To prepare for the second half of water treatment, Everbright Water competes in the capital market

Public information shows that as a member of the "Everbright Group", China Everbright Water, its direct parent company, owns 74.85% of its shares. Everbright Water is positioned as a comprehensive water environment solution provider. Its business scope covers sewage treatment, water environment management, comprehensive utilization of water resources and water ecological protection. Its business is concentrated in the Bohai Rim Economic Circle and the Yangtze River Delta. According to third-party reports, Everbright Water is one of the comprehensive water resource solution providers in China in terms of market share in 2017.

From the perspective of revenue and net profit, Everbright Water performed well. According to previously announced 2018 results, Everbright Water's revenue in 2018 was HK$4.768 billion, a year-on-year increase of 33%; net profit was HK$737 million, a year-on-year increase of 27%. Public information shows that its performance growth is mainly achieved by acquiring new projects from local governments, raising project bids and expansions, and acquiring new projects. Since Everbright Water's customers are generally China's municipal, district or county-level governments and end users of water supply projects, they are a relatively stable customer group. In the past three years, revenue has increased from approximately HK$2.5 billion in 2016 to approximately HK$4.8 billion in 2018, and net profit has increased from 350 million to 680 million in the same period.

The sewage treatment business line accounted for 97.6%, 64.9% and 74.7% of revenue respectively. With the environmental protection industry chain generally poised for development, the sewage treatment industry has naturally become one of the dark horses. During the reporting period, Everbright Water's gross profit margin was around 34%. Its water environment treatment business was launched in 2016. At that time, it only accounted for 0.1% of business revenue, but now it accounts for 13.1%. In terms of business type, although the contribution of municipal sewage treatment has declined, it is still the main source of income. As of December 31, 2018, Everbright Water had put into operation a total of 85 projects, of which 64 were BOT projects and 18 were TOT projects.

But for asset-heavy environmental protection companies, in addition to cash flow, debt ratio and solvency are also indicators that need to be focused on. Before achieving the ideal continuous cycle, sufficient and continuous capital injection will become the decisive factor in whether the project can proceed. The sewage treatment industry is a capital-intensive industry, with a period of 5-10 years or even more than 10 years. The huge capital requirements pose high barriers to new entrants with limited financing capabilities.

Although Everbright Water’s revenue and net profit have increased year after year in recent years, it is a negative cash flow operation. Specifically, the capital-liability ratio of Everbright Water in 2018is 87.7%, which is within the industry average. Everbright Water has previously stated that due to the large construction and acquisition projects and the long cycle, Everbright Water's repayment speed has not kept pace with the cash outflow speed. In fact, Everbright Water was listed on the SGX Main Board through a reverse takeover as early as 5 years ago and has not yet been delisted. However, Everbright Water's stock price performance has been unsatisfactory since its listing. If it is successfully listed in Hong Kong this time, it will also open a new model of "New + Hong Kong" simultaneous listing.

Everbright has publicly stated that for the Hong Kong market, listing on the Hong Kong main board will help the company further enhance its financing capabilities and broaden its investor base on the existing basis. However, many unicorn companies have been successfully listed in Hong Kong in 2018. It is still unclear whether the market is still interested in investing capital in the environmental protection industry where "slow work and careful work add up to little". For Everbright Water, whether it can further expand market share and increase gross profit margin through deepening industry integration will become the main key point for the growth of the enterprise industry.

　(Original title: "Arrangements" for water treatment in the second half, Everbright Water Racing Capital Market)