Enhanced entry point after Friday's share price correction; reiterating Buy
FPI's share price hit limit down (-10%) on Friday, likely driven by its 2017 earningspreview released on Thursday. The mid-point of its guided NP range for 2017implies a 8% miss (vs. the Street consensus), which points to a slowdown in4Q. However , we believe FPI's core business segments (i.e. EMS and laboratory,which together account for >60% of total sales) were on track in 4Q and weexpect its final full-year result to come towards the high end of its guided range.Moreover , we expect FPI's earnings to further speed up in 2018 on acceleratingEMS business and execution of the two PPP projects on hand. After Friday'scorrection, the stock is priced even more attractively at 21x 2018E P/E against a33% EPS projected over 2018-19. We reiterate Buy with a revised target price ofRmb47, offering 43% upside potential.
2017 earnings preview: +10-40% Y oY growth
FPI released its 2017 earnings preview after market close on 11 January. Thecompany expects its 2017 NP to come in the range of Rmb443-563m (previousDBe: Rmb544m) or a 10-40% Y oY growth (previous DBe: +35% Y oY). Based onthe 9M17 results, we believe FPI's full-year result will likely come towards the highend of its guided range as historically FPI's 9M earnings on average (2012-16)accounted for 60% of its full-year NP (which if holds true implies a full-year NP ofRmb537m for 2017). Our checks with the company also reconfirmed no signs ofslowdown for its core segments (EMS and laboratory) in 4Q.
EMS business is set to accelerate
Our DB China Environmental research team noted, in their recent report, that"China usually strengthens environmental enforcement during the last threeyears of a Five-Y ear-Plan period, as the country gets closer to assessmentdeadlines." After rounds of environmental inspections over the past two years,we expect the construction of China's environmental monitoring network tofollow the same pattern (i.e. accelerate in the coming three years). In particular ,we see two positive drivers to materialize ahead including government'sincreasing investment in monitoring stations for surface water and strengthenedenforcement of VOC monitoring in industrial zones. As a result, we expect FPI'sEMS business to sustain a 30%+ revenue growth in the coming years.
T wo PPP projects on hand to further strength earnings visibility
On top of the accelerating EMS business, we expect FPI's two PPP projectson hand, namely Huangshan (awarded in 2016) and Shandong profit (awardedin 2017), to start contributing to earnings into 2018. Based on the company'sguidance, we expect the two PPP projects to contribute around Rmb150m netprofit in total over the construction period of 2 years (likely Rmb10-20m in 2017).We estimate a total NP of Rmb80m will likely be recognized from these twoprojects in 2018 (15% of 2017's DBe NP).
Fine-tuning earnings while raising TP to Rmb47; risks
Factoring in 9M17 results and the guided range for full-year NP , we trimmed our2017 earnings by 3% while keeping our 2018-19 forecasts largely unchanged.Our earnings revision for 2017 mainly reflected slower-than-expected businessdevelopment for water conservancy and industrial process analysis segment. Onthe other hand, we raise our TP by 4% to Rmb47 after rolling forward our DCFvaluation timeframe (WACC: 8.5% and TGR: 2%). Our revised TP correspondsto 30x 2018E P/E, justified by its 33% EPS CAGR projected over 2018-19E. Wereiterate Buy. Key risks: slower-than-expected EMS growth and poor executionof investments.
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