kangda env (6136 hk) an undervalued gem buy › upload › 20141210 › ... · dcf-based target...

1

Company Research Initiating Coverage

See the last page of this report for important disclosures

Kangda Env (6136 HK) An undervalued gem We believe Kangda will continue to benefit from both the strong

WWT capacity growth (41% 2013-16 CAGR) and increasing tariff going

forward. We initiate coverage on Kangda with a BUY rating and a

DCF-based target price of HK$4.2, which offers 29% upside from the

current level.

Accelerating capacity growth underpinned by strong track record Kangda has already won 11 projects with an aggregate capacity of 0.4mtpd since

its July IPO this year. We believe one of the key reasons leading to its rapid

capacity growth is its extensive expertise and qualifications together with an

experienced management team. With the continual support from the government

in this sector, Kangda should be able to maintain a strong momentum in WWT

capacity addition going forward.

Higher discharge standards = Higher WWT tariff We see an opportunity for the company to enjoy increasing WWT tariffs with more

existing projects being upgraded from 1B standard to 1A standard, as the

government is pushing stricter policies to encourage higher discharge standards of

existing and new WWT projects. We also believe that Kangda’s new projects in the

future would be mostly 1A standard or even higher, effectively pushing up the

average water tariff in the long run.

Financing costs should go down post IPO We expect Kangda’s financing cost would be lowered in the next few years, as

after its IPO, the company has easier access to lower interest rates bank loans and

wider funding channels. Our sensitivity analysis shows that a 1% decline in average

interest rate could increase its FY15 earnings by 6.3%.

Initiate coverage with a BUY rating and a DCF-based TP of HK$4.2 At our target price of HK$4.2, Kangda would trade at 17.2x 15PE, still lower than

sector leaders such as Beijing Enterprise Water (BEW, 371.HK, BUY, TP: HK$6.0)

and CT Environment (CTE, 1363.HK, BUY, TP: HK$8.9), with BEW and CTE’s current

15PE at 18.6x and 19.2x respectively. Kangda would also trade at a similar 15PE to

its close peer Sound Global (SGL, 967.HK, BUY, TP: HK$10.1) should SGL reach our

target price. As SGL still has a considerable proportion of revenue coming from its

non-recurring EPC segment, while most of Kangda’s revenue are recurring by

nature, there could be further upside from our TP as Kangda could potentially

trade at a higher valuation than SGL.

Figure 1: Financial Summary

Year to Dec 31 (RMBmn) 2012A 2013A 2014E 2015E 2016E

Revenue 999 1,340 1,674 2,120 2,596

Operating Profit 367 445 561 693 846

Reported Profit 197 232 305 404 504

Underlying Profit 197 232 305 404 504

Underlying EPS (CNY) 0.10 0.11 0.15 0.20 0.24

BVPS (CNY) 0.54 0.65 1.56 1.76 2.00

P/E (x) 27.3 23.2 17.6 13.3 10.6

Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0

P/B (x) 4.8 4.0 1.7 1.5 1.3

ROE (%) 21.9 18.9 13.3 11.8 13.0

Source: Guosen Securities(HK)

China / Environmental & Clean Energy

9 December 2014 BUY Target price HK$4.20 Last price (9 Dec 14) HK$3.26 Upside/downside (%) 28.8

HSI 23485.83

Mkt cap (HK$mn/US$mn) 6,740/870

52 week range (HK$) 2.50 - 4.20

Avg trading volume daily (US$mn) 5.62

Free float (%) 27.4%

Source: Bloomberg

Performance

Performance 1M 3M 12M

Absolute (%) (12.1) (9.2)

Absolute (US$, %) (12.1) (9.2) Relative to HSI (%) (11.9) (2.4) Source: Bloomberg

Company background

Kangda International Environmental Co., Ltd. invests and operates wastewater treatment facilities in China.

Source: Bloomberg

Raymond Ip SFC CE No.: AMB348 +852 2899 3142 [email protected]

Anna Lu SFC CE No.: BCJ650 +852 2899 8342 [email protected]

80%

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Jul-14

HK$

Price(LHS) Rel. to HSI(RHS)

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公司报告首次覆盖

研究报告仅代表分析员个人观点，请务必阅读正文之后的免责声明。

康达环保 (6136 HK) 买入好时机我们认为康达会继续受益于未来的运营中污水处理能力的强劲增长

（2013-2016 年复合增长率 41%）以及污水处理费的上升。我们对

康达首予“买入”评级，以现金流折现为基础，目标价为 4.2 港元，

相对当前股价仍有 29%的上升空间。

过去表现强劲，预计未来污水处理能力加速增长康达自从今年 7 月上市之后已经获得 11 个项目，总处理能力接近 40 万吨

/天。我们认为康达的污水处理能力快速增长的关键因素在于其深厚的技

术专长及资质加上有经验丰富的管理团队。由于政府对于这一领域的持续

支持，康达未来的污水处理能力应能够保持强劲的增长动力。

更高的污水排放标准=更高的污水处理费随着政府推行更严格的政策来鼓励现有的以及未来新建的污水处理项目实

行更高的排放标准，当更多现有的项目从一级 A 标准提升至一级 B 标准时，

我们认为公司能够获得污水处理费上升的机会。同时，我们相信，康达未

来的新项目将主要是一级 A 甚至更高的标准，长远来看会有效提高平均污

水处理费。

上市之后融资成本应会下降我们预期康达未来几年的融资成本将会下降，因为其上市之后，公司将更

易获得低息银行贷款，融资渠道也会拓宽。敏感性分析显示，平均利率每

降低 1%，2015年的盈利就会上升 6.3%。

首予“买入”的评级，基于现金流折现目标价为 4.2港元按我们的目标价格 4.2 港元计算，康达之 15 年市盈率达到 17.2 倍，相

对龙头如北控水务（371.HK，买入，目标价：6.0 港元，现价 15 年市盈

率：18.6 倍）及中滔环保（1363.HK，买入，目标价：8.9 港元，现价 15

年市盈率：19.2 倍）之 15 年市盈率较为便宜。康达及桑德国际（967.HK，

买入，目标价：10.1 港元）之 15 年目标市盈率也相同，但因为桑德国际

之非持续收入比例相对康达较多（因桑德之收入大部分来自 EPC），我们

认为未来康达之股价有机会超过我们之目标价。

Figure 2: 盈利预测

截至 Dec 31 (人民币百万) 2012A 2013A 2014E 2015E 2016E

营业额 999 1,340 1,674 2,120 2,596

经营盈利 367 445 561 693 846

净利润 197 232 305 404 504

实际盈利 197 232 305 404 504

每股实际盈利 (CNY) 0.10 0.11 0.15 0.20 0.24

每股账面价值 (CNY) 0.54 0.65 1.56 1.76 2.00

市盈率 (x) 27.3 23.2 17.6 13.3 10.6

股息率 (%) 0.0 0.0 0.0 0.0 0.0

市净率 (x) 4.8 4.0 1.7 1.5 1.3

净资产收益率 (%) 21.9 18.9 13.3 11.8 13.0

资料来源：国信证券(香港)

中国 / 环保和清洁能源

2014 年 12 月 9日买入目标价 HK$4.20 收盘价 (9 Dec 14) HK$3.26

Upside/downside (%) 28.8

恒生指数 23485.83

总市值 (HK$/US$mn) 6,740/870

52周最高/最低 (HK$) 2.50 - 4.20

日均成交额 (US$mn) 5.62

流通量 (%) 27.4%

资料来源: 彭博

股价表现

股票数据 1M 3M 12M

绝对回报 (%) (12.1) (9.2)

绝对回报 (US$, %) (12.1) (9.2)

相对 HSI 回报 (%) (11.9) (2.4)


公司簡介

康达环保从事污水处理业务之投资及管理。.


