?s Republic of China (PRC), headquartered in Longyan City, Fujian Province. 

The group designs and constructs industrial waste gas treatment systems. Its key products include Electrostatic Precipitators (ESP), including Electrostatic Lentoid Precipitators (ESLP), bag houses and hybrid dust collectors.

■ Good track record

CEL was listed in SGX Main Board on 8/09. Despite a setback over the last two years, the group has been able to maintain a firm foothold in the PRC?s environmental protection industry with its healthy financial track record and continuing efforts on R& D. The group has been profitable and has achieved constant growth on equity since listing.

■ JV with College of Engineering, Peking University (China) to co-own the technologies ? including 

1) PM2.5 ultrafine particles removal technology  

2) power plants? residual heat recovery and recycling technology  

3) solid waste treatment technology. 

The group believes these new technologies should be ready by next year.

■ Favourable government policies as it continue to be focused on reducing emissions

The Chinese government has committed RMB1.7t to combat air pollution over the next five years. The government also increased subsidies to power generation sector to promote conformation to stringent emission standards in China (wef 25 Sept 2013). Dust emission standard for new thermal power plants were further reduced from current 30mg/m3 to 20mg/m3, but for existing plants will take effect from 1 July 2014.

■ Growing demand on replacement cycle

As more than 50% of existing thermal power plants do not meet the requirements, we believe CEL will clearly benefit from the replacement cycle. As at 2 September 2013, the group has an order book of approximately RMB241.2m comprising 19 projects scheduled for completion in 2013 and 2014. It has announced that it has secured another 5 new contracts worth RMB119m on Wednesday.

Technical Analysis

Daily Chart

(Wow! from 0.085 to 0.65 within 7 months).....just my comment.

■ CEL is currently trading at 44x historical FY12 PER or 32x FY13e based on the annualised HY2013 earnings, which is not cheap in the near-term as compared to its peer average of 30-40x PER market valuation. 

Given its strong order book on hand and strong demand for the replacement cycle, we believe CEL should be able to achieve net profit grow in FY14 and FY15, however, tight working capital could constrain its ability to secure more orders. Its new plant utilisation rate is only 50% currently. We currently do not have a rating on the stock. (Read Report)