China’s environmental service sector to benefit from big government spending

Water treatment companies tipped to see boost from public-private partnerships

PUBLISHED : Thursday, 04 February, 2016, 10:55am
UPDATED : Thursday, 04 February, 2016, 10:57am

China’s environmental service sector will benefit from rising government spending to tackle worsening pollution problems, analysts say.

China’s environmental expenditure rose 3 per cent year on year to 112 billion yuan in December, compared with 1 per cent growth in overall expenditures, the latest official statistics showed.

“We believe that the environmental services sector is likely to outperform the market given its much stronger growth rate for investment,” HSBC analysts said in a research note on Tuesday.

Among all the sub-sectors, HSBC prefers water service companies, as they are expected to be the largest beneficiary of public-private partnership (PPP), a model China has introduced to leverage private capital for state-run public sectors, and consequently should see the largest number of new orders in the 2016 fiscal year.

Analysts from China International Capital Corp also expect the environmental service sector to post solid growth this year and say water treatment companies will profit from the government’s promotion of the PPP business model in the industry.

The next step will be to treat industrial boilers, which will likely drive demand for boiler flue gas treatment and small boiler treatment
CICC analysts

In addition, smoke, gas and soil treatment companies and environmental monitoring service firms could see their fundamentals improve this year, thanks to the government’s stimulus measures and related investments, they said in a recently released report on the sector’s outlook.

The Chinese government unveiled policies to offer bonuses to coal power plants meeting stricter emission standards by the end of 2015, which should help drive the 30 billion yuan plant-upgrade market in 2016, they said.

On the other hand, the government is under growing pressure to take tougher measures to tackle the smog problem, which worsened in 2015 despite increased efforts to combat air pollution.

“The next step will be to treat industrial boilers, which will likely drive demand for boiler flue gas treatment and small boiler treatment,” CICC analysts said.

They said the long-awaited action plan for soil pollution prevention and treatment could come out soon and related investments might reach 2 trillion yuan over the next five years.

“If (the action plan is) implemented effectively, China’s soil treatment market size may reach 20 billion yuan, implying significant upside potential compared to the market size of 3 billion to 5 billion yuan over the past few years,” the analysts said.

For environmental monitoring companies, new guidance released in December on the reform of the environmental monitoring system would put local governments under “growing pressure” to combat pollution, while environmental monitoring stations would be outsourced to third parties, they added.

Besides organic growth, mergers and acquisitions in the environmental service sector might also gain momentum this year, as there were abundant acquisition targets in the Chinese markets, with only 50 to 60 listed companies in a total pool of 10,000 environmental services companies.

“As of now, the IPO progress remains slow, and is insufficient to meet environmental services companies’ fund-raising requirements,” the CICC analysts said.

It recommends stocks including Shenzhen-listed Beijing Originwater Technology, Beijing SPC Environment Protection Tech and Sailhero Environmental Protection High-tech.