CHINA EVERBRIGHT WATER is foraying further north with the proposed acquisition of well-known Liaoning sewage treatment player, Dalian Dongda Water, for one billion yuan.
The acquisition adds to the Group's wastewater treatment plants in Beijing and the provinces of Jiangsu, Shandong, Shaanxi and Henan. It also expands the Group wastewater treatment capacity by one-third to about 4.5 million tons a year.
Executive Chairman Wang Tianyi explained the 25X PE takeover price during a telecon with investment professionals on Tuesday.
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 Asia lags Europe in environmental, social and governance investing. In a departure from evaluating deals purely from a one-sided economic benefit standpoint, China Everbright Water Executive Chairman, who is also a former government official, Dr Wang Tianyi, is one of the first Asian business leaders to address the investment community about social responsibility in investing. Our acquisition of Dalian Dongda Water is a major one for the industry this year. There are 3 merits to the M&A.
Firstly, more than half of its plants are still discharging treated wastewater at standard 1B. We can increase the project return by upgrading the facilities to standard 1A.
Secondly, it has strong engineering expertise for wastewater treatment equipment.
Thirdly, most of Dongda's water tariff rates are relatively low compared to other cities. Even without any upgrade of facilities, we are expecting an upward revision of water tariff rates, and that will translate into revenue growth. We hope to get achieve an IRR of 8% to 9% for Dongda.
A well developed acquisition plan lies not so much in what great basement bargains we're striking, but whether the deal is win-win for both buyer and seller.
This acquisition was completed after negotiations that lasted for less than half a year, compared to over one year for Hankore. The negotiations were intensive, with both buyer and seller demonstrating shrewd business acumen. In my opinion, the transaction terms that were agreed upon are fair.
While waste to energy plants are similar to wastewater treatment in their BOT financing structure, there are few opportunities for M&A in this sector. On the other hand, only 70% to 80% of municipal wastewater is treated before discharge, and the government is looking to raise this to 90%. Therefore, we hope make more acquisitions of wastewater treatment plants.
 China Everbright wastewater treatment reservoir. NextInsight file photoAs we integrated Hankore's business assets this year, we were also able to ink the deal with Dongda. If we sustain our healthy cash levels and have management, we will be able to sustain our strong M&A momentum. This will enable us to achieve our targeted wastewater treatment capacity of 10 million tons a year in 3 to 5 years.
We will also continue to pursue BOT and TOT projects.
Our objective is not to pursue highly lucrative projects with returns of 20% to 30%, but to have an environmental protection business with a long term stability in project pipeline structured on fair economic terms and conditions.
As a state-owned enterprise, we need to balance fair economic return with public interest. We hope our shareholders be of the mindset that they are investing in a public infrastructure play that obtains revenue from taxpayer monies, and not view us as a multi-bagger like the commercial play Alibaba.
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| CEWL SP |
71 cents |
| 52-week range |
66 cents – $1.18 |
| Market cap |
S$1.9 billion |
| Current PE |
25.98X |
| Pretax margin |
41.2% |
| Price-to-Free Cashflow |
33.4X |
| Gearing |
18% |
Data from Bloomberg, 2 September 2015
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Dalian Dongda Water generated profit before tax of Rmb 50 million for FY2014, or 14% of the Group's Rmb 347 million for the same financial year.
The proposed acquisition is expected to be earnings, cash flow and returns accretive, without significant impact on gearing. The Group does not intend to raise capital for the acquisition.
The acquisition will be made through the Group's wholly-owned subsidiary Beijing Everbright Water Investment Management Co, to acquire 90% in Dalian Dongda Water for Rmb 800 million (S$177 million).
A first tranche of Rmb 302.2 million (38% of acquisition consideration) will be paid for an 34% interest within 30 days of the agreement date of 28 August. A second tranche of Rmb 497.8 million will be paid for the another 56% within 60 days. The remaining 10% will be transferred over the subsequent 3 years.
There is also a contingent payment of up to Rmb 203.15 million, subject to outstanding receivables of the same amount being recovered by the Group.
Dalian Dongda Water has 17 municipal waste water treatment projects in the province of Liaoning and in the Inner Mongolia autonomous region, a combined contractual operating scale of 1.125 million tons per day. It also provides water improvement services, the construction and operation of urban public utilities and infrastructure for sewage treatment plants.
The acquisition will expand the Group's operating assets of 32 waste water treatment projects (with total capacity of about 3.4 million tons a day), and add to its capabilities to supply services for reusable water, waste water heat pump, sludge treatment, R&D of environmental water technologies, engineering and construction.
