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Beijing Enterprises Water:Downgrade to Neutral—growth could slow in 2016E

研究机构:瑞银证券 研究员:Wei Yu,Yingzhen Xu 发布时间:2015-01-30

New growth opportunities could be limited under the 13th Five-Year Plan (FYP)

We downgrade Beijing Enterprises Water (BEWG) from Buy to Neutral as we believe industry trends are shifting from favourable to less attractive. With treatment ratios as high as around 90% in the cities, new capacities under the 13th FYP will likely shrink.However, local governments are leaving more projects to the private sector due to fiscal pressure. We think industry investments will likely surprise on the upside in 2015 (when the 12th FYP will end), but could disappoint in 2016 (with the start of the 13th FYP).

Growth drivers in 2016E could shift back to BT projects and acquisitions In 2013, BEWG’s growth drivers were build-transfer (BT) projects and acquisitions. It returned to winning build-operate-transfer (BOT) contracts in 2014. With shrinking new contracts in the market and the 12th FYP coming to an end, the company could return to BT projects or acquisitions for growth, which we view as less predictable and reliable.

Solid growth in 2014-15E; potential deceleration from 2016E onwards

We forecast 2014/2015/2016 net profit of HK$1,540m/HK$2,188m/HK$2,404m (previously HK$1,589m/HK$1,998m/HK$2,433m), representing 42%/42%/10% YoY growth. Our forecasts are -5%/+3%/-8% different from consensus. While BEWG’s aggressive acquisitions in 2013 have largely secured rapid growth in 2014E, we cut our 2014 earnings estimate to 5% below consensus given disappointing BT revenue. Our 2015 earnings forecast is 3% above consensus as it is the last year of the 12th FYP.However, we are concerned about slowing growth from next year onwards and have trimmed our 2016 earnings forecast.

Valuation: lower price target from HK$6.60 to HK$5.80; downgrade to Neutral

We base our price target on a two-stage DCF, assuming a 7.2% WACC, explicit cash flow to 2023E, 5% terminal growth, and an 8.5% ROIC (previously 9%). We cut our price target given our lower growth and terminal ROIC assumptions. We downgrade BEWG from Buy to Neutral.

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