Citic Envirotech(CEE) – Green and Win

Citic Envirotech(CEE) – Green and Win


This column is jointly written by @gordon_ong and @devinnath as part of the #analystsondemand series.

-Gordon has a demonstrable interest in equity investments, financial markets, and negotiating deals. As @NTUInvestmentClub president, he has an understanding of what factors drive an organisation’s success.
-Devin is a trader and investor who balances FA and TA in his investment decisions. He believes in using news and FA to spot the right stocks and rely on TA to give him the lowest risk-to-reward ratio possible.

Brief Background

CITIC Envirotech Ltd (“CEL”, “Group”) is a leading membrane-based integrated environmental solutions provider which specialises in water and wastewater treatment, water supply and recycling. It also provides solutions in sludge and hazardous waste treatment as well as river restoration. CEL undertakes both turnkey and investment projects as well as provides plant operation and maintenance services in water and environmental projects.

Major Shareholders and Major Subsidiaries

Source: Citic Envirotech

CEL’s main shareholders are state-owned giants CITIC and China Reform Fund (“CRF”), which allow it to enjoy implicit backing for 1. local government projects, 2. sale of membranes and 3. cheaper debt financing costs.

CEL’s advantage in securing projects and membrane sales due to its shareholders will be discussed later.

It must be noted that CEL’s cheap debt financing rates as a subsidiary of CITIC applies to only 619k/39573k or 1.56% of its total annual interest expense as of FY16. While the benefit is currently not too pronounced, CITIC’s stature as one of China’s largest conglomerates may allow CEL to more easily secure debt financing at better rates, both from external sources or from related parties like CITIC Bank. CEL has also recently secured RMB 20m (SGD 4m) credit facilities from China Merchant Bank, owning to both its recent financial success and status as CITIC’s subsidiary. Securing financing at lower interest rates are vitally important for CEL’s project-based business model to be profitable.

Source: Citic Envirotech

CEL acquired its membrane production arm, Memstar Pte Ltd in 2014. Memstar is known for its R&D centre and previously received financial support from the Singapore government. Its excellent PVDF and 3G-TIPS membranes have allowed CEL to secure an economic moat within China with respect to membrane technology and complying to government regulations regarding wastewater treatment. These are protected by IP rights.

Recent News and Events

– Jun 06, CITIC Envirotech Secured A TOT Cum BOT Wastewater Treatment Project In Suzhou City, Jiangsu Province, China worth RMB 100 Million
– May 31, CITIC Envirotech Awarded RMB 54 Million Phase 2 BOT Expansion Project In Mengzhou City, Henan Province, China
– May 18, CITIC Envirotech Secured River Restoration Project In Ningbo City, Zhejiang Province Worth RMB 3 Billion. CEL’s share is RMB 1.6B.
– April 27, AGM & Confirmation of Final Div of SGD 0.75c/ord. share, Special Div of SGD 0.25c/ord. share
– April 24, CITIC Envirotech Won Bid For A RMB 230 Million BOT Water Recycling Project In Changyi City, Shandong Province, China
– April 24, CITIC Envirotech Won Bid For A RMB 204 Million PPP Project In Xinji City, Hebei Province, China
– April 10, CITIC Envirotech Secures Up To RMB 20 Billion Credit Facilities From China Merchants Bank
– Mar 28, Incorporation of Baiyi Environment, a Joint Venture between CEL, Hui Sheng Fund Mgmt and Hui Yu Fund Mgmt. CEL holds 49.9% shareholdings in JV. JV will acquire 15,000m3/day TOT wastewater plant in Zhou Zhuang town.
– Mar 10, FY 2016 Annual Report
– Feb 1, Share Split 1:2

Business Model

CEL’s business model consists of three main business segments: 1) Engineering Procurement and Construction (EPC) both for external projects and internal BOTs, 2) investments and operating of water treatment utilities (O&M), and 3) Design, manufacturing and use/sale of membrane products and related services. CEL’s business model is vertical integration, to capture profits from the entire value chain of wastewater treatment including construction of the plant, membrane production and operating the plant. It constructs predominantly 3 types of plants: water supply (≈5%), water recycling (≈10%) and wastewater treatment (≈80%).

CEL has recently secured many new types of projects related to water treatment: its first river restoration project in Yixing, Jiangsu, its first hazardous waste treatment project in Rizhao, Shandong, its first sludge treatment and management project in Changyi Shandong, and a huge project worth 3,200m RMB involving water treatment, recycling and cogeneration plants in Chaonan, Guangdong (CEL’s share is ≈1,600m RMB). These could signify the start of multiple diversified revenue streams, especially considering the May 18 announcement that CEL has clinched another river restoration project in Ningbo, Zhejiang.

Geographical Location

Source: Citic Envirotech

CEL operates within mainland China, and has an especially heavy presence within the Hebei, Liaoning, Shandong, Guangdong and Jiangsu provinces. CEL’s established foothold in these provinces and past projects with the respective local governments suggest that it will have an easier time winning future project bids within these regions. Their past record of complying with the EPC requirements in these provinces, combined with their EPC record with China heavyweights such as Sinopec and CNPC, make them trusted by local governments. The deluge of recent order wins (see chart), including the new types of project that CEL never undertaken before (as stated earlier), all came from their traditional stronghold provinces.

Source: Citic Envirotech, as of June 2016 (before recent order wins)

Macro Trends in China’s wastewater sector

Their strength in these provinces align well with the current geographical concentration of water shortage in China.

Source: AQUASTAT, UN Food and Agricultural Organisation

Interesting to note that out of CEL’s dominant 5 provinces, 4 are part of the Dry 11: Hebei, Liaoning, Shandong and Jiangsu, where each person has less than 1000m3 of water per year. In fact, some Middle Eastern countries have higher annual renewable water per capita.

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