$Citic Envirotech(CEE.SI) the last private placement price of 0.85 should be the fundamental target. The company has undergone management changes in the last one year and has kitchen sink the past ill strategy of issuing USD perpetuals under a currency depreciation world. If the losses are well absorbed accounting wise, 2019 should be a start of a new phase.
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There are a lot of comparisons between Hyflux and the Citic Envirotech lately, especially after the dreadful downfall of a national champion. It is always essential to have more debates so that lessons are learnt. However, one has to be objective and be conscious of the difference so that we might not be drawn into the wrong conclusion.
1 accounting treatments are only the after effects. They are important but for a company to end up using accounting to hide the mistakes, it is really sad to see that. The fundamental problem with Hyflux is the mistake of going upstream. It is true that power consumption is the biggest cost of water treatment, but going upstream to the power generation business is certainly wishful thinking. The capital intensiveness and the rule of game is never something that Ms Lum could handle. Market deregulation became the last straw.
2 All infrastructure investments are capital intensive, that was why China decided a few years ago to go the PPP route. The difference is that the burden is shared not solely by The Central, but by the local municipal and the private. Yes, all infrastructure projects are inherent with risks, big risks indeed, because of the long tenor involved. PPP looks like the only commercially sensible solution for now. The only way to mitigate these risks is what Citic Envirotech has done, aligning itself with a big SOE so that problems that arise could be resolved more amicably.
3 water resources problem is different from power generation, one can live with a curtailing of power, but never a deprivation of clean water. In a worst case scenario, water supply has to be guaranteed, by all measures, regardless of the situation. Citic Envirotech certainly is in a right business, albeit risks, big risks!
4 water treatment is a multi generations effort. This means that the investment must be for the longer term. However, this results in the conflict between a short term stock investment mentality. That is why there are calls for Hyflux to be nationalised. We should be glad that we have a rare chance of investing into something meaningful for human livelihood.
5 the better comparison for Citic Envirotech is not t Hyflux, but 碧水源listed in China.
Again, long winded but hopefully this helps.
The current management decided to kitchen sink the bad decisions made by past leadership. This means using the final quarter to take as much losses and provisions as possible the risks hidden in the balance sheet. This includes the USD perpetual and the contract risks. Taking loan in replacement of the perpetual results in the reduction of NAV to 56 cents. They also took up to 36 milllon of impairment losses in Q4 to reflect the true value of the balance sheet. 2017 restatement of account plus the provisions explains the increase in operating expenses and the amount adds up. This means if we take the like for like comparisons into consideration, the core business is actually doing very well, (113+36=149)
All in all, this is a brave move to shake off all past ill decisions and the company is now in a clean slate to face the markets, which the company is getting more relevant each day in the waking up of environmental challenges in China.
The challenge of doing business in China is always there, Lanzhou contract was difficult as the province is not as well to do. But the need to clean the water is urgent after the 2014 drinking water scare in Lanzhou. Besides, if the source of water from Yellow river posts a health threat, the whole northern China will be in danger. I think being with CITIC group will only help to mitigate these business risks.
The top objectives now are to keep all the good work at core, leverage on technology, which they have, thanks to Memstar, and make sure that the cash flow is positive for 2019.
Long winded but at this price, 10 cents below NAV...the judgement is yours.