叶伟焯

证监会中央编号:AMB348 +852 2899 3142 [email protected]

陆翠萍

证监会中央编号: BCJ650 +852 2899 8342 [email protected]

80%

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140%

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HK$

Price(LHS) Rel. to HSI(RHS)

Kangda Env (6136 HK) Raymond Ip, +852 2899 3142, [email protected] Anna Lu, +852 2899 8342, [email protected]

Guosen Securities (HK) 3

What we like about Kangda

Accelerating capacity growth underpinned by strong track record

Kangda successfully demonstrated its strong capability in securing new projects in the past. In

2006, it had only 3 BOT projects in operation with a total capacity of 85 ktpd. The number of

projects and its total capacity kept growing in subsequent years, and by the end of 1H14, the

company already had a total of 48 WWT projects, with a total WWT capacity of 1.917 mtpd. We

believe one of the key reasons behind its rapid capacity growth is the expertise and qualifications

it has in the industry. Kangda is one of the few privately owned WWT players to be granted the

highest class qualification for both industrial and municipal WWT, being granted “Class A”

qualifications for contracting and operation of WWT facilities. Another reason is that the

management team is highly experienced with Chairman Zhao having over 25 years of industry

experience.

Figure 3 Kangda is granted national highest class qualifications

Source: Company data, Guosen Securities(HK) Research

The momentum of the company’s capacity growth remains robust after its listing in July 2014.

During 2H14, the company further won 11 projects with an aggregate capacity of 390 ktpd. 7 of

these news projects with a total capacity of 240 ktpd are already in operation, while the remaining

4 projects with a total capacity of 150 ktpd are pending or under construction.

We believe capacity growth is the most important key driver for Kangda’s future growth. Going

forward, we expect the total capacity of the company would keep its strong upward trend. We

believe the company can leverage its expertise, brand recognition, relationship with the local

governments and experience of more than 18 years in the WWT industry to ramp up its capacity in

the future. We expect Kangda could ramp up its total WWT capacity (in operation or

pending/under construction) from 1.9 mtpd in FY13 to 2.3 mtpd, 3.8 mtpd and 5.3 mtpd in

FY14/FY15/FY16 respectively, achieving 41% FY13-16 CAGR.

Figure 4 Total capacity of WWT projects (FY13-16e)


Month/Year Major awards and qualifications

2013 and 2011

Obtained the "Core Enterprise of China Association of Environmental Protection Industry"

award for 2012 and 2010

Aug-2012

Obtained the Certificate of Enterprise Credit Grade, indicating that Kangda Group is rated

as AAA credit grade by China Association of Environmental Protection Industry for the

period from August 2012 to August 2015

Jul-2012

Renewed the Qualification Certificate for Operation of Environmental Pollution

Treatment Facilities (industrial wastewater Class A) issued by the MEP for the period from

July 2012 to July 2015

Mar-2012

Renewed the Qualification Certificate for Operation of Environmental Pollution

Treatment Facilities (municipal wastewater Class A) issued by the MEP for the period

from March 2012 to March 2015

Jun-2007

Obtained the Municipal Facility Construction Projects General Contracting Qualification

Grade A issued by the MOHURD

1.9 2.3

3.8

5.3

0

1

2

3

4

5

6

2013 2014E 2015E 2016E

In operation Pending operation

mtpd

We expect total WWT capacity to grow by 41% FY13-16 CAGR.



Figure 5 Projects in operation (as of end-1H14)


Figure 6 Projects pending operation (as of end-1H14)


Operation

commencement Project Name Phase Location Province Mode

Concession

period (no.

of years)

Daily

Capacity

(tpd)

Utilization

rate

Discharge

quality

Jan-06 Feng County WWT Phase I Xuzhou Jiangsu BOT 25 20,000 100% IA

Apr-06 Gaomi No. 2 WWT Phase I Gaomi Shandong BOT 25 50,000 100% IB

Sep-06 Caiyu Town WWT Phase I Beijing Beijing BOT 30 15,000 67% Beijing III

Oct-08 Gaomi No. 2 WWT Phase II Gaomi Shandong BOT 25 50,000 100% IB

Jun-09 Anhui Jixi WWT Phase I Xuancheng Anhui BOT 30 15,000 95% IB

Jul-09 Feng County WWT Phase II Xuzhou Jiangsu BOT 25 20,000 100% IA

Jul-09 Jiaozuo City WWT Phase II Jiaozuo Henan BOT 26 100,000 100% IA

Aug-09 Linyi Nanfang WWT Phase I Linyi Shandong BOT 25 40,000 90% IB

Dec-09 Jiaozuo City Wanfang WWT Phase I Jiaozuo Henan BOT 26 25,000 100% IB

Feb-10 Hebei Dacheng WWT Phase I Langfang Hebei BOT 25 15,000 99% IA

Mar-10 Anhui Ningguo WWT Phase I Ningguo Anhui BOT 30 40,000 100% IB

Sep-10 Weifang Yuhe WWT Weifang Shandong BOT 30 100,000 100% IB

Oct-10 Shangqiu WWT Phase II Shangqiu Henan BOT 30 100,000 100% IA

Oct-10 Anhui Chaohu Huashan WWT Phase I Chaohu Anhui BOT 30 10,000 77% IA

May-11 Gaomi Third WWT Phase I Gaomi Shandong BOT 25 25,000 102% IB

Jul-12 Feng County Economic Zone WWT Phase I Xuzhou Jiangsu BOT 29 20,000 95% IA

Jul-13 Shandong Yucheng No. 2 WWT Phase I Dezhou Shandong BOT 25 30,000 89% IA

Jan-14 Shangqiu Liangyuan Industrial WWT Shangqiu Henan BOT 25 20,000 IA

Jan-14 Shandong Rushan Residential WWT Phase II Rushan Shandong BOT 27 20,000 IA

Nov-05 Shandong Haiyang WWT Haiyang Shandong TOT 22 20,000 100% IB

Oct-06 Anhui Suzhou Chengnan WWT 1 Suzhou Anhui TOT 28 80,000 88% II

Nov-06 Jiaozuo City WWT Phase I Jiaozuo Henan TOT 26 100,000 100% II

May-07 Shangqiu WWT Phase I Shangqiu Henan TOT 30 80,000 100% IB

Sep-08 Shandong Guangrao WWT Phase I Dongying Shandong TOT 26 50,000 110% IB

Sep-08 Linying WWT Luohe Henan TOT 30 30,000 99% IB

Mar-11 Tianjin Ninghe WWT Phase I Tianjin Tianjin TOT 30 30,000 98% IB

Sep-11 Harbin Hejiagou Qunli WWT Phase I Harbin Heilongjiang TOT 30 150,000 98% IB

Sep-11 Gaomi City WWT Gaomi Shandong TOT 30 35,000 95% IB

Dec-11 Shandong Rushan Industrial WWT Phase I Rushan Shandong TOT 30 20,000 74% IB

Dec-11 Shandong Rushan Residential WWT Phase I Rushan Shandong TOT 30 20,000 74% IA

Nov-12 Wugang Zhulan WWT Wugang Henan TOT 30 20,000 97% IA

Oct-13 Anhui Suzhou Chengnan WWT 2 Suzhou Anhui TOT 25 80,000 50% IA

Feb-14 Hua Dian WWT Hua Dian Jilin TOT 30 30,000 IB

Total 1,460,000

Operation

commencement Project Name Phase Location Province Mode

Concession

period (no.

of years)

Daily

Capacity

(tpd)

