中国 : 环保 : 水处理 结构变化已进入分水岭 ; 买入碧水源和万邦达 ( 摘要 ) 证券研究报告

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1 213 年 12 月 12 日 中国 : 环保 : 水处理 结构变化已进入分水岭 ; 买入碧水源和万邦达 ( 摘要 ) 证券研究报告 碧水蓝天成为公众 / 政府 / 企业共同追求, 中国已进入环保时代良好环境已经成为各方的共同追求 政府 : 国务院出台针对环保的考核政策, 将推动地方政府转变政绩观, 从过去的修路修桥, 转变为修环保设施等 ; 企业 : 最新司法解释细化了对环境污染犯罪的规定, 将促使企业加大环保投入 ; 公众压力 : 公众环保意识的提高, 也将给政府和企业施加更大压力 海外经验 : 中国已到大规模投入环保的阶段 194 年代后环境公害事件的大规模爆发推动了发达国家的环境立法与环保投入, 当时的人均 GDP 大约在 5,- 1, 美元 212 年中国人均 GDP 超过 6, 美元, 已经到了大规模投资于改善环境的阶段 水处理产业的结构变化与机遇 : 行业整合 膜市场和煤化工城市污水运营开始进入到行业整合阶段 212 年我国城镇龙头公司北控水务的市场占有率不到 3%; 而威立雅 苏伊士等在本国的市场占有率都超过 2% 水厂提标和再生水厂建设为膜技术公司提供机遇 十二五规划下,215 年再生水的规模将达到 3,885 万立方米 / 天, 比 21 年增加 221% 这些将推动我国膜市场从 21 年的 3 亿元增加到 215 年的 1, 亿元, 复合增长率约为 27%, 从而为碧水源和津膜科技等提供发展空间 工业污水处理需关注煤化工等细分市场 今年以来发改委核准了 21 个大型煤化工项目, 总投资超过 5, 亿元 ; 水处理为煤化工的关键环节, 预计 22 年前该领域环保水处理市场将达到 5 亿元, 万邦达为该领域的领先者 我们的首选股 : 买入碧水源和万邦达 ; 卖出创业环保 (A) 水处理设备与工程公司 : 买入碧水源和万邦达 碧水源 ( 膜行业龙头公司, 充分利用资本优势, 整合各方资源, 快速扩展, 买入 ); 万邦达 ( 煤化工和石化行业水处理龙头, 受益于煤化工的转暖, 买入 ), 津膜科技 ( 膜组件领域用户满意度最高, 有望利用 212 年上市的机遇实现业务的加速发展, 但由于估值因素给予中性评级 ) 12 个月目标价格和评级 公司 股票代码 评级 目标价 股价 12 月 9 日 上行空间 碧水源 37.SZ 买入 % 万邦达 355.SZ 买入 % 北控水务 371.HK 买入 % 津膜科技 3334.SZ 中性 % 创业环保 (H) 165.HK 中性 % 创业环保 (A) 6874.SS 卖出 % 注 : 目标价格采用当地货币单位 股价截至 213 年 12 月 9 日 我们用 PEG 估值方法来计算 12 个月目标价格, 用 EV/EBITDA 方法来计算创业环保 (A+H) 的目标价 资料来源 :DataStream 高华证券研究 中国控制污染的投入偏少 2.4% 2.2% 2.% 1.8% 1.6% 1.4% 1.2% 资料来源 : 历年全国环境统计公报 Eurostat 风险 2.2% 1.2% 环境投资占 GDP 的比例中国欧盟 2.4% 2.3% 2.1% 2.1% 2.2% 2.1% 2.3% 2.1% 1.9% 2.1% 2.1% 1.3% 1.3% 1.3% 1.4% 1.4% 上行 : 政府出台更加有利的产业政策 ; 严重的环境污染事件促使政府和企业加大环保投资力度 下行 : 地方政府可能缺少资金治理污染 1.6% 1.5% 1.5% 1.% % 水务运营公司 : 卖出创业环保 A 股 ( 成长性偏弱, 天津市污水处理价有下调风险, 且 A 股估值偏高 ),H 股中性 ; 北控水务中性 ( 兼具国有企业和民营企业的优势, 将继续通过兼并收购实现快速发展 ; 融资成本上升 ) * 全文翻译随后提供 韩永, CFA 执业证书编号 : S (21) yong.han@ghsl.cn 北京高华证券有限责任公司张富盛执业证书编号 : S (21) jefferson.zhang@ghsl.cn 北京高华证券有限责任公司 北京高华证券有限责任公司及其关联机构与其研究报告所分析的企业存在业务关系, 并且继续寻求发展这些关系 因此, 投资者应当考虑到本公司可能存在可能影响本报告客观性的利益冲突, 不应视本报告为作出投资决策的唯一因素 有关分析师的申明和其他重要信息, 见信息披露附录, 或请与您的投资代表联系 北京高华证券有限责任公司 投资研究

