SIIC shares three common characteristics with BEWG and CEI. First, similar to BEWG, it has a good track record in the water business, expanding its water capacity from only 1m tons/day in 2010 to 3.9m tons/day currently. Its projects are strategically located nationwide across 12 provinces in China. Second, being a SOE, SIIC?¡¥s financing cost is one of the lowest in the industry, giving it a similar edge to BEWG and CEI in the capital intensive business. Lastly, its parent co is supportive of SIIC and announced its plans to subscribe over 50% of SIIC?¡¥s recently proposed private placement. The parent co has a 47% stake in one of China?¡¥s largest water companies that may potentially be injected. Development plans in 2014
Learning from the experience of BEWG, SIIC plans to issue share options to its employees to incentivize and retain its top talent. The company also plans to list in HK next year. It has aggressive capacity addition plans, and intends to add 1m tons/day of water projects annually and 1000tons/day of waste incineration projects. With the establishment of the Shanghai Free Trade Zone, SIIC intends to set up a financing company to reduce its funding cost. Trend 1: Continued consolidation in China's water market
SIIC Environment believes there are abundant project opportunities in China's water sector as local government and private players are exiting the water market. Though competition is intensifying, returns will still be reasonable for established players with good execution track record. We believe BEWG, as the leading water player in China with a nationwide network and good access to financing, will continue to exploit the opportunities and expand at an accelerated pace. Thus, we forecast a 3m tons/day project addition for BEWG, higher than management's conservative 2m tons/day guidance (see BEWG: 2014 to be another bumper year, dated 28 October for details).
Eoin Treacy's view A number of the reforms expected from China's plenary session
are intertwined with how to reduce the influence of state owned and therefore
Communist Party cadre dominated enterprises. The correlation between support
for inefficient power and heavy industry and the country's pollution has been
evident for quite some time so progress in the former is likely to have meaningful
results for the latter.
Hong Kong listed China Everbright and Beijing Enterprises Water have benefitted from continued support for environmental measures and while valuations are no longer cheap they continue to hold progressions of higher reaction lows.
Singapore listed SIIC Corp is a considerably smaller company with a market cap of S$746 million. Following a steep decline in 2008 and a painful subsequent restructuring, the share broke out of a five-year base in October. A sustained move below 10¢ would be required to question medium-term recovery potential.