20170630-广发证券_香港_-2H17_Environmental_Protection_Outlook__New_era_of_PPP_projects_28页_1mb

2H17 Environmental Protection Outlook Summary

Core Content

This document provides an outlook on the growth and development of Public-Private Partnership (PPP) projects in the environmental protection sector in China, with a focus on the water environment treatment sub-sector. It highlights the increasing scale and implementation rate of PPP projects, the shift in funding models, and the performance of key listed companies in the sector.

Key Trends in PPP Projects

• Accelerated Roll-out: The total number of PPP projects in the CPPPC database increased by 59.1% YoY to 12,287 as of end-1Q17, with a significant rise in the number of executed projects.
• Implementation Rate: The number of projects at the execution stage rose from 298 in 2016 to 1,729 in 2017, representing 14% of all PPP projects. The implementation rate increased from 20% to 34.5%.
• Investment Growth: Total investment in executed projects reached Rmb2.87bn, accounting for 20% of total investment, up four-fold since the beginning of 2016.
• Green and Low-Carbon PPP Projects: These projects have grown by 73% in number and investment since 2016, now representing 59% of all projects and 41% of total investment.
• Sector Ranking: Environmental protection is the second largest sector in the E20 PPP database in terms of both number and investment, with Rmb2.99trn of investment as of end-2016.

Key Sectors and Funding Models

• Water Projects Dominance: After reclassification, more than half of environmental PPP projects are water-related, with Rmb1.5trn of investment by end-2016.
• Payment Methods: Feasibility gap grants have become the main funding model, with 3,401 projects relying on them at the end of 1Q17, representing 41.4% of total investment. The user-pays model has declined significantly.
• PFI Model Growth: The Private Finance Initiative (PFI) model is becoming mainstream, particularly in water projects, accounting for 89% of total investment in the sector.

Key Companies and Investment Recommendations

• Beijing Enterprises Water Group (371-HK):

  • Top Pick: The company has a first-mover advantage with its investment fund model and early investments in water environment treatment.
  • Asset-light Strategy: Utilizes green asset notes and other financing tools to reduce leverage.
  • Strong Project Pipeline: Has secured 4.5m tpd of new wastewater treatment projects, with 67% via PPP.
  • Performance: Rose 23.7% in 1H17, outperforming peers.
  • Valuation: Target price of HK$7.50, based on 17x/14x 2017/18E P/E, implying ~20% upside.

• Canvest (1381-HK):

  • Top Pick in WTE Sector: Preferred for using the traditional BOO model, which is less common in WTE PPP projects.
  • Strengths: Deep roots in Guangdong, higher-than-peer treatment fees, and strong local government support.
  • Track Record: Aggressive capacity additions and high-quality project execution.

Market Performance and Risks

• Sector Underperformance: Environmental protection shares underperformed by ~13pp in 1H17, mainly due to Yunnan Water (-11.8%) and CTE (-16.1%).
• Risks: The implementation rate and progress of investment fund models remain the biggest risks for the water sector. Declining waste treatment fees and potential industry consolidation also affect earnings visibility.

Conclusion

The environmental protection sector, particularly the water environment treatment sub-sector, is experiencing significant growth due to the expansion of PPP projects. The shift from user-pays to feasibility gap grants and the rise of PFI models are key drivers. Companies like Beijing Enterprises Water Group and Canvest are positioned to benefit from this trend, with BEW being highlighted as the top pick due to its strong project pipeline, asset-light structure, and innovative financing model. The outlook for 2H17 is more positive with the government's push for securitization and private capital utilization.