China Everbright Greentech Limited

Distributions at a cost Date of report: May 12, 2021

Hong Kong Stock Exchange, Ticker: 1257.HK

Environment Enterprise
Recommendation: HOLD
Current Price (as of 12 May 2021): HKD3.000

Growing sustainability company funded mainly by debt Trading Data

China Everbright Greentech Limited (“Everbright”, or the “Company”) is currently trading at a Price (12 May 2021) HKD12.00
steep discount to its peers with P/E at 4.8x (compared to 20.3x) This factors in a dividend yield 52-week range HKD2.66-3.83
of 4.6%, which is higher than peer average of 2.3%, resulting to an ROE of 11.8% - again higher Market cap HKD6.198bn
than peer average of 11.2%. Conducting a DuPont analysis, we see that despite a drop in profit Shares out. (mns) 21
margins and asset efficiency during the last few years, the driver behind the high ROE is their
30 Day Avg. Vol 4,359,300
excessive leverage, which may be unsustainable in our view.
ROE (2020) 11.8%
We issue a HOLD recommendation based on the following (1) growing company expanding
coverage (2) regulatory headwind hinder earnings and (3) excessive debt may not be
sustainable.

Growing company expanding coverage

The Company’s revenues grew by 6.0% in 2020, driven by growth in its main segment: biomass
utilization projects, which grew by 14%. Growth in this segment is driven by higher operational
revenues from existing projects and through increased volume from newly launched projects.
The pipeline for the Company remained robust in 2020, securing 17 new projects (14% of total
overall projects) and entering into 4 supplemental agreements involving investments and
environmental remediation. Although its construction revenues were affected by the pandemic,
volume growth due to operating projects more than offset this. Moving forward, there are
currently 34 projects under construction, and this is expected to provide a boost to earnings in
the near term. It is noteworthy that these new developments are spread across different regions
in China, as Management looks to expand its reach.

Regulatory headwind hinder earnings

A headwind for revenues involve a supplementary circular in which certain projects will not be
entitled to renewable energy tariff subsidy when operation period exceeds prescribed lifetime
operation hours. Management expects this to provide a negative effect on cash flows, and we
are already seeing this as the Company has a negative cash flows from operations. In light of
this, Management incurred an impairment on its intangible assets of HKD162.5m (after-tax
effect), which dragged earnings by 8.1% in 2020. Without this write-off, earnings were expected
to grow by 3% in 2020. It remains to be seen whether this shall continue to have an adverse
effect on the Company’s prospects, but what we are seeing now is a negative towards its cash
flow generation.

Excessive debt may not be sustainable

Since cash flows from operations are negative (and has been for the past few years), cash
generation does not seem sustainable since the Company will eventually need cash to pay off
its debt balance. Its distributions and capital investments are therefore funded through debt
and equity. Currently, the Company is on a net debt position with debt of HKD16.9bn and cash
of HKD2.5bn. At best, this positions their cash flows as a bit shaky, and the fallout will be
magnified in the event the Company is unable to pay off its debt.

Key Financial Highlights

Metric 2017 2018 2019 2020 CAGR/Avg

Total revenues (HKD mns) 4,581 7,002 9,280 9,835 29.0%
Operating income (HKD mns) 1,198 1,713 2,313 2,461 27.1%
Earnings per share (HKD) 51.70 64.12 78.48 72.72 12.0%
Operating cash flows (HKD mns) (80) (241) (138) (888) 123.1%
Cash (HKD mns) 2,404 2,045 2,685 2,506 1.4%
Dividend per share (HKD) - 12.50 16.00 15.00 9.5%
Dividend payout ratio (%) 0.0% 19.5% 20.4% 20.6% 15.1%
ROE (%) 10.9% 14.1% 15.6% 11.8% 13.1%

Solvency ratios 2017 2018 2019 2020 CAGR/Avg

Interest cover ratio - EBIT 9.54x 8.46x 6.14x 4.53x 7.17x
Debt to Equity 0.40x 0.64x 1.09x 1.32x 0.86x
Company Background
Leading environmental protection enterprise in China
Share Price
• The Company is a professional enviromental protection service provider in China
focusing on biomass utilization, hazardous and solid waste treatment, environmental 10.00
9.00
remediation, solar energy and wind power. 8.00
• Currently, the Company has its business coverage spanning across 14 provinces and 7.00
6.00
autonomous region in China, and in Germany. 5.00
4.00
Operating results show promise with regards to its constructions: 3.00
2.00
Operating results: 1.00
• In 2020, the Company adopted an innovative approach to expansion and sought to 0.00