2 Table of contents Overview: Sector acceleration, Buy OriginWater, WBD 3 Our view of China s water treatment sector in ten charts 5 Industry drivers: Assessment, enforcement, public opinion 8 Scarcity and pollution: Catalysts for water treatment industry 11 Enviro protection, water treatment: Rapid growth under 12 th FYP 16 Wastewater treatment costs effects on industry and everyday life 2 Sewage treatment: Membrane technology developing rapidly 23 Structural trends: Consolidation, membrane market, coal chemistry 28 Lessons from overseas: Incidents, demand drive development 32 Key industry risks: Funding sources, supervision and competition 38 Valuation and ratings: Buy OriginWater and WBD 4 OriginWater (37.SZ, Buy): Industry leader, consolidation ability 44 WBD (355.SZ, Buy): Coal chemical policy loosening is a tailwind 51 BEWG (371.HK, Neutral): Rapid expansion via M&A 59 MOTIMO (3334.SZ, N): Tech edge, possible catch-up post listing 66 Tianjin Capital (165.HK/6874.SS): Water leader, growth weak 73 Appendix 8 Disclosure Appendix 2 The prices in this report are as of the market close of Dec. 9, 213 unless stated otherwise. The author would like to thank Rory Wang for her contribution to this report. Exhibit 1: Global valuation comparison GS/GH 9-Dec-13 Up/Down Market cap EPS CAGR P/E (X) EV/EBITDA(X) ROE Ticker Rating Price Ccy 12M TP Potential USD mn 214E-216E 213E 214E 213E 214E 213E 214E China-A share Origin Water 37.SZ Buy CNY % 5,686 37% % 23% WBD 355.SZ Buy 34.4 CNY % 1,296 4% % 12% Tianjin MOTIMO 3334.SZ Neutral CNY % % % 16% TCEPC (A) 6874.SS Sell 8.67 CNY % 2,38-8% % 7% Median-Ashare companies % 14% HK-H share BEWG 371.HK Neutral 4.41 HKD % 4,798 25% % 13% TCEPC (H) 165.HK Neutral 3.27 HKD % 62-8% % 7% Median-H share companies % 1% US American Water Works Company, INC AWK Buy 41.1 USD % 7,335 8% % 9% Europe Veolia Environnement VIE.PA Neutral 11.2 EUR % 7,797 37% % 3% Suez Environnement SA SEVI.PA Neutral 12.5 EUR % 8,733 11% % 8% Pennon PNN.L Neutral 638 GBP % 3,81 18% % 17% Severn Trent SVT.L Buy 1,665 GBP 2, % 6,485 % % 41% United Utilities UU.L Buy 647 GBP % 7,227-5% % 23% Median-Europe companies % 17% Source: Datastream, Goldman Sachs Global Investment Research, Gao Hua Securities Research. 全球投资研究 2

3 Overview: Sector acceleration, Buy OriginWater, WBD Industry drivers: Assessment, enforcement, public opinion A clean environment has become a common pursuit. Government: The State Council has issued environmental supervision policies in January 213 to encourage local governments to change their focus from bridges and roads to environmental facilities. Corporates: The latest laws elaborate on criminal pollution rules in June 213, and will drive higher corporate environmental investment. Public pressure: People are becoming more environmentally conscious, putting more pressure on government and enterprises. Scarcity and pollution: Catalysts for water treatment industry According to 28 UN data, China s renewable freshwater per capita was only 214 m 3, one quarter of the world average. More than two-thirds of China s 658 cities face water shortage. Wastewater discharge volume in 211 was 65.9bn tonnes. In China s key watersheds, 35.8% have water quality below III, with 17.2% rated below V, the lowest rank. Enviro protection, water treatment: Rapid growth under 12th FYP According to the 12 th Five-year Plan, the output value of China s environmental protection industry will reach Rmb4.5tn by 215, a CAGR of 18%. During the 12 th Five-year Plan urban sewage treatment investment will be around Rmb43bn, and water supply investment will total Rmb41bn, while seawater desalination investment will total around Rmb21bn. Wastewater treatment costs effects on industry and everyday life Total industrial wastewater treatment costs in 211 were Rmb73bn, corresponding to 1.2% of total profits. In particular, the oil processing, paper, steel, textile and chemical industries had relatively high wastewater processing cost to total profit ratios. China s residential water spending is generally about.6% of disposable income, while developed countries like the US and European countries spend 1.1%-1.5%. Therefore, in terms of both necessity and affordability, there is room for water prices to increase, in our view. Sewage treatment: Membrane technology developing rapidly Membrane technology is not only stable and reliable, but also meets high water reclamation quality standards. It has no problem with sludge bulking. This significantly simplifies the process and reduces the amount of space required, solving the main deficiencies of traditional activated sludge technologies. Structural trends: Consolidation, membrane market, coal chemistry 1) Urban sewage operations are entering a consolidation phase. In 212, China s leading firm BEWG had market share of less than 3%, while French companies Veolia and Suez have a combined market share of over 6%. 2) Higher sewage discharge standard and reclamation water create significant market space for membrane products. China s membrane market is expected to increase to Rmb1bn in 215 from Rmb3bn in 21. 3) The water treatment in 全球投资研究 3

