SINGAPORE (July 9): Back in 2014, CITIC Group Corporation, China’s state-owned investment holding company with nearly $1.4 trillion in asset, partnered US private-equity firm KKR, to buy a controlling stake in wastewater treatment firm United Envirotech (UEL) which was promptly renamed CITIC Envirotech (CEL).
This was a bid to move into the fast-growing environmental-protection sector in China, a top priority for the Chinese government. The offer to buy the shares of the UEL at $1.65 a share in cash -- a premium of 12.6% over its last transacted price of $1.465 on Nov 6 -- valued the company at about $1.9 billion.
Fast forward to the present, CEL has its work cut out. As at end 2018, CEL had clinched projects in excess of RMB 6 billion ($1.2 billion), which will be progressively delivered over the next two years. And since January, CEL has won another five projects with a combined value of more than RMB 2 billion.
Indeed, China’s industrial wastewater treatment market is expected to grow 5-10% annually under its 13th Five-Year Plan from 2016-2020 on the back of increasingly stringent environmental protection regulations in China.
However, CEL reported a weak set of results in 1Q19, where its revenue and net profit fell 72% y-o-y and 92% y-o-y respectively.
According to a recent unrated report on CEL, UOB KayHian said this was due to a temporary project delay where the Meigu EPC project that is worth RMB 2.5 billion that was put on hold for the winter period. In addition, there was a change into a more conservative revenue recognition method based on percentage of cost incurred that is more back-loaded.
Nevertheless, CEL might have found a new growth driver in industrial hazardous waste treatment which comes with higher barriers of entry, better margins and better project IRR of around 20%. In 1H19, CEL secured more than RMB 1.5 billion of such projects, says UOB.
In addition, CEL has also consistently paid out dividends to its shareholders every year since 2010, culminating in its first interim dividend last year.
On Tuesday, shares in CEL closed at 35 cents at 10.9 times FY18 earnings or 1.2 times book value.
