China Everlight International Ltd (257.HK) - Business Expansion Supports Growth!
Company OverviewChina Everlight International（CEI） is a company which major business in environment protection business and alternative energy. In recent years, the Company has been expanding the market and maintains leadership in domestic environmental industry. SummaryThe Company's performance has been maintaining rapid and stable growth, revenue and net profit showed significant growth in report period. The Company's businesses are expanding and get important breakthrough in PV power business as well as traditional business in 2011. The increase in performance is diversified, partly depend on the input of new-added capacity and the rest are depend on the improvement of operation efficiency as well as service fee increases. Some financial indicators showed negative changes to 2010's data, the main reason is the deterioration of domestic macro economy, but as the growth trend is strong relatively, so it won`t put too much negative effects on the future operation. We estimate that the EPS growth rate will be 20%, namely to HKD 0.27, according to the comprehensive market condition, the P/E is 15x under our estimation. So the target price in next 12 months is HKD 4.00. So the rating is BUY. 1. Review of PerformanceThe business of China Everlight International has maintained rapid growth in 2011, the revenue growth is 25% and the net profit growth is 36%. From the general operation results, the Company didn`t affected by the economy recession with the subsidy and support from the government and stays in good operation condition. The company is still keeping the advantage in its traditional business, namely waste to energy and WWT. The operation costs are decreasing and the profit margins are improving. There`re something should be noted. Firstly, the new self-developed processing equipment has been completed in report period and won`t depends on import, which means that CEI has been finished the control from upstream to downstream in WTE business, the cost will decline in the future and this will bring more profit margins. Another one is the service fee of WTE and waste processing increased 7.5% approximately in some cities, on one hand, China will push forward tiered pricing for household electricity and this policy actually remove the restriction on the growth of electricity price, so the unit price of WTE business of CEI may also increase; on the other hand, as the difficulty of waste processing has been increasing rapidly in recent years, the industry scale is also expanding, but the processing fee is still relative lower than foreign market level, so we estimate that the processing fee will increase in the future. In general, we hold optimistic attitude to the WTE and waste processing business. 
From the WWT business, the profitability is keep increasing, the main reason is that as most projects in operation entered into the stable condition, the operation expense has been decreasing gradually and which results into the increase in profit margins. Most WWT projects showed significant growth in profit even the changes in actual processing amount isn`t much. According to the annual report of 2011, the processing amount was only increased 9% in report period, but the EBITDA was increased approximately 21.07%. We consider that with the improvement of operation efficiency and new-added projects in 2012, the profit contribution from WWT business could be increase stably. 
2. Alternative Energy BusinessAlthough the proportion in revenue is relative small, the alternative energy is the key business presently and also to be the new growth point. But there is great difference in the internal performance of alternative energy business, the biomass energy and waste water source pump projects` performance have no highlights and some projects even suffered profit decline, we estimate that the operation condition of both business are still in an unstable situation, the profitability is limited in short term. But as a new attempt in alternative energy, the PV energy business showed remarkable growth in report period, the revenue of 8 PV energy projects has been increasing fast. Although the domestic PV industry is in temporary recession and most PV companies have been trapped, as a new entrant, the CEI's PV business started later and it may get used to the market situation of recession easier than others who started earlier. Although the situation of domestic PV industry won`t be better in short time, that may provides cheaper materials to the PV business of CEI, as polysilicon, and it's helpful to lower the cost. We consider that the Company has been already adjusted its strategy according to the market situation, so we still hold optimistic attitude to the PV energy business of CEI. 
Beyond these, CEI is preparing for the wind energy, similar to the PV energy, the time of entering in wind energy business is also in the time of industry recession, but we consider that the profit contribution of wind energy will be like PV energy and shows good performance in initial time. In summary, although the proportion of alternative energy business is limited in CEI, we hold the cautious optimistic attitude to this sector; the main reason is that the occasion of entering market is the trough of the whole industry and with the retrieve of industry in the future, the alternative energy business would be promote definitely. 
3. Financial AnalysisThe Company's revenue growth rate is 25% approximately and declined sharply from the 65% of 2010. We estimate that the present growth rate will be stable in the future, after most projects complete; the growth rate of revenue won`t fluctuate sharply in the following years. Besides, the improvement in operation efficiency makes lower cost and with upgrade of technology and increase in service fee, the profit margins of CEI still may improve in the future. 
But something need to be noted, the debt level reached highest point in report period, including short and long term debt, the increase rate is over 30% as well as the interest expense payment in 2011 increased nearly 37%, in the next several years, the huge debt will be generate more interest payment and repayment pressure to the company, we consider that it may bring negative effect to the profit growth, besides, debt/asset and debt/equity are also increasing, which means the leverage ratio is increasing during the operation progress, but it will be offset by the rapid growth of revenue and won`t be affected the operation results too much. In summary, CEI showed good financial stability in report period, although the macro economy is not good, but as CEI's business have low sensitivity to the economy cycle and won`t be affected too much, we estimate that the rapid growth will be continuing. 
4. ValuationThe EPS of CEI is HKD 0.2186 in 2011, increased approximately 29.2% to the level of 2010. In general, the EPS growth is faster than revenue growth; the main reason is the improvement of internal efficiency and cut the related cost. As the capacity wouldn`t increase too much, we estimate that the growth rate of EPS will be decline. We estimate that the EPS growth rate will be 20%, namely to HKD 0.27, according to the comprehensive market condition, the P/E is 15x under our estimation. So the target price in next 12 months is HKD 4.00. So the rating is BUY. 
5. RiskDevelopment space for present business is limited. Performance of alternative energy business is lower than expectation. Macro-economy risk becomes larger. Financial Data of CEI
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