4 coal chemicals is accelerating. Since 213, NDRC gave approvals to 21 coal chemical projects, with total investments of Rmb55bn. Lessons from overseas: Incidents, demand drive development Developed countries underwent eruption of serious environmental events after 194s, and started large-scale investment in environment during the 196s-197s when per-capita GDP was about US$ 5,-1,. In 211, China s environmental investment was just 1.5% of GDP, while major developed countries were at approximately 2% during their pollution clean-up phases. China s per-capita GDP was over US$6, in 212, which makes it an upper middle income country according to the World Bank s classifications. Marginal utility of traditional consumer products is falling for Chinese consumers, while Clean air and water is becoming a more urgent consumption demand. Key industry risks: Funding sources, supervision and competition 1) Local governments may lack financing resources to deal with pollution when the central government began to control local government debt. 2) Enterprises may lack funding for pollution control because of low profitability. 3) Oversight may be insufficient, and companies may choose to discharge pollutants illegally rather than invest in pollution management. 4) Over the past two years, a number of policies have been enacted that clearly support the environmental industry, and this may attract more companies into this field, depressing gross margins. Valuation and ratings: Buy OriginWater and WBD We use PEG as our main methodology except TCEPC, because A + H-share back-testing results suggest PEG produce highest long alpha. We initiate OriginWater and WBD at Buy, initiate BEWG, MOTIMO and TCEPC-H at Neutral, initiate TCEPC-A at Sell. OriginWater (TP Rmb5.59, upside potential 29.8%, Buy) is the leader in the membrane market: 1) Sewage plant upgrade and reclaimed water plant construction provide development room. 2) The company has strong consolidating capability and a good track record. 3) It has a good incentive mechanism and is expected to remain the industry leader. 4) 214 PEG is.77x, lower than the sector average of.86x. WBD (TP Rmb4.52, 17.8% upside potential, Buy) is the leader in water treatment in coal chemicals: 1) Government policy towards coal chemical has turned warm. 2) Water scarcity in coal abundant area and stringent environment regulation make water treatment a key part of coal chemical projects. 3) 214 PEG is.85x, below sector average of.86x. TCEPC (A share Sell/H share Neutral): Tianjin Capital s expansion beyond its home region has slowed following a change in its strategy after 29. The firm is subject to potential downward revisions to its sewage treatment tariffs in Tianjin, as its tariffs are significantly higher than the national average. Based on historical EV/EBITDA valuations, we set 12-month target prices of HK$3.27/Rmb7.83 for Tianjin Capital H/A. BEWG (Neutral): 1) As the main operating body of Beijing Enterprises Group, BEWG enjoys the advantage of being an SOE. 2) BEWG also has flexible incentive mechanism like a private company. 3) It is expected to continue to realize rapid expansion via acquisitions. 4) 214 PEG is.9x, higher than sector average. MOTIMO (Neutral): 1) MOTIMO enjoys advantage in technology and was no. 1 in the user satisfaction survey in ) The company s capital has been strengthened since it listed in ) 214 PEG is.94x, higher than the sector average. 全球投资研究 4

5 213 年 12 月 12 日 中国 : 环保 : 水处理 Our view of China s water treatment sector in ten charts Exhibit 2: China underspends on pollution control Exhibit 3: China s water resources per capita are just one-quarter the world average 2.4% 2.2% 2.% 1.8% 1.6% 1.4% 1.2% 1.% 2.2% 1.2% 1.1% EP investment as percentage of GDP 2.1% 2.1% 1.3% 1.3% 2.1% China 2.1% 2.1% EU 1.3% 1.4% 1.4% % 2.1% 1.6% 2.4% 1.5% 2.3% 1.9% % 1.5% ' m 3 /capita Renewable freshwater per capita Source: Past National Environmental Statistics Bulletins, Eurostat Source: China Statistical Yearbook on the Environment, 212 Exhibit 4: Domestic water pollution incidents have continued to occur Source: News info compiled by Gao Hua Securities Research 全球投资研究 5

6 Exhibit 5: The environmental protection industry will develop rapidly during the 12 th Five-year Plan Exhibit 6: Water protection remains the largest submarket of environmental protection industry Energy conservation and environmental protection industry output (tn Rmb) 4.5 CAGR:18% Solid waste, 1% Current market share distribution Others, 2% Air pollution, 3% Water, 4% Source: 12 th Five-year Plan for the Energy Saving and Environmental Protection Industry Source: China Association of Environmental Protection Industry, Gao Hua Securities Research Exhibit 7: US municipal wastewater treatment unit operation cost is c.63% higher than that China Exhibit 8: Ten industries with highest wastewater treatment cost/profit ratio in 211 Rmb/t Unit operation cost of municipal wastewater treatment % 12% 1% 8% 6% 4% 2% % 12.% Proportion of industrial wastewater treatment fee to total profits 8.% 5.4% 5.% 2.6% 2.3% 1.5% 1.3% 1.3% 1.2%.6%.4.2. China US Oil processing, Coking, Nuclear Fuel processing Paper making and products Ferrous metal smelting and pressing Non-ferrous metal mining Textile, Wearing and Apparel Chemical Metal products Electric and heat power production and supply Food and beverage Industry Average Coal mining and washing Source: Handbook of Biological Wastewater, China Statistical Yearbook on the Environment, 212 Source: China Statistical Yearbook on the Environment 212, China Statistical Yearbook 212 全球投资研究 6