Discharge

quality

2H14 Shandong Guangrao WWT Phase II Dongying Shandong BOT 21 25,000 IA

2H14 Hebi Baoshan Industrial WWT Phase I Hebi Henan BOT 30 15,000 IA

2H14 Hebi Baoshan Water Supply Hebi Henan BOT 30 31,300 SH3099

2H14 Shan County Industrial WWT Heze Shandong BOT 28 40,000 IA

2H14 Shandong Jining Industrial WWT Jining Shandong BOT 30 25,000 IA

2H14 Gaomi Third WWT Phase II Gaomi Shandong BOT 25 25,000 IA

2H14 Shandong Yucheng No.2 WWT Phase II Dezhou Shandong BOT 25 30,000 IA

2H14 Henan Jiyuan Yuchuan WWT Phase I Jiyuan Henan BOT 28 20,000 IA

2H14 Shandong Haiyang Xingcun WWT Haiyang Shandong BOT 30 20,000 IA

2H14 Weifang Binhai Shuicheng WWT Weifang Shandong BOT 30 10,000 IA

1H15 Feng County Industrial WWT Xuzhou Jiangsu BOT 25 2,000 IA

1H15 Shandong Wendeng WWT Wendeng Shandong BOT 30 25,000 1B

1H15 Jiaozuo City WWT Phase II Exp Phase II Jiaozuo Henan BOT 26 50,000 IA

2H15 Shandong Liangshan WWT Liangshan Shandong BOT 30 20,000 IA

2H15 Harbin Hejiagou Qunli WWT Phase II Harbin Heilongjiang BOT 30 100,000 1B

2H14 Dongying Port North WWT Dongying Shandong TOT 30 50,000 IA

Total(excluding water supply project) 457,000



Figure 7 New WWT projects after listing (Nov 2014)


Figure 8 WWT project locations as of 1H14


Project Name Phase Location Province Mode

Concession

period (no. of

years)

Daily Capacity

(tpd) Discharge quality

Puyang Second WWT Puyang Henan BOT 30 50,000 1A

Yanggu County WWT Phase I Yanggu Shandong TOT 30 40,000 1A

Yanggu County WWT Phase II Yanggu Shandong BOT 30 40,000 1A

Xin County WWT Phase I Liaocheng Shandong TOT 30 20,000 1A

Xin County WWT Phase II Liaocheng Shandong TOT 30 20,000 1A

Xin County WWT Phase III Liaocheng Shandong BOT 30 30,000 1A

Liaocheng WWT Liaocheng Shandong BOT 30 30,000 1A

Jiaxiang BOT Second WWT Jining Shandong BOT 30 30,000 1A

Suihua WWT Phase I Suihua Heilongjiang TOT 30 50,000 1A

Suihua WWT Phase II Suihua Heilongjiang BOT 30 50,000 1A

Ninghe WWT Phase II Ninghe Tianjin BOT 28 30,000

Total 390,000



Strategically focus in provinces with extreme water shortage

According to a recently published report by World Bank, China constitutes 20% of the world’s

population but only contains 7% of its freshwater, indicating that water scarcity and quality

problems are inevitable in China. The gap between urban water demand and supply reached 6bn

cubic meters annually, with 420 cities having insufficient water supplies and 110 cities facing

severe water shortages. Some provinces in China are even more acute, such as Henan and

Shandong, with water resources per capita levels in these two provinces are only around 13% of

China’s average. As water resources of these areas are already scarce, we believe the central

government has a higher priority to treat wastewater in these regions compare to other water

abundant provinces.

Kangda is strategically positioned to benefit in this regards, since as of 1H14, 67% of Kangda’s

water treatment capacity came from Henan and Shandong. Going forward, we believe the

company should be able to locate more good quality projects in these regions.

Figure 9 Water resources in 2012 – breakdown by provinces


bn m3 Total Water resources Above ground Underground Double count Water resources per capita (m3/year) Shortage

Shanghai 33.9 27.4 9.7 3.2 143.4

Ningxia 10.8 8.5 21.6 19.2 168.0

Beijing 39.5 18.0 26.5 4.9 193.2

Tianjin 32.9 26.5 7.6 1.2 238.0

Henan 265.5 172.7 161.8 68.9 282.6

Shandong 274.3 182.2 164.2 72.1 283.9

Shanxi 106.2 65.9 88.3 48.0 295.0

Hebei 235.5 117.8 164.8 47.1 324.2

Jiangsu 373.3 279.1 110.2 16.0 472.0

Gansu 267.0 259.0 139.1 131.1 1,038.4

Shaanxi 390.5 368.0 130.2 107.7 1,041.9

Anhui 701.0 640.6 159.3 99.0 1,172.6

Liaoning 547.3 492.4 147.4 92.5 1,247.8

Hubei 813.9 783.8 262.8 232.7 1,411.0

Chongqing 476.9 476.9 97.8 97.8 1,626.5

Jilin 460.5 387.3 147.0 73.8 1,674.5

Guangdong 2,026.5 2,017.5 485.8 476.7 1,921.0

Inner Mongolia 510.3 349.2 258.4 97.4 2,052.7

Heilongjiang 841.4 695.7 289.8 144.1 2,194.6

Zhejiang 1,446.7 1,429.1 273.5 255.8 2,644.8

Guizhou 974.0 974.0 253.3 253.3 2,801.8

Hunan 1,988.9 1,981.3 417.9 410.3 3,005.7

Sichuan 2,892.4 2,891.2 614.9 613.8 3,587.2

Yunnan 1,689.8 1,689.8 583.2 583.2 3,637.7

Fujian 1,511.4 1,510.1 349.3 347.9 4,047.8

Xinjiang 900.6 851.6 557.0 508.0 4,055.3

Hainan 364.3 360.2 92.6 88.5 4,130.8

Guangxi 2,087.4 2,086.4 467.6 466.6 4,476.0

Jiangxi 2,174.4 2,155.8 462.3 443.7 4,836.0

Qinghai 895.2 879.2 400.5 384.5 15,687.2

Tibet 4,196.4 4,196.4 951.9 951.9 137,378.1

China 29,528.8 28,373.3 8,296.4 7,140.9 2,186.2

Extremely

Shortage

Shortage

No Shortage

As of 1H14, 67% of Kangda’s water treatment capacity was located in provinces with extreme water shortage.



Higher discharge standards = Higher WWT tariff

Pricing of water tariff are pre-determined at the time when Kangda and counterparties (local

government) enter into project agreement, and the actual tariff amount varies between different

projects and based on multiple factors, such as project construction and operation costs, water

discharge quality, local economies, pricing of comparable projects, competitor’s pricing strategy,

etc. During FY11-13, the average WWT tariff for Kangda’s BOT and TOT projects are stated below:

Figure 10 Kangda - Average water tariff (FY11-13)


Going forward, we see an opportunity for the company to enjoy increasing WWT tariffs with more

existing projects being upgraded from 1B standard to 1A standard, as the government is pushing

stricter policies to encourage higher discharge standards of existing and new WWT projects.

According to the government’s Urban Wastewater Treatment and Recycling Facilities Construction

Plan in the 12th Five-year Plan, 26.1 mtpd of WWT plants will be upgraded for higher discharge

standards during 2011-2015. The upcoming potential Rmb 2 trillion water action plan could also

provide details on the scale and timeline of improving water discharge quality of WWT projects to

levels comparable to developed countries.

As of 1H14, among the company’s 33 WWT projects in operation (totaled 1.46 mtpd), 19 projects

with a capacity of 970 ktpd have a discharge standards of 1B or lower, of which only 5 of them

with a capacity of 275 ktpd are undergoing upgrades. Therefore, we see the remaining 14 non-1A

projects with a capacity of 695 ktpd have upgrade potential in the future, and could resulting in

further increase in Kangda’s average water tariff.

Besides existing WWT plants upgrades, we believe Kangda’s future TOT or M&A strategy would be

focusing in acquiring WWT facilities with 1A or higher standards, and would also effectively

pushing up the average water tariff in the long run. In our earnings model, we conservatively

forecast a WWT tariff growth of 1% in 2014 and an annual growth of 2% in the subsequent two

years. Tariff hike will translate into higher revenue, gross margin and thus higher net profit.

