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  Phillip Investor Notes

24-11-2014(Mon) 21-11-2014(Fri) 20-11-2014(Thu) 19-11-2014(Wed) 18-11-2014(Tue)
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Investor Notes - Phillip Securities (HK) Ltd
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24 Nov, 2014 (Monday)

            
TRAVELSKY TECH(696)
Analysis:
Travelsky Technology (696) is the leading IT solution supplier of China air transport and tourism. Although the domestic economic slowdown in first half of this year, coupled with the unstable economic situation in the global market, the group remained considerable growth in interim results. Recently it was reported that the tender evaluation on the second phase of the ticket system for China Railway Engineering Corporation had been completed. China Aviation Info. S&T became the only successful candidate. If successful, it will be able to extend the aviation business to railway. (I do not hold the above stock)
Strategy:
Buy-in Price: $8.40, Target Price: $9.50, Cut Loss Price: $7.90

SHIMAO PROPERTY(813)
Analysis:
The People's Bank suddenly announced to cut its benchmark interest rate on Friday after market close, which was the first cut since July 2012. The cut will be implemented in asymmetric way in lowering the deposit and lending rates. One-year lending rate was cut 0.4 percentage point, while one year deposit rate was cut only by 0.25%. Meanwhile, it would also expand the floating range of deposit rates, which extend the upper limit from 1.1 times of benchmark to 1.2 times. Affected by the news, on the night future rose nearly 500 points on Friday night, or 2%. The market generally expects HSI to open 400-500 points up today. Benefit from interest rate cuts, interest rate sensitive stocks such as property developers and insurers are expected outperform the market. Among the mainland property stocks, high-quality housing companies such as China Vanke, Shimao (813), with the stable performance in a falling market, low PE and high yields are comparively attractive.
Strategy:
Buy-in Price: $16.00, Target Price: $18.00, Cut Loss Price: $15.50


Kangda Env (6136.HK) - A steady growth with limited potential

-In H1 2014, the Company recorded revenue of 864 million RMB, up 50% yoy. The gross profit recorded 310 million RMB with a gross margin of 36%, down approximately 4 ppts yoy, which was caused mainly by a higher proportion of the construction income. The recorded profit attributable to the owner of the parent company was 124 million RMB, up 17.7% yoy with earnings per share of 0.08 RMB.

-By the end of H1 2014, The pending projects had daily processing capacities of 457,000 tons/day, among which projects with daily processing capacities of 260,000 tons/day would start running by the end of 2014, and the rest projects with daily processing capacities of 197,000 tons/day would be put into use by the end of 2015. It is expected that with the projects constructed, the annual compound growth rate of the Company's processing capacity will remain around 18% for the next three years.

-In July and August, through shares acquisitions, the Company gained running projects` capacities by 240,000 tons/day and the capacities for the projects under construction by 120,000 tons/day. It is expected that the Company will keep the overall growth rate of the running projects at above 30% by means of acquisitions for the next three years, so as to ensure its leading position in the market.

-Currently, the Company has 320 million RMB in cash and 3 billion RMB of bank loans with a debt-to-capital ratio of 72.4% and an average borrowing cost rate of 6.94%, which remain basically the same compared to the same period last year. The IPO of company provided 1.3 billion HKD, therefore the Company's cash for the next three years should be enough in covering the constructions and acquisitions.

-At present, the Company is mainly running BOT and TOT projects. It only did a few acquisitions in H2 and an acquisition last year (the acquisition of Beijing Changsheng). The Company's new projects mainly have been from the acquisitions of other companies and projects for recent two years.we believe that, currently it will be hard for the Company to improve its comprehensive strength and industrial competitiveness when relying on the development strategy of horizontal acquisitions, and the Company's development potential is limited.

The Company's performance grows steadily

In H1 2014, the Company recorded revenue of 864 million RMB, up 50% yoy. The gross profit recorded 310 million RMB with a gross margin of 36%, down approximately 4 ppts yoy, which was caused mainly by a higher proportion of the construction income. The recorded profit attributable to the owner of the parent company was 124 million RMB, up 17.7% yoy with earnings per share of 0.08 RMB. It can be concluded that the Company's performance had a relatively steady growth.

Large-scale constructions of projects

The Company is the biggest privately-owned sewage treatment enterprise in China. By the end of H1 2014, the Company had total 48 sewage treatment projects, including 33 BOT projects and 15 TOT projects, which were located in 27 cities of 9 provinces in Northeast China, North China and Southeast China, with daily sewage processing capacity of 1,460,000 tons/day. The pending projects had daily processing capacities of 457,000 tons/day, among which projects with daily processing capacities of 260,000 tons/day would start running by the end of 2014, and the rest projects with daily processing capacities of 197,000 tons/day would be put into use by the end of 2015. The construction earning of the Company in H1 was 482 million RMB, up sharply 157% yoy. Eight sewage treatment projects and one water supply project were under construction. It is expected that with the projects constructed, the annual compound growth rate of the Company's processing capacity will remain around 18% for the next three years. The BOT operating revenue was 194 million RMB in H1, up 23.7% yoy. This was mainly due to the increased numbers of projects put into service as well as the increased quantities of sewage treatment. The treatment rate of sewage was 89.68% with an average treating cost of 1.04 RMB/ton.