7 Exhibit 9: This growth will likely continue through the 12 th Five-year Plan Exhibit 1: Our earnings forecast is above consensus except for TCEPC China's membrane industry scale (Rmb bn) 1 CAGR: 27.2% 3 Rmb/ share OriginWater WBD BEWG MOTIMO TCEPC 214 GH estimated EPS consensus EPS Difference 3% 19% 12% 3% -24% 215 GH estimated EPS consensus EPS N/A Difference 6% 21% 21% 8% N/A Note: EPS for BEWG is in HKD. N/A=Not Available E Source: 12th Five-year Plan for Technological Development of Highperformance Membranes Source: Wind, Bloomberg, Gao Hua Securities Research Exhibit 11: We use PEG methodology to value OriginWater, WBD, BEWG and Tianjin MOTIMO and use EV/EBITDA to value TCEPC (A + H) Stock Price 214P/E EPS CAGR 214PEG Target Target Target EV/EBITDA 214 EBITDA Target Potential DCF Rating ( ) PEG P/E (Historical Average) (HKD/Rmb mn for H/A) Price Upside based TP OriginWater x 37.%.77x 1.x 37.x N/A 1, % Buy 52.6 WBD x 39.8%.85x 1.x 39.8x N/A % Buy 4.8 BEWG x 25.4%.9x 1.x 25.4x N/A 2, % Neutral 5.1 Tianjin MOTIMO x 43.%.94x 1.x 43.x N/A % Neutral 32. TCEPC (H) x N/M N/A N/A N/A 5.9x 1, % Neutral N/A TCEPC (A) x N/M N/A N/A N/A 13.9x % Sell N/A Note: Priced as of December 9, 213. Target prices are on a 12-month basis. Target prices and share prices for BEWG and TCEPC (H) in HKD, and in CNY for others. Source: Quantum, Gao Hua Securities Research. 全球投资研究 7

8 Industry drivers: Assessment, enforcement, public opinion Central government strengthening environmental assessments of local governments: Clean air/water now key political achievement The State Council s Measures for the Assessment of Reduction of the Total Emission of Major Pollutants during the 12th Five-year Plan (the Assessment Measures) strengthen assessment of environmental protection activities of local governments. According to these measures, announced on January 5, 213, each region must set workable targets for control of emission of major pollutants at each level of government. For local governments that do not pass their yearly assessment, the policy provides a veto mechanism which will temporarily halt environmental approvals for all new pollutant emitting projects in the region, disqualify leading cadres from annual awards, etc. On September 3, 213, the Ministry of Environmental Protection released the Assessment Results of the 212 Special Plan on Prevention and Control of Water Pollution of Key River Basins. Environmental approvals for new projects discharging water pollutants have been suspended for five cities that failed the assessment Siping, Hefei, Lu an, Kunming and Enshi. The Ministry of Environmental Protection s supporting measures detail measurement and monitoring standards for emissions reduction. In February 213, the Ministry of Environmental Protection released the Measures for Measuring the Reduction of Total Emissions of Major Pollutants during the 12 th Five-year Plan, clarifying the measurement principles and calculation methods for various pollutants. The Ministry also released the Measures for Monitoring the Reduction of Total Emission of Major Pollutants during the 12 th Five-year Plan, which authorizes the monitoring of major pollution sources and verifying the effectiveness of emissions reduction. Judicial interpretation of environmental crimes by China s Two Supremes will drive enterprise environmental investment The latest judicial interpretations of environmental crimes will strengthen measures to combat industrial environmental crime, and drive investment in environmental protection. In June 213, China s Supreme People s Court and Supreme People s Procuratorate jointly released Interpretations on Certain Issues Concerning the Application of Law in the Handling of Criminal Cases of Environmental Pollution (the Interpretations), which clarify rules of criminal law related to criminal environmental pollution and wrongdoing by environmental protection regulation institutions. Under Article 338 of the Criminal Code, discharging or disposing of radioactive, infectious, toxic or otherwise harmful waste in violation of national laws, resulting in severe environmental pollution, is punishable by imprisonment up to three years; cases resulting in extraordinary harm are punishable by imprisonment of three to seven years. Under Article 339 of the Criminal Code, importing and dumping, storing or disposing of solid waste from outside the country in violation of national laws is punishable by imprisonment or detention of up to five years; cases resulting in a large environmental pollution accident are punishable by imprisonment of up to ten years; cases leading to extraordinary harm are punishable by imprisonment of more than ten years. 全球投资研究 8

9 Under Article 48 of the Criminal Code, significant dereliction of duty by state personnel in charge of supervising environmental protection leading to significant environmental pollution face imprisonment of up to three years. These Interpretations clarify relevant elements of the criminal code, improving workability: They set 14 criteria for severe environmental pollution, including interrupting the water supply for a town or greater area for 12 hours or more, causing at least Rmb3, of property damage, seriously injuring one or more people, etc. In particular, there are five activities classified as criminal severe environmental pollution even in the absence of other effects: releasing toxic material into a Category 1 drinking water source; illegally releasing three tons or more of hazardous waste; illegally releasing heavy metals or persistent organic pollutants at over three times the national or provincial government standard; releasing toxic material through illegal underground pipes or seepage wells; receiving two administrative punishments, and continuing with the same action. They specify 11 situations which classify as extraordinary harm, including halting water supply to a county-level or larger cities for 12 hours or more, causing at least Rmb1mn in property damage, or causing death or severe disability for one or more people. They criminalize providing a third party with, or allowing a third party to collect, store, use or handle hazardous waste, resulting in environmental pollution, knowing that third party either has no operating license or is exceeding the scope of its license. A number of cases have been decided since the release of these Interpretations. In August 213, the court in Nanjing, Jiangsu, ruled on a case of environmental pollution, sentencing Rongxin Chemical legal representative and other defendants to imprisonment of years for criminal environmental pollution. We estimate that, as this type of case becomes more common, it will drive companies to increase their investment in environmental protection, which will benefit the development of the environmental protection industry. Increasing environmental focus from the public will also promote environmental protection industry development As environmental awareness in China increases, environment-related mass incidents are rapidly increasing. According to a Beijing News report from September 27, 212, environmental mass incidents have increased an average of 29% annually since Since 25, the Ministry of Environmental Protection has received direct reports of 927 incidents. Major incidents were up 12% yoy in 211, especially those related to heavy metals and hazardous chemicals. 全球投资研究 9