Figure 11 Operating capacity by discharge standard (as of 30 May 2014)

Figure 12 Tariff per mtpd

Source: Company data, Guosen Securities(HK) Research Source: Company data, Guosen Securities(HK) Research

(Rmb/ton) FY11 FY12 FY13

Henan 0.84 0.89 0.89

Shandong 1.22 1.21 1.19

Anhui 0.8 0.8 0.91

Jiangsu 0.98 1.07 1.1

Others 1.18 1.18 1.15

Average 1.03 1.05 1.04

Grade 1A33%

Grade 1B54%

Grade 212%

Beijing Grade 3

1%

1.01

1.02

1.03

1.04

1.05

1.06

1.07

1.08

1.09

1.1

2013 2014E 2015E 2016E

RMB

We expect average WWT tariff to increase amid favorable government policies to upgrade water discharge standards



Financing costs should go down post IPO

Kangda is required to make substantial investments during the initial phases of BOT projects, and

would not receive any payments from its customers until the project commence operation

(typically 12-18 months after construction starts). Moreover, the company maintains an active

M&A strategy of pursuing selective acquisitions of TOT projects in order to complement its growth

and strengthen its market position rapidly, which also requires large amount of capital. Therefore,

Kangda has every incentive to lower its financing cost, and we believe that post IPO in July,

Kangda’s financing cost would be lowered from 7.0% in FY13 to 6.6% in FY16 due to two reasons as

stated below.

Figure 13 Effective finance cost (FY13-16E)


Easier access to bank loans with lower interest rates due to the company ’s lower net

debt-to-equity ratio

In its IPO in July, Kangda raised net proceeds of approximately HKD1.2 bn. Thus, we expect its

net debt-to-equity ratio to decline from 162% in FY13 to 32% in FY14. As a result, we believe

banks and other financial institutions would be more willing to provide lower cost funding to

Kangda going forward.

Figure 14 Net debt-to-equity ratio (FY12-16E)


More funding channels after its listing

As a listed company, Kangda should be able to access to more funding channels, such as

overseas or domestic bond issues, bank loans with more favorable terms or further equity

raising, effectively lowering Kangda’s average interest expenses.

6.4%

6.5%

6.6%

6.7%

6.8%

6.9%

7.0%

7.1%

2013 2014E 2015E 2016E

148%

173%

37%47%

50%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

2012 2013 2014e 2015e 2016e

Lower financing cost comes from easier access to lower borrowing rates as well as more funding channels.



Higher exposure to small/medium size cities means bigger growth opportunity

According to the 12th Five-Year Plan for wastewater treatment, the target for wastewater

treatment rate in cities is 85.0%, up by 2.7 ppts compared with the WWT rate of 82.3% in 2010. On

the other hand, the WWT rate in counties is expected to increase from 60.1% in 2010 to 70.0% in

2015, a 9.9 ppts increase. Moreover, according to consulting firm Frost & Sullivan, WWT capacity

of counties would expand by 49.3% from 20.4 mn cm/day in 2010 to 30.5 mn cm/day in 2015,

much higher than the expected 25% growth rate in cities during the same period. We therefore

see a bigger growth potential in smaller cities.

Figure 15 WWT rate targets in the 12th Five-Year Plan

Figure 16 WWT capacity targets in 2010 and 2015

Source: State Council, Guosen Securities(HK) Research Source: Frost & Sullivan, Guosen Securities(HK) Research

Kangda’s WWT projects are mainly located in Tier-3 and Tier-4 cities. According to city tier

ranking defined by CBNweekly, As of Nov 2014, around 80% of its total capacity is located in

Tier-3 cities or below. We believe Kangda’s strategy to focus on smaller cities is beneficial in the

long run, as the company could find more potential WWT projects for further growth in these

regions.

Figure 17 Total No. of WWT projects by city tier (as of 30 Nov 2014)

Figure 18 Total WWT capacity by city tier (as of 30 Nov 2014)

Source: CBNweekly, company, Guosen Securities(HK) Research Source: CBNweekly, company, Guosen Securities(HK) Research

82.3%85.0%

60.1%

70.0%

50%

55%

60%

65%

70%

75%

80%

85%

90%

2010 2015E

Cities Counties

104.36130.44

20.4

30.46

9.09

9.55

0

20

40

60

80

100

120

140

160

180

2010 2015E

Cities Counties Towns

mn cubic meters pd

Tier 1 (3), 5.1%

Tier 2 (9), 15.3%

Tier 3 (10), 16.9%

Tier 4 (6), 10.2%

Below Tier 4 (31), 52.5%

Tier 1 (75 ktpd), 3.3%

Tier 2 (462 ktpd), 20.0%

Tier 3 (295 ktpd), 12.8%

Tier 4 (335 ktpd), 14.5%

Below Tier 4 (1140 ktpd),

49.4%

Around 80% of Kangda’s capacity is located in Tier-3 cities or below, which we believe should find higher growth compare to bigger cities.



Focus on BOT and TOT project models provides higher recurring revenue

Kangda has higher recurring revenue than its non-SOE peers such as Sound Global (SGL) (967.HK,

BUY, TP:$10.1). A large part of Kangda’s revenue (FY14: 88%) comes from service concession

arrangements (including BOT and TOT), which includes two revenue parts: 1. Construction –

revenue derived from construction of new BOT projects or project upgrades, and 2. Operation –

revenue derived from the operation of WWT/water supply plants. A plant typically has a long

concession period which ranges from 25 to 30 years, and during the period, it will continuously

generate stable cash flow (since there is a guaranteed minimum treatment volume for its tariff

payments), most of which translates into operation revenue.

In contrast, most of SGL’s revenue is derived from EPC (Engineering, Procurement and

Construction), which generates “one-off” revenue for each project. In FY13, revenue from EPC

accounted for 91.8% of SGL. Only 6.1% of its revenue came from operation and maintenance (the

“recurring revenue”), compare to Kangda’s recurring revenue of around 24.5% in FY13.

Putting aside other factors such as the length of listing and geographical locations, we believe

Kangda deserves a higher valuation than SGL as Kangda participates less in EPC or BT business in

the WWT segment and mostly focus in the investment part (BOT/TOT) of the industry that

generates recurring income.

Figure 19 Kangda's revenue breakdown in FY14E (Also revisit the revenue breakdown)

Figure 20 SGL’s revenue breakdown in FY14E


Figure 21 Percentage of operation revenue in total revenue (FY11-16E)


Service concession

arrangements - Contruction,

47.7%

Service concession

arrangements - Operation,

26.7%

Service concession

arrangements - Financial income,

13.6%

Others, 12.0%

Revenue from EPC,

89.2%

Sales of equipments,

1.9%O&M, 8.9%

2.6% 3.6%6.1%

8.9%

15.0% 15.3%

35.6%

31.6%

24.5%26.8% 26.0% 26.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2011 2012 2013 2014E 2015E 2016E

SGL Kangda

Focus in recurring revenue (BOT/TOT) rather than one-off revenue (EPC/BT)



Sludge treatment – A potential revenue driver in mid to long term

Currently, less than 30% of WWT plants in cities in China have proper sludge treatment facilities.

This creates huge growth opportunities for sludge treatment in general. China planned to add

5.18mn tons/yr of new capacity during the 12th FYP, and by the end of 2015, total sludge

treatment capacity should have grown from 2.8mn tons/yr to around 8mn tons/yr. However, it is

estimated by the end of 2015, the total output of sludge in China would exceed 46mn tons/yr from

23mn tons in 2010. Even China can achieve the 8mn tons/yr capacity in 2015, it still means only

less than 20% of sludge could be properly treated by that time. Compared to other developed

countries with sludge utilization rate ranging from 40% to 85%, sludge utilization rate in China is

far below average, which also indicates significant growth potential in this area.

