20150417-美银美林-Policy_to_boost_capacity_add___sludge_treatment__PO_s_lifted_13页_737kb

Summary of Policy to Boost Capacity Add & Sludge Treatment

Core Content

The PRC government launched the "Action Plan for Water Pollution Prevention" on 16 April, aiming to improve water pollution treatment and drinkable water quality. The plan outlines several key targets and measures to achieve these objectives, including increasing wastewater treatment (WWT) coverage, promoting sludge treatment, accelerating water tariff reform, and encouraging the use of recycled water.

Main Targets and Measures

• WWT Coverage:
  By the end of 2020, the WWT ratio for county level should reach 85% (up from 70% in 2015), and for city level it should reach 95% (up from 85% in 2015).
  By 2017, municipality, provincial capital, and listed cities should achieve 100% WWT collection and treatment, while the rest should reach this target by the end of 2020.

• Sludge Treatment:
  By 2020, the sludge treatment ratio for prefecture and higher level cities should reach 90% (up from 70% in 2015). Sludge must be stabilized, detoxed, and fully utilized by 2017.
  Existing sludge treatment facilities must be upgraded to meet standards by 2017.

• Industrial WWT:
  Industrial parks and companies must be equipped with centralized industrial WWT facilities by 2017, otherwise their licenses will be suspended.
  New water licenses for industrial companies will be ceased, promoting the use of recycled water and desalinated seawater.

• Water Recycling:
  By 2018, new public buildings with over 20,000 m² (20,000 m² for Beijing, 50,000 m² for Tianjin, 100,000 m² for Hebei) should install water recycling facilities.
  By 2020, water recycling ratio in cities with water shortage problems should exceed 20%, and in Beijing-Tianjin-Hebei area 30% (up from 20% in 2015).

• Water Usage Efficiency:
  By 2020, the national total water consumption should be less than 670 billion cubic meters.
  Water consumption per ten thousand RMB of GDP and per ten thousand RMB of industrial value added should be 35% and 30% lower than 2013 levels, respectively.

• Water Tariff Reform:
  A progressive water tariff setting mechanism will be implemented for prefecture and higher tier cities by the end of 2015.
  Penalty tariffs for non-residential users will be fully implemented by 2020.
  Sewage treatment tariffs should not be lower than the cost of sewage and sludge treatment.
  Underground water resources fees should be higher than surface water.

• PPP and EPC Models:
  The government encourages public-private partnerships (PPP) and third-party treatment to accelerate the development of the environment protection service sector.

Key Players and Impact

• Beijing Enterprises Water (BEW):

  • Lifted WWT capacity addition forecast from 3.5mn tons to 4mn tons for 2018-20.
  • Environmental renovation BT revenue forecast lifted from Rmb1.5bn to Rmb2bn post 2017.
  • Sludge treatment is expected to lift 2017 net profit by 5.9%.
  • Price objective (PO) lifted from HK$5.9 to HK$7.0.

• China Everbright International (CEI):

  • Projected to add 1mn tons WWT capacity per year from 2015-20.
  • Sludge treatment is expected to lift 2017 net profit by 1.2%.
  • PO lifted from HK$14.2 to HK$16.9.

• SIIC:

  • Lifted WWT capacity addition forecast from 1mn tons to 1.5mn tons for 2018-20.
  • Sludge treatment is expected to lift 2017 net profit by 6.2%.
  • PO lifted from S$0.25 to S$0.295.
  • SIIC is highlighted as the top pick in the PRC waste treatment sector due to its lower valuation and higher EPS CAGR.

Financial Projections and Valuation

• EPS Lifts:

  • PRC waste treatment players’ 2017 EPS estimates were lifted by 5.5%.
  • Post-2018 EPS estimates were lifted by 7.1% due to increased capacity addition and sludge treatment profit.

• Price Objective (PO) Changes:

  • SIIC: PO lifted from S$0.25 to S$0.295.
  • CEI: PO lifted from HK$14.2 to HK$16.9.
  • BEW: PO lifted from HK$5.9 to HK$7.0.

• Valuation Metrics:

  • SIIC currently trades at 0.5x 2015 PEG, significantly lower than BEW and CEI's 1x.
  • SIIC's valuation is considered more attractive compared to BEW and CEI.
  • BEW has 52% of total revenue from construction in FY14, while CEI has 57%, and SIIC has 34%.

Key Financial Ratios

Conclusion

The "Action Plan for Water Pollution Prevention" sets ambitious targets for improving water treatment and quality in China, with a focus on increasing WWT capacity, promoting sludge treatment, and reforming water tariffs. These policies are expected to benefit wastewater treatment companies, particularly SIIC, which is highlighted as the top pick due to its attractive valuation and strong growth potential. The increased capacity addition and sludge treatment profits are projected to drive EPS growth and raise price objectives for all three companies. However, there are also risks associated with policy changes, competition, and cash flow challenges that could impact their performance.