10 Exhibit 12: Popular opposition to new industrial projects is increasing Jun, Xiamen, PX project Nov, Panyu of Guangdong, construction of waste incineration plant Jul, Shifang of Sichuan, Mo-Cu project; Jul, Qidong of Jiangsu, paper making water disposal at sea; Oct, Ningbo of Zhejiang, PX project Aug, Shanghai, magnetic suspension project; Aug, Lijiang, water pollution from Gaoyuan Construction Material Aug, Dalian, PX project; Sep, Haining of Zhejiang, pollution from Jingke Energy Source: Gao Hua Securities Research, consolidated from press reports Laws and policies like the new Environmental Protection Law will drive environmental protection industry development Opinions of the State Council on Strengthening Urban Infrastructure Construction (the Opinions) were formally released on September 16, 213, and will benefit environmental protection industry development. The Opinions set out four aspects in which to improve urban infrastructure construction, of which three are relevant to the environmental protection industry: 1) strengthening construction and improvement of underground pipe networks by city authorities; 2) strengthening sewage and waste management, with urban sewage and domestic waste safe disposal rates of 85% and 9% respectively by the end of the 12 th Five-year Plan; and 3) strengthening construction of ecological gardens. This will likely lead to improvements such as the following: Simplified approval procedures, creating a green channel for large projects, accelerating the approval process for projects Increasing central and local government investment in urban infrastructure Promoting investment and financing system and operational mechanism reforms, encouraging social funding participation Research the introduction of fiscal support and tax incentive policies On October 16, 213, the State Council released Regulations of Urban Drainage and Sewage Treatment, which will benefit sewage treatment firms. These regulations require new districts of cities and towns to optimize drainage and sewage treatment facility construction. Areas without facilities may not begin to use, areas which are not up to standards must be upgraded. They also strengthen supervision of sewage drainage and treatment facility operations. The Environmental Protection Law is being revised, and will be a catalyst for the environmental protection industry. On October 21, 213, the Standing Committee of the National People s Congress undertook its third review of the Environmental Protection Law, clarifying that the state would increase fiscal investment in environmental protection (in areas including public finances, taxation, pricing, government expenditure, etc.), strengthen evaluation on governments of environmental protection works, raise the cost to companies of violating the law by introducing daily penalties, and introduce public interest litigation; this will benefit the development of the environmental protection industry. 全球投资研究 1

11 Scarcity and pollution: Catalysts for water treatment industry China faces both water resource scarcity and water pollution China s water resources per capita are only one-quarter the world average. China s water resource scarcity is relatively severe China has 21% of the world s population, and only 6% of its water resources according to 28 UN data. Water resources per capita are only around one quarter of the world average, making it one of the world s most water-poor countries. More than two-thirds of China s 658 cities face water shortages. Exhibit 13: China s water resources per capita are just one-quarter the world average ' m 3 /capita 25 Renewable freshwater per capita Source: China Statistical Yearbook on the Environment, 212 China s water resources are distributed very unequally. According to a 211 water resource report from the Ministry of Water Resources, China s six northern watersheds have a total of 491.8bn cu m of water, or 21.1% of the national total, while total water use in those regions accounts for 45.3% of the national total. 全球投资研究 11

12 Exhibit 14: Water resources are not equally divided between north and south Water Resources Level 1 Zones (bn m 3 ) Precipitation Source: 211 China Water Resources Report. Surface Water Resources Ground Water Resources Duplicated Measurement of Surface Wate and Groundwater Total Resources % Total Usage National 5,513 2, , North 6 districts 1, % % Songhuajiang River % 5 8.1% Liaohe River % % Haihe River % 37 6.% Yellow River % 4 6.6% Huaihe River % % Northwest rivers % % South 4 districts 3,562 1, , % % Yangtze River 1, % % Taihu River % % Southeast rivers % % Pearl River % % Southwest rivers % % % Domestic sewage volume is higher than industrial wastewater. In 211, domestic sewage in China totaled 42.8bn tons, 65% of total wastewater; industrial wastewater was 23.1bn tons, or 35% of the total. Exhibit 15: In 211, domestic sewage volume in China far surpassed industrial wastewater bn tonnes 8 Discharge of industrial wastewater Discharge of household wastewater % 58% % 42% 58% 57% 42% 43% 63% 44% 37% 56% 64% 71% 65% 57% 36% 29% 35% 43% Source: China Statistical Yearbook on the Environment, 212 Water pollution remains a serious problem. China is facing a difficult environmental situation, as industry develops, urbanization accelerates and population rises rapidly. In China s key drainage basins, 64.2% of water resources has quality ratings of I-III, with 17.2% rated below V, the lowest rank, with the Haihe River Basin heavily polluted, and the Yellow River, Huaihe River and Liaohe River basins moderately polluted. Eutrophication of lakes and reservoirs remains a serious problem: monitoring of trophic states of 56 lakes and reservoirs shows three 全球投资研究 12