Figure 22 Global - Sludge utilization rate and production, from ADB 2012 report

Source: East Asia Department ADB 2012 report, Guosen Securities(HK) Research

There are only around 50 companies in China investing and operating in the sludge treatment

market. We believe listed WWT players could benefit from expanding into sludge treatment to

bring synergies with their current WWT business. Although Kangda currently does not have sludge

treatment facilities and generally outsource to third parties, it is part of the company’s mid to long

term plan to provide sludge treatment at WWT facilities, in locations where sludge treatment is

encouraged by favorable local governmental policies. Kangda is already in the process of

conducting research on the qualification requirements and consulting with external experts as its

first steps on treating sludge, aiming to capitalise on this new opportunity and making this

segment into another growth driver.

Should Kangda be able to break into the sludge treatment business, we believe this could not only

help adding value to its existing WWT business, but also diversifying its revenue stream, as well as

capitalising on its project management experience and technical knowhow in the merged (WWT +

sludge) business model.

Figure 23 A typical WWT process for Kangda

Source: Company Data, Guosen Securities(HK) Research

Countries Utilization rate (%) Production (mn tons/yr) Main Sludge Application

UK 85 1.05 Land application, energy recovery

Australia 80 0.36 Land application

South Africa 80 1 Land application

India 80 N/A Land application

Japan 74 2.2 Energy recovery, construction products

Germany 60 2.3 Land application, energy recovery

United States 55 17.8 Land application

EU 40 9 Land application

China <20 23 N/A

South Korea 6 1.9 Energy recovery, construction products

Singapore 0 0.12 N/A

Hong Kong 0 0.3 N/A

Compared to other developed countries with sludge utilization rate ranging from 40% to 85%, sludge utilization rate in China is far below average.



Investments risks

Capacity addition may be slower than expected

A significant proportion of the company’s revenue comes from the construction and operation of

WWT projects. For FY11, FY12 and FY13, its revenue from the construction and operation of WWT

projects under BOT and TOT models accounted for about 74.2%, 70.5% and 76.9% of total revenue

respectively. Moreover, the company has no plan to enter new BT projects in the future. Therefore,

the company’s growth in the following years depends on its ability to gain and execute new WWT

projects, primarily BOT and TOT projects. If the company’s new capacity is lower than expected,

this would negatively affect Kangda’s construction and operation revenue.

Delays in BOT projects

BOT projects involve various kinds of construction risks. The contractors may not be able to

complete the construction and installation work of the projects on time. Shortages of equipment,

materials or labor would also cause delays in the completion of construction. Moreover, adverse

weather or natural disasters would surely affect the completion of projects. As a result, WWT

projects under the BOT models may not be completed on time, or if completed, their operations

may not commence as anticipated. Although any delays due to the act of God should not incur any

penalty for the company, but as construction revenue is recognized subject to the percentage of

completion, delays due to any reason might result in less than expected revenue and thus earnings

in these years.

Potential financing risks

As the company’s bank loans are principally denominated in RMB, the interest rates on its loans

are primarily affected by the benchmark interest rates set by PBOC. If PBOC raises benchmark

interest rates unexpectedly or the company cannot negotiate lower loan rates with banks as

expected after listing, financing costs may be higher than expected. Moreover, should the

company has more aggressive capex plans, addition equity raising is possible in the future.

Slower-than-expected tariff hike

Although the service concession agreements usually contain provisions specifying tariff adjustment

conditions such as quality upgrade of treated wastewater, tariff increase is still subject to consent

from the local government, which generally involves time-consuming approval process. Therefore,

tariff hike may be slower than our estimate, which would translate into slower-than-expected

operation revenue growth.



Financial assumptions

Revenue forecast

Figure 24 Kangda - Revenue forecast (FY13-16E)


Revenue from construction of service concession arrangements would still be the major

contributor of total revenue in FY14-16, and its proportion is expected to rise from 47.7% in FY14

to 57.6% in FY16, as we believe Kangda would gain more BOT projects with the equity raising from

its recent IPO. Operation revenue from service concession arrangements, as a percentage of total

revenue, should maintain at above 26% with increasing operating capacity as well as rising average

water tariff. The proportion of financial income for service concession arrangements would be

rather stable due to expanding financial receivables but declining effective interest rates. We

think contribution from BT arrangements would significantly decline in the future as we believe

the company would focus on BOT/TOT rather than BT going forward. For the others revenue

segment, it mainly comprises of management services business which provides O&M services,

construction services related to other construction service projects and operation services for

other third parties. We expect this segment to contribute insignificantly in the future as

management concentrates more on recurring revenue of the WWT industry chain. As a result, we

forecast total revenue to grow 24.9% in 2014 to Rmb1,674mn, 26.7% in 2015 to Rmb2,120mn, and

22.4% in 2016 to Rmb2,596mn.

RMB mn 2013 2014E 2015E 2016E

Service concession arrangements

Construction

Revenue 532 799 1,220 1,496

YoY 102.0% 50.2% 52.8% 22.6%

% of total revenue 39.7% 47.7% 57.5% 57.6%

Operation

Capacity in operation (mtpd) 1.4 2.0 2.5 3.3

Effective utilisation rate 85% 80% 75%

Tariff (RMB/mtpd) 1.04 1.04 1.07 1.09

Revenue 326 447 551 694

YoY 3.8% 37.2% 23.3% 26.0%

% of total revenue 24.3% 26.7% 26.0% 26.7%

Financial income

Financial receivables 3,286 4,052 5,028 5,985

Revenue 173 227 279 336

YoY 36.1% 31.4% 22.7% 20.3%

% of total revenue 12.9% 13.6% 13.2% 12.9%

BT arrangements

Revenue 302 5 0 0

% of total revenue 22.5% 0.3% 0.0% 0.0%

Others

Revenue 7 196 70 70

% of total revenue 0.6% 11.7% 3.3% 2.7%

Overall

Revenue 1,340 1,674 2,120 2,596

YoY 34.1% 24.9% 26.7% 22.4%



EBIT margin forecast

In FY13, EBIT margin declined by 3.5 ppts to 33.2%, as construction revenue, which has lower

margin, contributed more to the total revenue. We estimate Kangda’s EBIT margin would be

relatively stable at 33.5%, 32.7% and 32.6% in FY14, FY15 and FY16 respectively as revenue

contribution from construction services would remain at high levels.

Figure 25 Kangda - EBIT and EBIT margin (FY11-FY16E)


Interest expense forecast

We believe Kangda’s interest expense would increase from Rmb168mn in FY13 to Rmb191mn,

Rmb203mn and Rmb221mn in FY14, FY15 and FY16 respectively, on the back of rising loans to

fund capital expenditure of new projects. However, the interest rate is expected to decline from

7.0% in FY13 to 6.7% in FY15 and 6.6% in FY16, as we expect it will be easier for the company to

get funding with lower interest rates after its IPO listing.

Figure 26 Interest expense forecast (FY12-FY16E)


38.8%

36.7%

33.2% 33.5% 32.7%

32.6%

29.0%

30.0%

31.0%

32.0%

33.0%

34.0%

35.0%

36.0%

37.0%

38.0%

39.0%

40.0%

0

100

200

300

400

500

600

700

800

900

FY11 FY12 FY13 FY14E FY15E FY16E

RMB mn

EBIT EBIT margin

6.9%

7.0% 7.0%

6.7% 6.6%

6.0%

6.2%

6.4%

6.6%

6.8%

7.0%

7.2%

0

50

100

150

200

250

FY12 FY13 FY14E FY15E FY16E

RMB mn

Interest expense Interest rate



Net profit forecast

On the back of strong revenue growth from construction and operation of service concession

arrangements, relatively stable EBIT margins and modest growth in interest expenses, we estimate

net profit will grow 31.7% in FY14 to Rmb305mn, 32.6% in FY15 to Rmb404mn and 24.7% in FY16

to Rmb504mn. Accordingly, net margin will expand from 17.3% in FY13 to 18.2%, 19.2% and 19.4%

in FY14, FY15 and FY16 respectively since we expect interest rates would be lower in the future.

