Broker's View

Deutsche Bank maintains positive view on ‘green’ Chinese stocks

Environmental protection sector now accounts for nearly a quarter of the total number of PPP-backed projects

PUBLISHED : Monday, 19 September, 2016, 1:03pm
UPDATED : Monday, 19 September, 2016, 10:30pm

Deutsche Bank is maintaining a positive view of China’s environmental sector, based on favourable government policies, strong earnings growth potential, and what it sees as attractive stock valuations.

And Public Private Partnership (PPP) contracts continue to play a vital role in the government’s ambition to clean up the environment, the bank said in its recent market research report on the sector.

Thomas Zhu, research analyst at Deutsche Bank, said the number of Chinese PPP-backed projects grew strongly in the second quarter of the year,

“We calculate projects accelerated from an average of 360 per month in the first three months this year to 521 in the second quarter,” said Zhu.

“The amount of investment involved has shown a similar trend, with average monthly additions accelerating from 330 billion yuan per month in the first quarter to 610 billion yuan per month in the second quarter.”

Within those figures, the environmental protection sector was among the biggest contributors, representing nearly a quarter (23 per cent) of the total number of projects added.

In terms of sub-sectors, both sewage treatment and environment renovation ranked among the top five contributors.

Deutsche Bank now expects those environmental PPP rollouts to continue apace, especially given both were among the key topics raised during the recent G20 summit in China when Ministry of Finance officials said they are poised to release the third batch of PPP demonstration projects.

China’s environmental sector is carrying attractive valuation estimates as a result.

The sector has only slightly underperformed the market over the past three months, rising 11 per cent, compared with the 15 per cent performance of MSCI China over the period.

“The sector’s valuation looks attractive at current levels, compared with its own trading history and also with the index,” said Zhu in the report.

“We think the sector’s current valuation offers decent safety margins to buy into the stocks.”

The PEs of most environmental stocks are below or close to their average minus one standard deviation since 2013, in terms of both reported earnings and adjusted earnings. The relative PE versus MSCI China has also dropped below the average minus one standard deviation since 2013.

Deutsche Bank maintains “Buy” ratings on six major players in the environmental sector, including Beijing Enterprises Water, China Everbright International and CT Environmental.

The sector’s current valuation offers decent safety margins to buy into the stocks
Thomas Zhu, research analyst at Deutsche Bank

The bank says it likes Beijing Enterprises, based on strong earnings growth prospects and its efforts to become asset-lighter.

China Everbright will also continue to be a “Buy” as it tipped to beat consensus earnings forecasts for 2016-2017 with strong growth prospects based on better market understanding of the biomass industry. The bank, however, warn of possible risks for Everbright if it manages to win fewer-than-expected new project, and if there are construction delays in any of its current projects.

The bank expects CT Environmental to have what it calls “firstmover advantage” in industrial water and waste treatment, making it stand to benefit from the government’s planned Soil Pollution Control Action Plan.

CT ’s downsides are suggested as the potential closure or relocation of existing industrial

customers, or lower-than-expected utilisation rates due to economic growth slowdown.