13 with moderate eutrophication, or 5.2%; mild eutrophication was present in 1, or 17.2%. China began its three rivers and three lakes pollution control (three rivers: Liaohe River, Haihe River, Huaihe River; three lakes: Tai Lake, Chao Lake, Dianchi Lake) in 1995, but these regions continue to have severe water pollution. Exhibit 16: The Hai He Basin is heavily polluted, and the Yellow River, Huai He and Liao River basins are moderately polluted River Classify River length of Evaluate Length (%) Evaluate Length Worse than (km) Grade I Grade II Grade III Grade IV Grade V Grade V National Total 189, Songhuangjiang River 13, Liaohe River 4, Haihe River 14, Yellow River 2, Huaihe River 24, Yangtze River 56, Taihu Lake 5, Southeastern Rivers 6, Zhujiang River 19, Southwestern Rivers 18, Northwestern Rivers 1, Source: China Statistical Yearbook on the Environment, 212 In recent years, China has seen a series of major environmental pollution incidents and accidents, with about half resulting in water pollution. According to statistical analysis from the Ministry of Supervision, China has seen over 1,7 water pollution incidents annually over the past several years. In January 213, as widely reported in the local media, Shanxi s Tianji Group had an aniline spill that was covered up by the local government leading to contamination of the Zhang River downstream, and affecting drinking water and daily lives of people in Shanxi, Hebei and Henan. Other major water pollution incidents with severe impacts in recent years include the February 212 cadmium contamination of the Longjiang River in Guangxi, the Zijin Mining water pollution incident and pollution of the Songhua River in Jilin in July 21. 全球投资研究 13

14 213 年 12 月 12 日 中国 : 环保 : 水处理 Exhibit 17: Domestic water pollution incidents have continued to occur Source: News info compiled by Gao Hua Securities Research. China has established an elementary treatment system for domestic sewage and industrial wastewater Domestic sewage treatment rates are increasing rapidly. In 211, total domestic sewage volume in China was 42.8bn tons, representing growth of 12.7% yoy, and 65% of China s total wastewater. China s urban domestic sewage treatment rates have increased rapidly, from 18.5% in 21 to 72.9% in 21. Exhibit 18: Urban domestic sewage volume is increasing rapidly Exhibit 19: Urban domestic sewage treatment rates are increasing rapidly bn tonnes 7 Total discharge of wastewater Urban domestic sewage discharge Urban domestic sewage discharge yoy (RHS) 14% 8% Urban domestic sewage treatment rate 72.9% % 1% 8% 6% 4% 2% % 7% 6% 5% 4% 3% 2% 1% 57.4% 63.3% 43.8% 49.1% 32.3% 37.4% 22.3% 25.8% 18.5% Source: Past National Environmental Statistics Bulletins. Source: Past National Environmental Statistics Bulletins. Industrial wastewater volumes have been steadily decreasing since 26, with compliance rates rising. Total volume in 211 was 23.9bn tons, down 2.8% yoy. Industrial wastewater is also decreasing as a percentage of total wastewater volume, down to 35% in 211 from 46.8% in 2. Industrial wastewater compliance rates are increasing yearly, reaching 95.3% in 211, up 9.7pp from 21 s 85.6%. 全球投资研究 14

15 Exhibit 2: China s industrial wastewater volume is steadily falling bn tonnes Total discharge of wastewater Industrial wastewater discharge Industrial wastewater discharge yoy (RHS) % 1% 8% 6% 4% 2% % -2% -4% Exhibit 21: Industrial wastewater compliance rates and water reclamation rates are rising yearly 1% 95% 9% 85% 8% 75% 7% 65% 6% 85.6% 88.3% 69.6% 71.5% Industrial wastewater compliance rate Industrial wastewater reclamation rate 89.2% 72.5% 9.7% 74.2% 91.2% 75.1% 92.1% 91.7% 92.4% 8.6% 82.% 83.8% 94.2% 95.3% 85.% 85.7% Source: Past National Environmental Statistics Bulletins. Source: Past National Environmental Statistics Bulletins. China has very low wastewater standards, resulting in compliant pollution. China s National Integrated Wastewater Discharge Standards (GB ) have been in effect for 17 years, and have not been integrated with the Environmental Quality Standards for Surface Water. For instance, based on the surface water quality standards, lead content of over.1 mg/l results in a sub-v ranking; however, the standards for lead-related enterprises set a standard of 1 mg/l. 全球投资研究 15