Figure 27 Net profit forecast (FY11-FY16E)


Valuation

Initiate coverage with a BUY rating and a DCF-based TP of $4.2 on Kangda

Our target price is based on the DCF model. We believe DCF valuation is suitable for Kangda, given

their relatively stable cash flows and consistent growth rates. We also crosscheck our DCF-based

target price with PE multiples of other HK-listed WWT operators to determine our final rating of

the company.

Figure 28 Kangda – Main assumptions of our DCF model

Source: Guosen Securities(HK) Research

At our target price of $4.2, Kangda would trade at 17.2x 15PE, which is similar to the 15PE of SGL

should SGL reach our target price. We believe SGL is the closest peer among HK listed WWT

operators, given their non-SOE status and also similar operating capacity. We however believe

that Kangda could potentially trade at a higher valuation than SGL given that SGL still has a

considerable proportion of revenue coming from its non-recurring EPC segment, while most of

Kangda’s revenue are recurring by nature. At our target price, Kangda is still trading more

attractively than sector leaders such as BEW and CTE, with BEW and CTE’s current 15PE at 18.6x

and 19.2x respectively. Thus, we initiate coverage with a BUY rating and a $4.2 target price on

Kangda.

21.3%19.7%

17.3%18.2%

19.1% 19.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

100

200

300

400

500

600

FY11 FY12 FY13 FY14E FY15E FY16E

RMB mn

Net Profit NP margin

Avg cost of debt 6.6%

Tax shield 75.0%

Avg risk free rate 4.5%

Mkt risk premium 7.5%

Beta 1.00

Cost of equity 12.0%

Equity weighting 70.0%

Debt weighting 30.0%

WACC 9.9%

Terminal growth rate 4.0%

DCF-based Target Price 4.2

Our DCF based TP is $4.2, which offers 29% upside from the current level.



Figure 29 Peers Comparison Table (closing price as of 9 Dec 2014)

Source: Bloomberg, Guosen Securities(HK) Research

China Waste and Water Price

Mkt

Cap

(USD)

14PE 15PE 16PE 14PB 15PB 16PB 14DY 15DY 16DY 14ROE 15ROE 16ROE

* 6136 HK KANGDA INTERNATIONAL ENVIRON 3.26 869 18.3 13.6 10.6 2.1 1.8 1.5 0.5% 0.7% 0.7% 14.3 14.3 15.6

* 1363 HK CT ENVIRONMENTAL GROUP LTD 7.09 1,319 29.4 19.2 14.8 7.4 5.7 4.4 0.7% 1.0% 1.4% 25.2 29.6 29.6

* 371 HK BEIJING ENTERPRISES WATER GR 4.61 5,178 24.2 18.6 15.1 2.7 2.5 2.2 1.6% 2.0% 2.5% 11.3 13.4 14.8

* 967 HK SOUND GLOBAL LTD 7.27 1,376 15.1 12.3 9.9 2.3 1.7 1.4 0.7% 0.8% 1.0% 15.5 13.3 14.4

257 HK CHINA EVERBRIGHT INTL LTD 10.7 6,200 27.1 20.5 17.3 3.2 2.8 2.5 0.9% 1.2% 1.5% 12.5 14.9 15.8

1065 HK TIANJIN CAPITAL ENVIRON-H 4.93 1,796 18.7 18.3 16.9 1.4 1.3 1.2 1.7% 1.9% 2.5% 8.0 8.0 8.1

895 HK DONGJIANG ENVIRONMENTAL-H 25.2 1,680 24.7 15.3 11.8 2.7 2.3 2.0 1.1% 1.5% 2.0% 12.0 15.7 20.1

855 HK CHINA WATER AFFAIRS GROUP 3.62 670 19.1 17.7 N/A 1.4 1.3 N/A 1.9% 2.2% N/A 7.4 8.1 N/A

1330 HK DYNAGREEN ENVIRONMENTAL PR-H 4.35 586 22.7 14.6 10.9 1.6 1.5 1.3 0.5% 0.5% 0.8% 8.2 10.2 12.3

3989 HK CAPITAL ENVIRONMENT HOLDINGS 0.4 241 65.8 12.3 8.1 2.3 1.8 1.5 N/A N/A N/A 3.8 16.0 19.8

UENV SP UNITED ENVIROTECH LTD 1.6 1,165 31.9 24.9 20.4 3.8 3.2 N/A 0.3% 0.3% 0.3% 11.8 11.8 11.6

SIIC SP SIIC ENVIRONMENT HOLDINGS LT 0.14 989 22.0 17.2 13.7 1.6 1.4 1.3 0.0% 0.0% N/A 7.8 9.2 9.4

AVERAGE (*) based on Guosen Securities (HK) estimates 26.6 17.1 13.6 2.7 2.3 1.9 0.9% 1.1% 1.4% 11.5 13.7 15.6



Company profile

Kangda is a leading privately-owned company specializing in the investment and operation of

wastewater treatment facilities in China. The company provides customised and integrated

wastewater treatment solutions and services mainly through service concession arrangements

under BOT and TOT models. Its customers mainly consist of municipal, district or county level

governments in China or their designees. As one of the first privately-owned participants in the

wastewater treatment industry in China, the company’s history can be traced back to a limited

liability company established in 1996 and now it has accumulated over 18 years of industry

experience.

The company is the largest privately-owned wastewater investment and operation service

provider in China in terms of daily treatment capacity in operation as at 31 December 2013. By the

end of 1H14, Kangda engaged in a total of 48 wastewater treatment projects, including 33 BOT

projects and 15 TOT projects located in 27 cities in nine provinces within China. Their aggregate

WWT capacity amounted to 1.917 mtpd, with 1.460 mtpd of capacity in operation, and the

remaining 0.457 mtpd of capacity were pending or under construction. During 2H14, the company

further announced new WWT projects with a total capacity of 0.39 mtpd, brining up the total

WWT capacity to around 2.3 mtpd. In addition to WWT projects, the company also has one water

supply project in Henan with a daily capacity of around 31,300 tons.

Kangda mainly focuses on the business of service concession arrangements (including BOT and

TOT models). In 1H14, revenue from service concession arrangements accounted for 90.7% of total

revenue, up from 73.6% in 2013. Within the service concession arrangements segment in 1H14,

the construction business’s GM was 19.9%, while operation business’s GM was 50.0%.

Figure 30 Kangda- Revenue breakdown in 1H14

Figure 31 Kangda – Gross profit margin breakdown of service concession arrangement business


Figure 32 Kangda - Shareholder structure


Service concession

arrangements - Contruction,

55.8%

Service concession

arrangements - Operation,

22.5%

Service concession

arrangements - Finance

income, 12.4%

BT arrangements,

0.3%

Others, 9.0%

19.6%

48.1%

19.9%

50.0%

1H2013 1H2014

Service concession arrangements - Construction

Service concession arrangements - Operation

Kangda is a leading privately-owned company for investment and operation of wastewater treatment facilities in China with over 18 years of operating history.



Figure 33 Kangda– Profile of Key Management

Source: Guosen Securities(HK) Research

Name Title Profile

Mr. Zhao

Juanxian

Executive Director,

chairman of the Board and

the chairman of the

nomination committee

aged 61, founder of the Group. He is the executive Director, and the chairman of the Board of the Company,

responsible for strategic development and planning, overall operational management, market development

and major decision making. He was appointed as a Director on 22 August 2011. He has acted as a director and

the chief executive officer of Kangda Group since the beginning of the establishment of Kangda Group and

ceased to be the chief executive officer of Kangda Group from September 2012. He has also served as a director

of Jilin Kangda and Hebi Kangda since September 2011 and February 2012, respectively. Mr. Zhao Juanxian has

about 25 years of experience in the environmental protection and wastewater treatment industry.

