We have recently paid a research visit to Chongto's project of Yonghe Haitao Treatment Facility located in Guangzhou city, and have exchanged views with the management on the latest development of the Company.

Strict requirement by the Guangdong Province

The Phase III of the project of Yonghe Haitao Treatment Facility involves construction of pipelines to collect industrial wastewater from textile factories in the vicinity of 12 km from the project site, and the provision of industrial wastewater treatment services to them. Those textile factories previously used their own self-equipped wastewater treatment facilities; however, due to the strict requirement by the authority of Guangdong Province, the factories have to shift to employ professional enterprises for wastewater treatment. Currently there are only 15% of enterprises in the Province choosing professional third party to perform the wastewater treatment job, while 85% of enterprises still using their own self-equipped wastewater treatment facilities, representing a huge market in this area.

Extending wastewater treatment business to industry of mechanical and electrical appliances

On 6 July 2015, Chongto entered into the investment agreement with the authority of Yinghong town of Yingde city in Guangdong, in relation to an industrial wastewater treatment plant and an industrial water supply plant in the town under the operation mode of BOO (Build-Own-Operate). This project includes industrial wastewater treatment capacity of 80,000 tons per day and industrial water supplies capacity of 200,000 tons per day, with a total investment amounted to RMB420 million. One of a phase under this project involves wastewater treatment capacity of 20,000 tons per day and water supplies capacity of 50,000 tons per day. The enterprises producing wastewater in the local area are mainly in the industries of mechanical chemistry, electrical and electronic production etc, leading the Company to enter a new aspect of industrial wastewater treatment. This project is expected to kick start in 2015Q4, and to commence operation in 2016Q3. The IRR of the project is expected to be 20%.

Launching large-scaled hazardous waste project

The Company announced on 23 April that a project in Nansha region in Guangzhou will be constructed to treat 500,000 tons hazardous waste and to produce 150,000 tons of bio-diesel annually. Total investment of this project amounted to RMB320 million. This hazardous waste project mainly handles cabin-cleaning wastewater at ports, oil leaked from vessels, and also diesel from oil refineries. There are some treatment equipment in the area, and thus this project would focus on technical upgrade and expansion, and construction of associated equipment. This project is currently under operation. With its large scale, it is expected to be completed by the end of 2016.

Hazardous waste and sewage generate synergy effect

The Company recently has been devoted to develop business of hazardous waste treatment, which generates synergy effect with the existing business of industrial wastewater treatment. For example, some waste acid will be released during the process of hazardous waste treatment, which can be used for neutralizing the strength of alkalinity of industrial wastewater; Moreover, copper powder will be extracted from wastewater with copper during the process of hazardous waste treatment and ferric chloride will be produced at the same time. Ferric chloride is an excellent flocculant, which can be used to eliminate the suspended particles in wastewater. Such synergy effect has been currently adopted in the operation of the Company.

Valuation

The three core business segments of Chongto, namely industrial wastewater treatment, sludge treatment, and hazardous waste treatment, all carry the features of strong profitability and great market potentials. The comprehensive treatment capacity of the Company gives her ability to offer overall integrated solutions to enterprises producing wastewater in industrial park. Diversification of businesses also helps to lower the possible business risk of concentrating on a type of business. Recently, the Company has implemented stock splitting. We raised the target price to HK$3, which is equivalent to 18x of the 2016 eP/E, keeping the rating of ¡§Accumulate¡¨. (Closing price as at 27 July 2015)

Financials

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