16 Enviro protection, water treatment: Rapid growth under 12 th FYP Investment in environmental protection is increasing, but it remains a small portion of GDP. According to the Environmental Protection Law, Pollution prevention measures for projects under construction must be planned, built and put into operation at the same time as the main project. In recent years, China has increased investment in the environmental protection field: in 22, total industrial environmental investment was just Rmb57.81 bn, but had grown to Rmb bn by 211, realizing a CAGR of 18%. However, environmental investment remains a small percentage of GDP, with just 1.5% of GDP spent on pollution control in 211; in the EU, spending remained above 2% of GDP during non-peak periods. Exhibit 22: Total industrial environmental investment has been growing rapidly Exhibit 23: China underspends on pollution control Rmb bn Industrial environmental investment 3 yoy (RHS) % 5% 4% 3% 2% 1% % -1% -2% -3% 2.4% 2.2% 2.% 1.8% 1.6% 1.4% 1.2% 1.% 2.2% 1.2% 1.1% EP investment as percentage of GDP 2.1% 2.1% 1.3% 1.3% 2.1% China 2.1% 2.1% EU 1.3% 1.4% 1.4% 2.2% 2.1% 1.6% 2.4% 1.5% 2.3% 1.9% % 1.5% Source: China Statistical Yearbook on the Environment, 212. Source: Past National Environmental Statistics Bulletins, Eurostat. Environmental protection industry will develop rapidly during the 12th Five-year Plan. According to the 12 th Five-year Plan for the Energy Saving and Environmental Protection Industry, the output value of China s environmental protection industry will reach Rmb4.5tn by 215, a CAGR of 18% (21-215); water-related environmental protection will remain the largest submarket, at an estimated 4%. Exhibit 24: The environmental protection industry will develop rapidly during the 12 th Five-year Plan Exhibit 25: Water protection remains the largest submarket of environmental protection industry Energy conservation and environmental protection industry output (tn Rmb) 4.5 CAGR:18% Solid waste, 1% Current market share distribution Others, 2% Air pollution, 3% Water, 4% Source: 12 th Five-year Plan for the Energy Saving and Environmental Protection Industry. Source: China Association of Environmental Protection Industry, Gao Hua Securities Research. 全球投资研究 16

17 12 th Five-year Plan to promote urban water treatment development According to the 12 th Five-year Plan for Urban Sewage Treatment and Reclamation Facilities, by 215, sewage treatment rates will reach 85% in cities, 7% in county towns, and an average of 3% in designated towns. Utilization of reclaimed water from urban sewage treatment facilities will surpass 15%. Exhibit 26: Key urban sewage treatment and reclamation utilization targets for the 12 th Five-year Plan Wastewater treatment rate (%) Sludge harmlessness rate (%) Indicator City County Town City County Town Reclaimed water utilization rate (%) Network scale (' km) Wastewater treatment vol. (mn m 3 /d) Sewage plant upgrade size (mn m 3 /d) Sludge treatment size (mt/yr) Reclaimed water scale (mn m 3 /d) Newly increased <2 3 >1 < <1 15 > Note: national sewage treatment scale (28.5 mn cu m/d) includes capacity under construction at end-21 (37.6 mn cu m/d); 2. Sludge treatment and disposal is calculated using dry volume; 3) newly increased in last column refers to increase during Source: 12th Five-year Plan for Urban Sewage Treatment and Reclamation Facilities. During the 12th Five-year Plan, national urban sewage treatment and water reclamation facility construction investment will be around Rmb43bn, 3% higher than during the 11th Five-year Plan, presenting a major opportunity for the domestic sewage treatment and reclamation industry. 全球投资研究 17

18 Exhibit 27: Investment in national urban sewage treatment and reclamation facilities during the 12 th Five-year Plan New water reclamation 7% New sludge treatment 8% New treatment capability 25% New pipeline network 57% Upgrading wastewater treatment facility 3% Source: 12th Five-year Plan for Urban Sewage Treatment and Reclamation Facilities. Municipal drinking water supply and purification New drinking water standards will drive water supply investment, requiring around Rmb41bn during the 12th Five-year Plan. In 26, the Ministry of Health released its Standards for Drinking Water Quality (GB ), increasing the number of standards to 16 from 35. These standards were originally planned to go into effect on July 1, 212, but implementation has been postponed to 215, requiring significant investment to raise drinking water standards during the 12 th Five-year Plan. During the 12 th Five-year Plan, municipal water supply capability will have to increase to 345mn cu m/d from 21 s level of 29mn cu m/d, and China s 67mn cu m/d of waterworks will have to be upgraded. This will require Rmb41bn of investment in the water supply industry during that period. Exhibit 28: Urban water supply capacity construction during the 12 th Five-year Plan Exhibit 29: Water supply investment during the 12 th Fiveyear Plan will total Rmb41bn Urban public water supply capacity (mn cu m/d) Water supply investement during 12th Five-year period (Rmb bn) New water plant 22.9% New network 45.% Network upgrade 2.4% Water quality monitoring.4% Emergency water supply capacity.% Water plant upgrade 11.3% Source: Ministry of Housing and Urban-Rural Development. Source: Ministry of Housing and Urban-Rural Development. 全球投资研究 18