May-2017

May-2018

May-2019

May-2020
Sep-2019
Sep-2017

Sep-2018

Sep-2020
Jan-2018

Jan-2019

Jan-2020

Jan-2021
identify opportunities around the market on a highly selective basis. As a result, the
Company has expanded into the end-of-life tyres disposal business to enrich its
business portfolio.
• During the year, the Company secured 17 new projects and entered into 4
supplemental agreements involving total investments of RMB2.56bn and Dividend yield
environmental remediation contracts worth RMB289m.
• As of December 2020, the Company had 119 environmental protection projects with 7.00%
6.00%
total investment of approx. RMB31.47bn and had undertaken 36 environmental
5.00%
remediation projects with a total contract of RMB1.014bn.
4.00%
• In terms of project construction, the Company continued to ensure steady progress as
3.00%
28 projects are currently under construction with 20 projects completed in 2020 alone.
2.00%
Currently, there are 34 projects under construction.
1.00%
• In 2020, construction revenues from operations declined by 9% while operating
0.00%
services from the same segments grew by 22%.

May-2018
May-2017

May-2019

May-2020
Sep-2017

Sep-2018

Sep-2019

Sep-2020
Jan-2018

Jan-2019

Jan-2020

Jan-2021
Operating stiatics under the biomass utilization segment (the main segment):
Operating statistics 2017 2018 2019 2020 CAGR//Avg
On-grid electricity (GW) 1,393 2,557 3,827 5,366 56.7%
Biomass raw mat processing vol
1,685 3,160 4,636 6,708 58.5%
(000 tonnes)
Waste processing vol (000 tonnes) 249 881 1,440 2,272 108.9%
Volume of steam supplied (000
171 363 819 1,344 98.8%
tonnes)

Cash flows shows distributions are funded solely through debt and equity
FCFE (HKD mns) 2017 2018 2019 2020
Cash flows from operations (80) (241) (138) (888)
Cash flows from investing (2,867) (2,370) (4,279) (3,263)
Debt issuance 1,936 3,244 6,309 7,761
FCFE (1,011) 633 1,892 3,610
Distributions - (310) (300) (339)
Excess / (Deficit) (1,011) 324 1,592 3,271
Cumulative balance (1,011) (688) 904 4,175

Segment information:
Revenue breakdown:
HKD in billions 2017 2018 2019 2020
Biomass utilization projects 3,994 5,862 7,270 8,318
Solid waste treatment projects 379 782 1,518 1,158
Environment remediation projects - 118 287 168
Solar energy and wind power projects 209 240 204 191
Total 4,581 7,002 9,280 9,835

Segment EBITDA
HKD in millions 2017 Margin 2018 Margin 2019 Margin 2020 Margin
Biomass utilization projects 1,143 28.6% 1,632 22.4% 2,193 30.2% 2,557 30.7%
Solid waste treatment projects 241 63.8% 370 24.4% 572 37.7% 420 36.2%
Environment remediation projects (3) N/A 25 8.5% 55 19.3% 39 23.4%
Solar energy and wind power projects 196 93.6% 226 110.5% 186 90.9% 181 94.9%
Total 1,578 34.4% 2,252 24.3% 3,006 32.4% 3,198 32.5%
Financial Analysis and Peer Analysis
Income Statement (HKD mns) 2017 2018 2019 2020 CAGR/Avg
Operating revenues 4,581 7,002 9,280 9,835 29.0%
Biomass utilization projects 3,994 5,862 7,270 8,318 27.7%
Solid waste treatment projects 379 782 1,518 1,158 45.2%
Environment remediation projects - 118 287 168 19.4%
Solar energy and wind power projects 209 240 204 191 -3.0%
Operating expenses (3,383) (5,289) (6,967) (7,375) 29.7%
Direct costs (3,146) (4,932) (6,479) (6,824) 29.4%
Administrative expenses (237) (357) (488) (551) 32.5%
Operating income 1,198 1,713 2,313 2,461 27.1%
Other operating income/expenses (11) (44) (203) (535) 270.4%
Other income 115 158 173 9 N/A
Interest expense (126) (202) (377) (544) 63.0%
Operating profit 1,188 1,668 2,109 1,926 17.5%
Taxes (230) (337) (462) (413) 21.5%
Net Income 957 1,331 1,647 1,513 16.5%

Balance sheet (HKD mns) 2017 2018 2019 2020

Cash and cash equivalents 2,404 2,045 2,685 2,506
Trade and receivables 518 1,240 1,380 3,001
Contract assets 821 1,562 7,004 10,256
PPE and IA 7,414 9,988 13,978 17,965
Other assets 3,274 3,768 1,212 1,536
TOTAL ASSETS 14,432 18,603 26,258 35,265

