



Asia Pacific Equity Research		30 April 2014
China Everbright International (257 HK) Negotiations still ongoing with Hankore		Overweight Price: HK$9.72 30 Apr 2014 Price Target: HK$13.00 PT End Date: 30 Jun 2015

· Exclusivity period with Hankore extended to 31 May. China Everbright Int’l (CEI) said it has entered into a supplemental agreement with Hankore, and has thereby extended the exclusivity period of the proposed acquisition to 31 May 2014. The company added that no definitive agreement has been entered into and that the proposed transaction may or may not proceed. (Source: Company announcement, 30 Apr 2014)

· JPM comments: More time likely needed to negotiate on price. We believe most of the due diligence on this transaction has been completed following the four months the two sides had since the original framework agreement was signed. However, the two parties probably need more time to agree on a price, in our view.

· Hankore acquisition may be value accretive. Based on our scenario analysis, CEI will likely get >70% of Hankore’s shares post acquisition and that this could be a value accretive exercise for CEI if its water assets were injected at >1.3x P/B. See our analysis from our 24 Apr 2014 note here.

· Background of the proposed transaction. On 30 Dec 2013, CEI signed a framework agreement with Hankore Environment Tech Group (BIOT SP, Not Covered) in a proposal to inject all of its water assets into Hankore in exchange for Hankore’s shares. After this transaction, CEI is expected to hold >50% of Hankore shares and Hankore will become a subsidiary of CEI, according to the announcement. The parties have agreed to an issue price of SGD0.0703 (average of Hankore’s 90-day trading price at the time).

· Background on CEI’s water business: CEI’s wastewater segment contributes ~25% of the company’s total earnings and has 1.9MM tons/day of wastewater treatment capacity.

· Background on Hankore: Hankore has 11 municipal and industrial wastewater treatment projects in Beijing, Jiangsu, Shandong, Shaanxi and Henan. It has wastewater treatment capacity of 1.57MM tons/day. However, only ~750,000 tons/ day of Hankore’s treatment capacity is operational currently. The company has five expansion projects, with capacity of ~250,000 tons/day, currently under construction. It plans to have all of its treatment capacity up and running by end-2015.

· Maintain OW on CEI. CEI is our top pick in the China water and waste sector given its visible 20-35% EPS growth backed by a strong order book of RMB11B. Our PT of HK$13 assumes WTE project wins into 2019E, but has not factored in the potential acquisition of Hankore, which could potentially add 5-10% to FY15E EPS.

Investment Thesis

China Everbright Int’l (CEI) is the environmental energy arm of China Everbright Holdings, a state-owned enterprise under the State Council. CEI constructs and operates waste-to-energy (WTE), wastewater treatment and alternative energy (wind, solar, biomass, methane-to-energy) projects. The company also manufactures its own WTE equipment in China.

Valuation

Our Jun-15 PT of HK$13.00 for CEI is determined based on a sum-of-the-parts valuation, using DCF (WACC of 8.3%, terminal growth rate of 2.3%) to value each of CEI’s business segments. Our PT implies FY15E PER of 23x.

Risks to Rating and Price Target

1) Project delays could result in lower construction and operation revenue and net earnings, 2) higher interest rates would result in lower net earnings, 3) low utilization rates at projects would result in lower operating earnings, 4) delays in payments from customers would put a strain on cash flow and potentially increase the need for additional borrowing and
5) risks of a potential share placement may increase as CEI’s net gearing rises. This may dilute EPS.

Utilities

Elaine Wu ^AC

(852) 2800-8575

elaine.wu@jpmorgan.com

Bloomberg JPMA EWU <GO>

Boris Kan

(852) 2800-8573

boris.cw.kan@jpmorgan.com

J.P. Morgan Securities (Asia Pacific) Limited

www.jpmorganmarkets.com

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Date	Rating	Share Price (HK$)	Price Target (HK$)
21-Oct-11	N	1.84	2.30
21-Feb-12	N	3.53	3.90
05-Jun-12	OW	3.46	4.50
23-Aug-12	OW	4.11	4.80
07-Nov-12	OW	3.86	4.60
28-Feb-13	OW	4.99	5.30
11-Jul-13	OW	6.08	7.60
06-Aug-13	OW	7.02	8.30
24-Apr-14	OW	10.36	13.00

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.

Coverage Universe: Wu, Elaine: Beijing Enterprises Water (0371.HK), CLP Holdings (0002.HK), Cheung Kong Infrastructure (1038.HK), China Everbright International (0257.HK), Guangdong Investment Limited (0270.HK), Hong Kong & China Gas (0003.HK), Power Assets Holdings Ltd (0006.HK), Sound Global Limited (0967.HK)

J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2014

	Overweight (buy)	Neutral (hold)	Underweight (sell)
J.P. Morgan Global Equity Research Coverage	44%	44%	11%
IB clients*	58%	49%	40%
JPMS Equity Research Coverage	45%	48%	7%
IB clients*	78%	67%	60%

*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

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