The Company concentrates on acquisitions in H2

In July and August, through shares acquisitions, the Company gained 90% of the shares of four sewage treatment plants from Puyang County Water Authority and Shandong Central States Industrial Co., Ltd., as well as franchise rights of a BOT and a TOT projects in Suihua, Heilongjiang Province, which increased the running projects` capacities by 240,000 tons/day and the capacities for the projects under construction by 120,000 tons/day. The acquisitions cost total 420 million RMB. It is expected that the Company will keep the overall growth rate of the running projects at above 30% by means of acquisitions for the next three years, so as to ensure its leading position in the market.

The financial status is still promising

Currently, the Company has 320 million RMB in cash and 3 billion RMB of bank loans with a debt-to-capital ratio of 72.4% and an average borrowing cost rate of 6.94%, which remain basically the same compared to the same period last year. The IPO of company provided 1.3 billion HKD, therefore the Company's cash for the next three years should be enough in covering the constructions and acquisitions.

The development direction is comparatively monotonous

At present, the Company is mainly running BOT and TOT projects. It only did a few acquisitions in H2 and an acquisition last year (the acquisition of Beijing Changsheng ). The Company's new projects mainly have been from the acquisitions of other companies and projects for recent two years. Let us look at the biggest privately-owned sewage treatment enterprise—Sound Global Limited (967.HK) for comparison. Sound Global Limited has gained total 14 new projects in H2 2014 by ways of acquisition, bid-winning and government cooperation. The overall sewage processing scale is over 600,000 tons/day, which shows its strong bidding ability and the influences among local governments. And also look at CT Environmental Group Limited (1363.HK) for comparison, who is mainly engaged in processing industrial sewage. Aside of expanding the scale of sewage treatment projects, CT Environmental Group Limited is constantly upgrading the technology of sludge treatment, so as to improve the efficiency of the whole sewage treatment process as well as the profit ability. Therefore, we believe that, currently it will be hard for the Company to improve its comprehensive strength and industrial competitiveness when relying on the development strategy of horizontal acquisitions, and the Company's development potential is limited.

Valuation

The Company is well funded for the moment, the new projects under construction are sufficient to ensure a steady growth of the earnings for the next two years. However, in the long run, the development potential of the Company is limited due to the simple development strategy of the Company at present. We have made a comparison between the valuation levels of other three sewage treatment companies listed in Hongkong and thus given the Company a 12 months target price of 4.05 HKD, which is equal to a P/E ratio of 20 times for 2015. Therefore the Company's investment rating is "Neutral".

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Recommendation on 24-11-2014
RecommendationNeutral
Price on Recommendation Date$ 3.880
Suggested purchase priceN/A
Target Price$ 4.050
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Phillip Research - Hong Kong 輝立研究部 – 香港及中國
Company Stock Code Last Update Suggestion Target Price Price on Recom
Mainland Financial Xingyu Chen (86) 2151698900-105chenxingyu@phillip.com.cn
Huishang Bank369818/11/2014Buy4.13.34
China Construction Bank93931/10/2014Accumulate6.55.72
Transportation and Automobiles Zhang Jing (86) 2151699200-103zhangjing@phillip.com.cn
Brilliance China111420/11/2014Buy15.6712.58
GAC Group223813/11/2014Accumulate8.527.47
Mainland Property Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
China South City166804/11/2014Buy5.53.52
Wanda Commercial Properties Group16929/09/2014Accumulate21.73
Insurance Xingyu Chen (86) 2151699400-105chenxingyu@phillip.com.cn
CPIC260111/11/2014Buy33.728.1
New China Insurance133615/08/2014Buy36.628
Properties  
FORTUNE REIT77814/10/2014Accumulate7.326.92
China State Construction International Holdings Ltd331116/05/2014Buy15.813.16
Hotels and Entertainment Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
Galaxy Entertainment2719/11/2014Accumulate5651.75
Galaxy Entertainment2716/07/2014Accumulate7262.95
New Energy  
Kangda Env613624/11/2014Neutral4.050.000
Xinjiang Goldwind220810/11/2014Accumulate15.5613.46
Food, Beverage and Retail  
Samsonite International SA191012/11/2014Accumulate3127
Sa Sa International17816/09/2014Reduce5.075.81
Telecommunications  
AAC Technologies201817/11/2014Accumulate48.5543.85
BYD Electronic28507/11/2014Buy10.788.84
Oil and Gas Geng Chen (86) 2151699400-107chengeng@phillip.com.cn
CIMC ENRIC389927/10/2014Buy107.67
Anton Oilfield Service333710/10/2014Neutral2.22.29
Software & Service Kay Ng (852) 2277 6751kayng@phillip.com.hk
IGG800221/11/2014Accumulate3.953.44
BOYAA43414/11/2014Accumulate8.527.39

Information contained herein is based on sources that Phillip Securities (Hong Kong) Limited and/or its affiliates ( the “Group”) believe to be accurate. The Group does not bear responsibility for any loss occasioned by reliance placed upon the contents hereof. The Group (or its employees) may have interests in relevant investment products. For details of different products’ risks, please view the Risk Disclosures Statement on http://www.phillip.com.hk.

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