Stronger enforcement, improving cashflow
Comment of the Day

November 16 2017

Commentary by Eoin Treacy

Stronger enforcement, improving cashflow

Thanks to a subscriber for this report from Deutsche Bank focusing on the Chinese Environmental sector. Here is a section:

The sector’s valuation looks attractive at current levels compared with its own trading history and also with the index. The P/Es of most stocks are below/close to their average minus one standard deviation since 2015, in terms of both their own PE and also relative PE to MSCI China. We think that the sector’s current valuation offers decent safety margins to buy into most stocks.

China usually strengthens environmental enforcement during the last three years of Five-Year Plan periods as the country gets closer to assessment deadlines. We expect the same to take place from 2018, especially as the CPC's 19th National Congress recently mentioned that China plans to set up a "National Natural Resources and Ecology Administration" soon. We expect these factors to benefit this laggard sector, together with improving cashflow profile/earnings quality with selective companies over the next few years


Eoin Treacy's view

Here is a link to the full report.

By all accounts New Delhi’s pollution is quickly catching up with Beijing’s but China is further along on its development track that India. The thick soup of smog that clings to Northern China during the winter is a political liability as the middle class evolves and demands better conditions. The closing down of inefficient production facilities and fabricators is driven both by a desire to cut back on overcapacity and to tackle nonperforming loans. Improving the environment at the same time is a bonus.

However, nothing is simple when polluting industries employ significant numbers of people. For example, China uses more aluminium than copper for wiring because so many more people are employed in aluminium production. These kinds of considerations are what has delayed wider adoption of environmentally friendly solutions. 

China Everbright International has held a progression of higher reaction lows since early 2016 and broke out to new recovery highs last week. Potential for higher to lateral ranging can be given the benefit of the doubt provided to continue to hold the HK$10 area. 

The adoption of electric / hybrid electric vehicles is potentially a more interesting way of playing the evolving Chinese environmental theme because it has a real chance of becoming globally competitive in battery manufacturing. 

BYD surged higher in September and has been consolidating that move since. It will need to hold the HK$60 if the benefit of the doubt is to be given to the upside.


Back to top

You need to be logged in to comment.

New members registration