Post-results road show
We hosted a road show with Dongjiang Environmental after its 2016 annualresults. Ms. Wang Tian (Board Secretary) and Ms. Huang Shuxin (IR) attendedour meetings. Key takeaways are that management expects the volume ofhazardous waste treated to expand ~50% in 2017 and that the recently issuedABS provides low-cost funding for the company. Maintain Buy.
Major operations data
Hazardous treatment capacity reached 730ktpa at end 2016 and managementbelieves that it will expand to over 960ktpa by end 2017. Actual treatmentvolume was ~400,000 tonnes in 2016 for hazardous waste and managementsees ~50% growth in treatment volume for 2017.
The Jiangxi project has had very high utilization (~90%) since it wascommissioned mid last year as large amounts of hazardous waste werepreviously stored (but not treated) in the region. The Jiangxi projectcontributed a profit of ~RMB30m last year and management believes thatleveraged IRR was over 20% for the project.
PPP and cement kiln waste incineration
PPP projects will be one of the focus areas for Dongjiang going forward andthe company plans to launch PPP funds soon. The significant 2017 revenuegrowth guidance is driven by environmental PPP projects.
Dongjiang plans to set up a JV with cement companies to treat cement kilnwaste. Management believes that Dongjiang has an advantage over cementcompanies in its expertise in pre-treatment.
Competitive advantage and M&A
Compared with other players in hazardous waste, management believesDongjiang’s biggest advantage is a longer and better track record, which helpsa lot to win projects (e.g. the Jiangxi project). Management sees limitedopportunities for sizable M&A.
Financing
Dongjiang provides a guarantee for the ABS (asset-backed securities) itrecently issued (4.15% interest rate). The assets will stay on its balance sheet.Management believes privatization or share buy-backs for the H-share isunlikely. It thinks that Dongjiang will have to make share placements at somestage in order to fund long-term growth.