The firms being tipped to tap into China’s quest for cleaner water

A multi-billion yuan government programme to rid the country of severe water pollution and shortages, offers specialist firms massive opportunities

PUBLISHED : Tuesday, 02 August, 2016, 6:18pm
UPDATED : Tuesday, 02 August, 2016, 10:55pm

China’s water supply issues may be a growing headache for Beijing — but increased government investment in upgrading the quality of the country’s drinking water could prove a winner for specialist companies in the sector, according to new report from Morgan Stanley.

The study, led by equity analyst Joseph Lam, said the Chinese government is aiming to clamp down on water consumption, recycle more and increase wastewater treatment as it attempts to deal with the triple challenges of worsening shortages, declining quality, and meeting environmental targets.

A series of stark findings in the report, however, show just how big a challenge lies ahead.

China ranks number two in the world for number of people living without access to safe water, 63 million people, second only to India’s 76 million. And two-thirds of its cities have some level of water shortage, and the problem is getting worse.

The study also shows that while water consumption rose, water resources reduced between 2005-2014. At the same time, the country’s water quality deteriorated.

Lam said the government’s investment in wastewater treatment is expected to increase from its 430 billion yuan target during the 12th five-year-plan (2011-2015) to 535 billion yuan in the 13th five-year-plan (2016-2020), including an estimated 51 billion yuan upgrade to existing treatment plants to meet its own water quality targets by 2020.

That huge spending, of course, is good news for specialist companies in the sector, and Morgan Stanley has given three Chinese firms overweight ratings, given their strong positions to play an important role in the massive upgrade.

It tips wastewater treatment company Beijing Enterprises Water (BEW), particularly, to be one of the biggest to benefit from plans to curb water pollution.

The company’s shares sat steady at around HK$4.58 in July, but Morgan Stanley has now set a price target of HK$6.3 by July next year, reaching as high as HK$8.

About half of BEW’s existing wastewater treatment portfolio produces water at what’s called “1B standard” or below, meaning it has potential to be upgraded to meet the government’s desired “1A standard”.

“Given rising public concern over water resources and pollution, we think the government will continue to raise the wastewater discharge standards and increase treatment penetration along the value chain, such as sludge treatment,” Lam said.

“Stricter standards will likely provide more investment opportunities for existing WWT [wastewater treatment] operators, with a return at least similar to that of existing projects.”

Already with the largest capacity of any Chinese wastewater treatment company listed on the Hong Kong Stock Exchange, BEW is also in a prime position to win work, given its parent company is state-owned, Lam added.

Stricter standards will likely provide more investment opportunities for existing WWT [wastewater treatment] operators, with a return at least similar to that of existing projects
Morgan Stanley equity analyst Joseph Lam

Guangdong Investment (GDI), which earns 60 per cent of its revenue by supplying raw water to Hong Kong, is also strongly tipped.

The Morgan Stanley report has given it a target price of HK$13.50 for July next year, up from its July 2016 price of HK$11.92.

Lam said with an existing Hong Kong water supply contract in place, GDI has guaranteed cash flow for future merges and acquisitions, and that stable demand for water means there are limited downsides to its current situation.

The third recommended stock is Beijing OriginWater, which uses high-end membrane technology to treat water.

Lam said with the government promoting recycled water, and a projected 29 billion yuan in government investment in new facilities, he expects “membrane bioreactor” technology to grow its share of the wastewater treatment market.

And that should boost OriginWater’s current 8 per cent share of the recycled water sector, to a dominant 30 per cent by 2020.

OriginWater has a projected share price target of 21 yuan by July next year and a maximum price of 31.3 yuan — again both significantly higher on the July 16.24 yuan price.