Mr. Zhang

Weizhong

Executive Director, the

chief executive officer and

member of the nomination

committee

aged 62, appointed as the Director on 15 March 2013. He was appointed as the president of Kangda Group on 25

September 2012. He has over 30 years of experience of management. As at 13 June 2014, Mr. Zhang still held

directorships in China Huandao (Group) Limited Company, Sea Master Finance Limited and Cheer Harvest

Industries Limited. In addition, he was also the general manager and chairman of Huandao South Development

Limited Company, as well as the general manager and legal representative of Haikou Haidian Island Real Estate

Development Limited Company.

Ms. Liu ZhiweiExecutive Director, vice

president

aged 49, was appointed as a Director on 15 May 2012. She joined the Group in 1996 and has served various

positions, including chief accountant, chief officer of asset management department, deputy chief financial

officer, audit director, executive director and vice president, and is currently responsible for the investor

relationship and risk control matters of the Group.

Mr. Gu Weiping

Executive Director, vice

president and member of

the remuneration

committee

aged 59, was appointed as a Director on 15 May 2012. He joined the Group in 1996 and has served various

positions, including general manager assistant, vice president and deputy chairman. He is currently responsible

for the management of administrative and human resource affairs of the Group. He has also served as a director

of Hebi Kangda and Dongying Kangda since February 2012 and November 2012, respectively.

Mr. Wang LitongExecutive Director and vice

president

aged 45, was appointed as a Director on 30 October 2013. He was appointed as the vice president of Kangda

Group in charge of marketing department, technology management department and water projects

management department on 28 July 2011. He is currently in charge of the marketing and business development

of our Group. He has also served as a director of Jilin Kangda and Hebi Kangda since September 2011 and

February 2012, respectively, and a director of Nanchang Qingshanhu Sewage since its 20% equity interest was

indirectly acquired by Kangda Group in May 2013.

Mr. Zhuang Ping Non-executive Director

aged 50, joined the Group on 30 October 2013 when he was appointed as a non-executive Director. Mr. Zhuang

became a grade II wastewater treatment plant operator granted by the Water Pollution Control System

Operations Certification Commission of the State of North Carolina, the US, in February 1996, a professional

engineer in North Carolina, the US, in February 1997, a professional engineer in Florida, the US, in October 1997.

Mr. Tsui Yiu Wa

Alec

Independent non-

executive Director, the

chairman of the audit

committee and member of

the nomination committee

aged 64, joined the Group on 30 October 2013 when he was appointed as an independent non-executive

Director. Mr. Tsui has over 20 years of experience in finance and administration, corporate and strategic

planning, information technology and human resources management. Mr. Tsui Yiu Wa Alec served various

positions, including the chief executive of the Stock Exchange from February 1997 to August 2000, the chief

operating officer of Hong Kong Exchanges and Clearing Limited) from March 2000 to August 2000 and the

chairman of Hong Kong Securities Institute from November 1998 to December 2004.

Mr. Yuan Shaoli

Independent non-

executive Director, the

chairman of the

remuneration committee,

member of the audit

committee and the

nomination committee


Director. Mr. Yuan completed a programme provided by the department of finance, international trade and

economics at Graduate School of Chinese Academy of Social Sciences located in Beijing with his major in

international trade, in September 1998. Mr. Yuan had served as the deputy division chief, the division chief and

a director of one of the central state ministries of the PRC for several years.

Mr. Song Qianwu

Independent non-

executive Director,

member of the audit

committee, remuneration

committee and nomination

committee


Director. Mr. Song graduated from Tsinghua University located in Beijing, with a bachelor’s degree in engineering

physics in January 1978, a master’s degree in environmental engineering in July 1985 and a doctorate degree in

engineering in April 1991. Mr. Song has about 20 years of experience in environmental engineering.

Mr. Li Gang CFO

aged 37, chief financial officer of the Group primarily responsible for overseeing and coordinating the operation

of our Group’s finance department as well as managing the financial, accounting and taxation functions and

financing activities of our Group. He joined the Group in July 2012 and was appointed as the chief financial

officer of our Company on 26 September 2012. He obtained a bachelor’s degree in accounting from the Beijing

Institute of Light Industry (now Beijing Technology and Business University) located in Beijing in July 1998.

Mr. Liang ZupingHead of the auditing

department

aged 59, was appointed as the head of the auditing department of Kangda Group on 28 July 2011, mainly

responsible for the internal auditing and risk control matters of our Group. He joined the Group in July 1996 and

has served various positions, including finance manager, deputy head of finance department, head and vice

manager of finance department of construction management centre, manager of audit and supervision

department, chief of tender committee, head of company supervision department and head of the auditing

department.



Summary financial statements

Profit & Loss (RMBmn) 2012A 2013A 2014E 2015E 2016E Financial Ratios 2012A 2013A 2014E 2015E 2016E

Revenue from Waste 0 0 0 0 0 Revenue growth (%) 36.0 34.1 24.9 26.7 22.4

Revenue from Water 999 1,340 1,674 2,120 2,596 Operating profit growth (%) 28.8 21.4 26.0 23.4 22.1

Other Revenue 0 0 0 0 0 Reported profit growth (%) 25.3 17.8 31.7 32.6 24.7

Revenue 999 1,340 1,674 2,120 2,596 Underlying profit growth (%) 25.3 17.8 31.7 32.6 24.7

Cost of sales (558) (826) (986) (1,291) (1,584) Underlying EPS growth (%) 25.3 17.8 31.7 32.6 24.7

Gross profit 442 513 688 829 1,012 Dividend growth (%) 0.0 0.0 0.0 0.0 0.0

Other income/(expense) 6 45 18 30 32 Gross profit margin (%) 44.2 38.3 41.1 39.1 39.0

Operating expenses (81) (113) (145) (166) (199) Operating profit margin (%) 36.7 33.2 33.5 32.7 32.6

Operating profit 367 445 561 693 846 Underlying profit margin (%) 19.7 17.3 18.2 19.1 19.4

Other non operating inc/(exp) 0 0 0 0 0 Net debt/equity (%) 143 162 32.3 42.8 47.0

Finance income 0 0 0 0 0 Net debt/total assets (%) 40.9 46.1 15.1 19.9 22.1

Finance expenses (134) (168) (191) (203) (221) Current ratio (%) 156 144 251 243 231

Associates & JCE 0 4 0 0 0 Dividend payout (%) 0.0 0.0 0.0 0.0 0.0

Profit before taxation 233 282 370 490 625 Interest cover (x) 2.7 2.7 2.9 3.4 3.8

Taxation (36) (49) (63) (83) (119) Dividend cover (x)

Non-controlling interests (1) (1) (2) (2) (2) Dupont Analysis 2012A 2013A 2014E 2015E 2016E

Net profit 197 232 305 404 504 Tax burden (%) 84.3 82.2 82.5 82.6 80.7

Other Adjustments on UP 0 0 0 0 0 Interest burden (%) 63.5 63.2 65.9 70.7 73.9

Underlying Profit 197 232 305 404 504 Operating profit margin (%) 36.7 33.2 33.5 32.7 32.6

Source: Guosen Research estimates Asset turnover (x) 0.3 0.3 0.3 0.3 0.3

Leverage ratio (x) 3.8 3.5 2.5 2.1 2.1

ROA (%) 5.8 5.4 5.2 5.5 6.1

ROE (%) 21.9 18.9 13.3 11.8 13.0

Source: Guosen Research estimates

Balance Sheet (RMBmn) 2012A 2013A 2014E 2015E 2016E Cashflow (RMBmn) 2012A 2013A 2014E 2015E 2016E

