SINGAPORE (March 22): CIMB is initiating coverage on waste-to-energy (WTE) operator China Jinjiang Environment (CJE) with an “add” recommendation and a target price of S$1.10, drawing attention to the counter as an “overlooked WTE leader in China” with low valuations and a high dividend yield.
In a Tuesday report, analyst Keith Li says he reckons CJE is not so well-known to the investing community due to its short listing history, having commenced trading on the SGX Mainboard just last year in July.
“We think this is unjustified given CJE’s longer operating history [of over 18 years], large operating capacity, and projects for development,” he opines.
In particular, Li believes the company is well positioned to capture China’s WTE boom given its extensive network, good track record and well-established technology in circulating fluidised bed (CFB). He also forecasts the company’s net profit to grow at 13.5% from FY16-19F, as a result of its WTE capacity expansion.
“With 84% of the portfolio in BOO (Build-Operate-Own) concession format, CJE recognises most of its earnings under conventional accounting method and does not include much construction earnings, which are pre-operational earnings made by the BOT (Build-Operate-Transfer) accounting treatment adopted by peers. BOT construction accounts for 5% of CJE’s gross profit in FY17F and 4% in FY18F,” adds the analyst.
“BOO contracts have advantages over BOT contracts from the perspective of operators as well as investors, in our view.”
Considering CJE’s low investment costs for CFB at a 10-30% discount to the moving grate technology used by peers, he also believes the company has the ability to capture opportunities that are cost-sensitive. This is in comparison to CJE’s two major-listed competitors CEI and Canvest, which Li thinks the company has an edge over in terms of history, WTE portfolio and technology in CFB.
“One may criticise that CJE does not have governmental backing and thus should deserve a lower valuation. However, the three private enterprises, CTEG, Dongjiang and Canvest, are also traded at higher P/E multiples,” says Li.
“We see a re-rating opportunity if investors have further understanding about the company and are more convinced by its attractive earnings growth prospects. CJE will commence the construction of its large number of WTE projects on hand this year and we expect it will continue to secure more WTE projects, which are the key catalysts, in our view.”
As at 11.11am, shares of China Jinjiang are trading 4.7% higher at 88.5 Singaporean cents.