Trade payables 1,666 2,417 2,989 3,971

Debt 3,495 6,007 11,555 16,933
Other liabilities 505 749 1,127 1,493
Share capital 1,608 1,608 1,608 1,608
Retained earnings 7,140 7,731 8,738 10,916
Other equity accounts 18 92 241 343
TOTAL LIABILITIES AND EQUITY 14,432 18,603 26,258 35,265

Metrics - Operations 2017 2018 2019 2020 CAGR/Avg

EBIT margin 26.2% 24.5% 24.9% 25.0% 25.1%
Net profit margin 20.9% 19.0% 17.7% 15.4% 18.3%
Earnings per share (HKD) 51.7 64.1 78.5 72.7 12.0%
ROE (%) 10.9% 14.1% 15.6% 11.8% 13.1%

Financial Commentary:
• Revenues and EBITDA grew by 6% and 7%, respectively. Excluding the effect of a one-
off impairment in intangible assets, profit attributable to equity owners grew by 3% in Direct cost ratio
2020. 71.0%
• Growth in revenue is in line with ongoing increase in volumes of on-grid electricity 70.5%
through integrated biomass utilization, household waste processed and steam
70.0%
supplied.
• The decline in net income were mainly due to a supplementary circular in which certain 69.5%
projects will not be entitled to the renewable energy tariff subsidy when operation 69.0%
period exceeds prescribed lifetime operation hours. 68.5%
• In light of this, Management conservatively provisioned an impairment assessment on
68.0%
its intangible assets, PPE and ROU assets and recognized a one-off expense of
HKD162.5 (after-tax effect). 67.5%
2017 2018 2019 2020
• Profit under the biomass utilization segment increased by 10% is due to substantial
increase in revenues from operation services in tandem with the continuous growth in
total on-grid electricity from projects in operation.
• Profit under the hazardous and solid waste treatment segment declined by 44% due to
the decrease in revenue from operation services as the processing volume had been
affected by the pandemic.
 • Profit under the environmental remediation segment declined by over 50% in 2020
due to the impact of the pandemic on construction work progress and reduction in
government tenders.

Peer Comparison
Peer analysis EV/EBITDA P/E D/E ratio Dividend yield
Canvest Environmental Protection Group Company8.7x
Limited (SEHK:1381)
12.5x 1.2x 2.1%
eREX Co.,Ltd. (TSE:9517) 12.1x 26.1x 1.5x 0.9%
China Datang Corporation Renewable Power Co., Limited
8.2x (SEHK:1798)
10.9x 2.0x 2.1%
CECEP Solar Energy Co.,Ltd. (SZSE:000591) 11.4x 22.3x 1.5x 1.9%
Beijing Enterprises Clean Energy Group Limited (SEHK:1250)
10.9x 15.3x 2.3x -
Xinyi Energy Holdings Limited (SEHK:3868) 15.6x 34.8x 0.2x 4.4%
Average peers 11.2x 20.3x 1.5x 2.3%
Everbright Greentech 6.5x 4.8x 1.3x 4.6%

Peer analysis ROA ROE EBIT margin Net Income

Canvest Environmental Protection Group Company
5.5%
Limited (SEHK:1381)
15.7% 28.7% 21.1%
eREX Co.,Ltd. (TSE:9517) 5.2% 20.8% 9.0% 4.9%
China Datang Corporation Renewable Power Co., Limited
3.1% (SEHK:1798)
7.4% 44.5% 12.7%
CECEP Solar Energy Co.,Ltd. (SZSE:000591) 3.7% 7.4% 40.0% 19.7%
Beijing Enterprises Clean Energy Group Limited (SEHK:1250)
2.5% 7.3% 39.7% 11.9%
Xinyi Energy Holdings Limited (SEHK:3868) 4.7% 8.3% 70.3% 53.5%
Average peers 4.1% 11.2% 38.7% 20.6%
Everbright Greentech 4.3% 11.8% 25.0% 15.4%

Recommendation
Given the fundamentals of Everbright, I suggest a HOLD recommendation based on the following
key points:
• When normalizing its earnings for one-off expenses, profit grew by around 3% in 2020,
driven by higher volume and operating revenues from its main segment, biomass
utilization.
• The one-off expense related to an impairment of its intangible assets, following a
circular in which they will not be granted a subsidy on its tariff when operation period
exceeds prescribed lifetime operation hours. This may have further negative
implication on its future outlook.
• Excessive debt and cash flows dependent on debt and equity to fund its normal
operations on a year to year basis is risky in itself. Although not entirely a negative, it’s
definitely a red flag, especially when the time comes when the Company will have to
pay off its debt.

Submitted by: RS