Spring Cleaning
Comment of the Day

December 08 2014

Commentary by Eoin Treacy

Spring Cleaning

Thanks to a subscriber for this report on the Chinese Waste and Environment Services sector for RHB OSK. Here is a section: 

Environmental protection investment. China budgeted CNY3.4trn for environmental protection under the 12FYP, ie 140%/57% above the budgeted/actual for 11FYP respectively. The upcoming Water Pollution Prevention and Treatment Plan will assign CNY2.0trn in 2013-2017 for water projects, 45% above 12FYP’s numbers. This shows China's commitment at least until 2017 on this matter. 

Municipal waste water treatment, higher budget. The NDRC budgeted CNY430bn for municipal waste water treatment in 12FYP. This was 30%/14% above the budgeted/actual numbers under 11FYP. The huge investment was intended to raise the treatment rate for cities/counties/towns to 85%70%/30% in 2015 from 77%60%/20% respectively. Future municipal sewage volume is on an uptrend, backed by the ongoing urbanisation process. Near-term drivers are: i) the “go rural” (county/town) with still low treatment rates, and ii) a discharge standards upgrade.

?Industrial waste water treatment, a more centralised treatment. Despite the already high treatment rate of 95% in 2010, industrial sewage still offers enormous opportunities via waste water treatment by third-parties, which have better cost efficiencies than manufacturers that treat sewage by themselves. China’s economy slowdown may drag down industrial sewage volume, but textile industry has better visibility due to the recoveries in the US. We prefer the BOO model for industrial waste water treatment as it charges higher, more flexible tariffs.

Sludge, a new market. Sludge is highly toxic, and its treatment rate was low in 2010 (below 25%). The NDRC plans to raise this rate up to 70% for cities in 2015, and budgeted CNY35.0bn for 12FYP, 7% more than its 11FYP budget. Guangdong has committed the most on sludge treatment and its market is large, accounting for 11% of China’s total new sludge treatment capacity for 12FYP. Sludge BOOs can deliver 20% IRR

Eoin Treacy's view

Here is a link to the report.

The current stock market rally in China is related more to the opening up of two-way investment avenue between the Shanghai and Hong Kong stock exchanges that began last month, than any other single factor. The fact that it has been accompanied by the first cut to short-term interest rates in a number of years has been an additional bonus. This move is being led higher by the banking and broking sectors not least because of their size, liquidity and that they benefit from an increasing number of transactions. 

If China is to achieve its investment goals, the environment represents a substantial challenge. As human capital takes on a more important role in achieving growth, public health considerations will have to take precedence. From an appraisal of some of the charts, much of this story is already in the market. 

Beijing Enterprises Water has Type-2 top formation development characteristics as taught at the Chart Seminar. 

Sound Global has a similar pattern and will need to find support in the current area if potential for additional higher to lateral ranging is to remain credible.

China Everbright International has been ranging for most of the year following an accelerated advance last year and will to continue to hold above the 200-day MA if the benefit of the doubt is to be given to the upside. 


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