Company Profile

Kaidi Ecological and Environmental Technology is mainly engaged in businesses related to powersupply and new energies; investment, management, technical research and development, andcomprehensive utilization of coal-seam methane (gas of coal mine) and shale gas resources; survey,consultation, design, and supervision project of overseas environmental projects.

Investment Highlight

Kaidi Ecological and Environmental Technology (the company) is an industry leader in biomasspower generation solutions.

Becoming listed in 1999, the company is mainly engaged in biomass power generation, new energypower generation and forestry businesses. In the first half of 2016, the company made CNY 1.98bi llion operation revenue, up 47.6% YoY. The net profit attributable to the listed company was CNY104 mi llion, down 34.7%c YoY.

The Company works with reliable upstream suppliers. The installed capacity and the number ofpower generation hours have moved onto the fast-growth track.

Low cos t and continued supply of biomass purchase are key competencies of leading biomass powergenerators. Since 2012, the company has started restoring channels and established a supportsystem for biomass purchase network. To improve efficiency and reduce cost of biomass purchase,the company mainly purchases biomass from village farmers instead of from big companies, whichshapes i ts own competency. The ability to get adequate amount of biomass at low cost helps ensurethe company’s installed capacity to grow at a n alarming CAGR of 181%0 In 16Q1, the company’spower generation increased by 99% YoY, with the utilization of i ts existing production facilities.Biomass power generation has become a key earnings driver.

The company will shortly launch private placement; it is expected to see reduction on financialexpenses as it will be able to raise more funds at lower costs from different sources of finance.

1) Re l atively high financial expense is the main constraint on company’s earnings i mprovement.Previously, the company raised money mainly by borrowing from banks, and the overall fund cost isrelatively high. As the company grows larger and stronger, the amount of interest-bearing debtsundertaken by the company is also on fast increase. Currently the expense rate accounts for 22% ofthe operating revenue, and the company’s gearing ratio has increased to as high as 74.5%.

2) The company’s private placement scheme has obtained re gulatory a pproval. Once launched, it willhe l p bring down the company’s i ndebtedness i n the short term.

3) With low indebtedness, the company will be able to raise more money with low costs, and this will continue optimizing its financial structure. At present, the company is planning for issuing CNY 3bi llion in green perpetual bonds and CNY 3 bi llion in overseas yuan-denominated bonds. According toour calculation, the amount of funds that the company plans to raise is almost equivalent to i tscurrent scale of interest-bearing debts. This means that in the future, the company is able togradually replace its high-yield bonds with the low-yield ones.

Kaidi Ecological and Environmental Technology looks to align business development with thepoverty relief goal.

Fol lowing the strategy of ‘re ducing poverty through promoting green businesses’, the companys tands a good chance to receive loan support from the government. By establishing various forms ofcooperation with low-income families, the company will able to further consolidate its network withthe suppliers and get more fund support from the government.

Earnings Forecast and Investment Grading:

Ma i ntain BUY rating. We estimate the company’s net profit will reach CNY 423 million in 2016, CNY655 mi llion in 2017 and CNY 914 mi llion in 2018, implying 46x 16E PE, 30x 17E PE and 21x 18E PE.The private offering price is fixed at CNY 9.3 per share. After the launch of the private placement, thecompany’s financial structure is e xpected to substantially i mprove . With strong confidence towardsthe company’s future prospects, we maintain BUY rating.

Potential Risk: Delay in launch of private placement