China Water &Environment:Riding on policy tailwinds

Govt steps up support for public-private-partnerships

The government in 4Q16 reaffirmed its commitment to public-privatepartnerships(PPP) by publishing guidelines for financial management,implementation and property rights protection. With Rmb12tn of projects sittingon the Ministry of Finance (MOF) database, we believe the opportunities arelarge. In this report, we cherry pick the quality stocks that can mitigate executionand collection risk. We also like companies that can attract LP (limited partners)to go asset light. The State Council’s guidelines announced on 26 Dec 2016 onPPP asset securitisation should further boost development. We think BEW (371HK) is best positioned to benefit from these developments.

New 5-yr wastewater plan favours comprehensive solution

The government said in 4Q16 its aims to boost investment in wastewatertreatment (WWT) by 35% in the 13th Five Year Plan (FYP) vs the 12th-FYP. Thisshould create more opportunities in WWT plant development and for pipelineand rainwater collection and treatment. Together with policies favouring thebundling of pipelines and plant assets, likely in the form of PPP, we thinkoperators with integrated capabilities in design, construction and operation ofboth water plants and environmental renovation will be the biggest beneficiaries.

Waste-incineration development – growth still strong

The waste treatment budget is slated to rise by 85% during the 13th-FYP overthe amount actually spent in the 12th-FYP. With waste incineration capacitytargeted to grow by 60% from 2014 to 2020, we expect a pick-up in constructionrevenue for HK-listed companies that adopt concession accounting (IFRIC12).Contrary to market concerns, we see slim prospects for a change in the powertariff mechanism for waste-to-energy (WTE) projects in 2017. We also think thatthe build-operate-transfer (BOT) contracts (i.e. treatment fee adjustment clause)will help defend returns in the event of a change in the power tariff mechanism.

Key stocks: BEW best-positioned. GDI: upside potentialfrom PPP. CEI: strong backlog underpins growth

We maintain our positive view on the water and environment sector on the backof industry growth underpinned by strong policy support. BEW (371 HK) is ourtop pick in the water & environment space. If PPP development (black & odorouswater) picks up in 2017 as we expect, BEW will be best placed to benefit. This isdue to its track record in environmental renovation and its state enterprise (SOE)background. Its status as a reputable player in China’s water space should alsohelp it attract LP to go asset-light.

GDI (270 HK) is a defensive play with high-quality earnings growth and a strongbalance sheet underpinned by HK water sales. PPP development presentsopportunities for GDI to deploy its capital to enhance shareholder value, in ourview. On a longer term basis, we also like CEI’s (257 HK) strong project pipelinein its core waste-to-energy (WTE) business (37.1k tons/day, incl. Ph II, vs. 21.2ktons/day in operation), underpinning visible growth ahead.