Company focusing on waste-to-energy business with efficient operationsDynagreen Environmental is an operator of waste incineration power plants in Chinacontrolled by Beijing State-Owned Assets Management. It has operated in the industryfor 13 years. As of Dec 2017, the company has signed 27 waste incineration powergeneration concession agreements, of which 13 projects have been brought intooperation, with a daily processing capacity of 9,550 tonnes.
Waste incineration power generation entering mature stage of development withindustry concentration to increase The proportion of waste processed throughincineration has increased year by year. Industry conditions are highly differentiatedbetween regional markets: urban markets are nearing saturation with strong expansiondemand from existing projects, while new projects are increasingly located in counties. Asthe industry enters a mature stage of development, competition is likely to intensify andindustry concentration to increase. The company’s industry ranking has risen to No.8 bymarket share.
Abundant project pipeline; company changes accounting rules to support A-shareIPO The company has a solid project pipeline, and is expanding upstream to cover wastecollection & transportation, kitchen waste and waste treatment integration. In addition, ithas expanded its business scope by acquiring hazardous waste treatment companies.
The company has changed its accounting rules such that it has stopped recognizingconstruction revenue starting from its 2017 annual report. Dynagreen will launch its AshareIPO in 2018, which will enhance its financing ability and speed up project expansion.
Furthermore, we expect its H-share liquidity and valuation to strengthen following itsinclusion into SH-HK Stock Connect program.
Earnings forecasts As construction revenue is no longer recognized in 2017, we expectrevenue and profit to have dropped by 52.5% and 18.6% from 2016, with positive growthof 34.0% and 25.7% following retrospective adjustments. Dynagreen closed at HK$4.66on Jan 3. We forecast 2017-2019E EPS of Rmb0.278, Rmb0.360 and Rmb0.436respectively following the accounting rules change, corresponding to 14.10x, 10.89x and8.97x P/E. We have a Buy rating and a target price of HK$5.39 based on 15x 2018E P/E（industry average）。
Risks Project site selection difficulties, slower-than-expected progress on projects, costoverruns and project delays, changes to waste treatment fee and tax incentives, slowerthan-expected A-share IPO progress.