Fixed assets 73 80 86 91 96 Operating profit 367 445 561 693 846

Associates & JCE 0 50 50 50 50 Depreciation & amortization 4 4 4 5 5

Others 1,904 2,590 2,998 3,408 3,995 Interest income 0 0 0 0 0

Non-current assets 1,977 2,721 3,134 3,550 4,141 Change in working capital (742) (627) (768) (916) (893)

Inventories 5 3 4 4 5 Tax paid (15) (16) (58) (80) (113)

Debtors & prepayments 908 1,024 1,404 2,037 2,480 Other operating cashflow 4 (13) 0 0 0

Bank deposits & cash 544 276 1,673 1,476 1,407 Operating activities (382) (206) (261) (300) (156)

Others 443 691 718 747 778 Purchase of non-current assets (Capex) (9) (12) (10) (10) (10)

Current assets 1,900 1,993 3,799 4,265 4,669 Free cash flow (391) (218) (271) (310) (166)

Bank & other borrowings 768 785 864 950 1,045 Disposal of non-current assets 0 0 0 0 0

Trade & payables 408 537 586 742 909 Associates & JCE (net) (37) (132) 0 0 0

Taxation 6 5 9 12 18 Interest received 0 0 0 0 0

Others 40 53 53 53 53 Dividends received 0 3 0 0 0

Current liabilities 1,222 1,381 1,513 1,758 2,025 Other investing cashflow 117 (83) 0 0 0

Bank & other borrowings 1,416 1,802 1,994 2,223 2,446 Investing activities 71 (225) (10) (10) (10)

Others 123 178 178 178 178 New loans raised 1,541 1,587 271 315 318

Non-current liabilities 1,539 1,980 2,172 2,401 2,624 Repayment of loans (1,026) (1,260) 0 0 0

Net assets 1,116 1,353 3,249 3,655 4,161 Dividends paid 0 0 0 0 0

Share capital 0 0 1,589 1,589 1,589 Other financing cashflow 97 (163) 1,398 (203) (221)

Premium & reserves 1,109 1,340 1,645 2,050 2,554 Financing activities 612 165 1,668 113 98

Shareholders' funds 1,109 1,340 3,234 3,639 4,143 Inc/(dec) in cash 300 (266) 1,397 (197) (69)

Non-controlling interests 7 12 14 16 18 Cash at beginning of year 246 544 276 1,673 1,476

Total equity 1,116 1,353 3,249 3,655 4,161 Foreign exchange effect (2) (3) 0 0 0

Source: Guosen Research estimates Cash at end of year 544 276 1,673 1,476 1,407

Source: Guosen Research estimates



Information Disclosures

Stock ratings, sector ratings and related definitions

Stock Ratings:

Buy: A return potential of 10 % or more relative to overall market within 6 – 12 months.

Neutral: A return potential ranging from -10% to 10% relative to overall market within 6 – 12 months.

Sell: A negative return of 10% or more relative to overall market within 6 –12 months.

Sector Ratings:

Overweight: The sector will outperform the overall market by 10% or higher within 6 –12 months.

Neutral: The sector performance will range from -10% to 10% relative to overall market within 6 –12 months.

Underweight: The sector will underperform the overall market by 10% or lower within 6 – 12 months.

Interest disclosure statement

The analyst is licensed by the Hong Kong Securities and Futures Commission. Neither the analyst nor his/her associates serves as an

officer of the listed companies covered in this report and has no financial interests in the companies.

Guosen Securities (HK) Brokerage Co., Ltd. and its associated companies (collectively “Guosen Securities (HK)”) has no disclosable

financial interests (including securities holding) or make a market in the securities in respect of the listed companies. Guo sen

Securities (HK) has no investment banking relationship within the past 12 months, to the listed companies. Guosen Securities (HK)

has no individual employed by the listed companies.

Disclaimers

The prices of securities may fluctuate up or down. It may become valueless. It is as likely that losses will be incurred rather than

profit made as a result of buying and selling securities.

The content of this report does not represent a recommendation of Guosen Securities (HK) and does not constitute any

buying/selling or dealing agreement in relation to the securities mentioned. Guosen Securities (HK) may be seeking or will seek

investment banking or other business (such as placing agent, lead manager, sponsor, underwriter or proprietary trading in suc h

securities) with the listed companies. Individuals of Guosen Securities (HK) may have personal investment interests in the listed

companies.

This report is based on information available to the public that we consider reliable, however, the authenticity, accuracy or

completeness of such information is not guaranteed by Guosen Securities (HK). This report does not take into account the particular

investment objectives, financial situation or needs of individual clients and does not constitute a personal investment

recommendation to anyone. Clients are wholly responsible for any investment decision based on this report. Clients are advised to

consider whether any advice or recommendation contained in this report is suitable for their particular circumstances. This r eport is

not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned.

This report is for distribution only to clients of Guosen Securities (HK). Without Guosen Securities (HK)’s written authoriza tion, any

form of quotation, reproduction or transmission to third parties is prohibited, or may be subject to legal action. Such information

and opinions contained therein are subject to change and may be amended without any notification. This report is not directed at,

or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction w here such

distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject G uosen

Securities (HK) and its group companies to any registration or licensing requirement within such jurisdiction.



信息披露

公司评级、行业评级及相关定义

公司评级

买入：我们预计未来 6-12 个月内，个股相对大盘涨幅在 10%以上；

中性：我们预计未来 6-12 个月内，个股相对大盘涨幅介于-10%与 10%之间；

减持：我们预计未来 6-12 个月内，个股相对大盘跌幅大于 10%。

行业评级

超配：我们预计未来 6-12 个月内，行业整体回报高于市场整体水平 10%以上；

中性：我们预计未来 6-12 个月内，行业整体回报介于市场整体水平-10%与 10%之间；

低配：我们预计未来 6-12 个月内，行业整体回报低于市场整体水平 10%以上。

利益披露声明

报告作者为香港证监会持牌人士，分析员本人或其有联系者并未担任本研究报告所评论的上市法团高级管理人员，也未持有其任何财务权益。

本报告中，国信证券（香港）经纪有限公司及其所属关联机构（合称国信证券（香港））并无持有该公司须作出披露的财务权益(包括持股)，在过去 12 个月内与该公司并无投资银行关系，亦无进行该公司有关股份的庄家活动。本公司员工均非该上市公司的雇员。

免责条款

证券价格有时可能非常波动。证券价格可升可跌，甚至变成毫无价值。买卖证券未必一定能够赚取利润，反而可能会招致损失。

本研究报告内容既不代表国信证券（香港）的推荐意见，也并不构成所涉及的个别股票的买卖或交易要约。国信证券（香港）或其集团公司有可能会与本报告涉及的公司洽谈投资银行业务或其它业务（例如配售代理、牵头经办人、保荐人、包销商或从事自营投资于该股票）。国信证券（香港）不排除其员工有个人投资于本报告内所提及的上市法团。

报告中的资料均来自公开信息，我们力求准确可靠，但对这些信息的正确性、公正性及完整性不做任何保证。本报告没有考虑到个别客户特殊的投资目标、财务状况或需要，并不构成个人投资建议，客户据此投资，责任自负。客户在阅读本研究报告时应考虑报告中的任何意见或建议是否符合其个人特定状况。本报告并不存在招揽或邀约购买或出售任何证券的企图。

本报告仅向特定客户传送，未经国信证券香港书面授权许可，任何人不得引用、转载以及向第三方传播，否则可能将承担法律责任。研究报告所载的资料及意见，如有任何更改，本司将不作另行通知。在一些管辖区域内，针对或意图向该等区域内的市民、居民、个人或实体发布、公布、供其使用或提供获取渠道的行为会违反该区域内所适用的法律或规例或令国信证券（香港）受制于任何注册或领牌规定，则本研究报告不适用于该等管辖区域内的市民、居民或身处该范围内的任何人或实体。

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