19 Seawater desalination investment will total around Rmb21bn. Given the scarcity and wildly uneven distribution of China s water resources, especially the severe water shortage in coastal Northern China, the seawater desalination industry is gradually developing. As of the end of 21, China had over 7 seawater desalination facilities, with 6k cu m/d of desalination capacity. According to the 12 th Five-year Plan for the Seawater Desalination Industry, China will have over 2.2mn cu m/d of desalination capacity, providing over 5% of incremental water supply to islands, and over 15% of newly constructed water supply in coastal regions. The development of the desalination industry during the 12 th Five-year Plan will require investment of around Rmb21bn. Exhibit 3: Seawater desalination capacity will increase significantly during the 12 th Five-year Plan Exhibit 31: Seawater desalination industry investment will total Rmb21bn during the 12 th Five-year Plan Seawater desalination capacity (mn m 3 /d) Seawater desalination investment (Rmb bn) Seawater desalination engineering and network, 16.5 Seawater desalination base, 3.5 System building, E Source: 12th Five-year Plan for the Seawater Desalination Industry. Source: 12th Five-year Plan for the Seawater Desalination Industry. China is focusing on investment in key watershed pollution control According to the Water Pollution Prevention Plan for key watersheds ( ), key watersheds for pollution control during the 12 th Five-year Plan comprise 1 watersheds the Songhua River, Huaihe River, Haihe River, Liaohe River, Yellow River (middle and upper reaches), Tai Lake, Chao Lake, Dianchi Lake, Three Gorges Reservoir (and upstream sources) and Danjiangkou Reservoir (and upstream sources). During the 12 th Five-year Plan, China will strengthen pollution control in these areas, and invest more than Rmb346bn. Exhibit 32: Investment summary for projects in key watersheds Urban sewage Industrial pollution Drinking water source Livestock breeding Comprehensive treatment and prevention and pollution prevention and pollution prevention regional environmental Total Watershed ancillary facility control project control project and contral project treatment project (Rmbbn) No. of No. of Investment projects projects Investment No. of No. of No. of No. of Investment Investment Investment projects projects projects projects Investment Songhuang River Huai River , Hai River , Liao River Yellow River (mid Chao Lake Dianchi Lake Three Gorges Res , Total 2, , , , Source: Water Pollution Prevention Plan for Key watersheds ( ). 全球投资研究 19

20 Wastewater treatment costs effects on industry and everyday life Paper making, chemical, textile, power, coal, food &beverage are main industries for wastewater discharge. The largest 1 industries contribute for over 8% of all industrial wastewater in 211. This makes these industries key markets for the industrial wastewater treatment industry. Exhibit 33: China s top ten wastewater discharging industries in 211 Electric and heat power production and supply 9% Textile, Wearing and Apparel 15% Chemical 18% Coal mining and washing 8% Paper making and products 21% Agricultural food processing 8% Food and beverage 7% Ferrous metal smelting and pressing 7% Oil processing, Coking, Nuclear Fuel processing 4% Non-ferrous metal mining 3% Source: China Statistical Yearbook on the Environment, 212. Looking at 211 expenditures, the ten industries shown in Exhibit 34 have the highest treatment costs. Total operating cost on industrial wastewater treatment in 211 was Rmb73.2 bn, and the five industries which spent the most were the steel, chemical, textile, paper and oil processing industries. 全球投资研究 2

21 Exhibit 34: The ten industries with the highest 211 wastewater treatment expenditure Rmb bn industrial wastewater treatment facility operation fees Ferrous metal smelting and pressing Chemical Textile, Wearing and Apparel Paper making and products Oil processing, Coking, Nuclear Fuel processing Non-ferrous metal mining Food and beverage Coal mining and washing Electric and heat power production and supply Metal products Sector average Source: China Statistical Yearbook on the Environment, 212. Looking at wastewater treatment costs as a percentage of profits helps illustrate how industries are affected by increases in wastewater treatment fees. Total industrial profits in 211 were Rmb6,139.6bn, and total wastewater treatment costs were Rmb73.2bn, corresponding to 1.2% of total profits. In particular, the petroleum processing, paper, steel, textile and chemical industries had relatively high wastewater processing cost to total profit ratios: oil processing was the highest, at 12%, and if we assume wastewater standards tighten and wastewater costs double, that would represent a profit decline of 12%. Exhibit 35: Ten industries with highest wastewater treatment cost/profit ratio in 211 Proportion of industrial wastewater treatment fee to total profits 14% 12% 12.% 1% 8% 6% 8.% 5.4% 5.% 4% 2% % 2.6% 2.3% 1.5% 1.3% 1.3% 1.2%.6% Oil processing, Coking, Nuclear Fuel processing Paper making and products Ferrous metal smelting and pressing Non-ferrous metal mining Textile, Wearing and Apparel Chemical Metal products Electric and heat power production and supply Food and beverage Industry Average Coal mining and washing Source: China Statistical Yearbook on the Environment 212, China Statistical Yearbook 212. Residential water prices still have room to increase. Water prices in Central and Western China particularly sewage treatment costs remain quite low, at less than the national 全球投资研究 21

22 recommendation of Rmb.8/t. China s residential water spending is generally about.6% of disposable income, while developed countries like the US and European countries spend 1%-2%. Also, US municipal wastewater treatment unit operation cost is c.63% higher than China. Therefore, in terms of both necessity and the ability of people to bear higher costs, there is room for water prices to increase, in our view. Exhibit 36: Comparison of water bills as a percentage of disposable income Region Usage per capita (t/y) Tap water price (Rmb/t) Wastewater price (Rmb/t) Total water bill (Rmb/y) Disposable income per capita (Rmb/y) Water bill/ Disposable income Beijing ,93.58% Shanghai ,23.64% Shenyang ,326.65% Hefei ,459.69% Hohhot ,877.49% Average( ) ,759.61% Average($) 63 $.33 $.15 $28 $4,676.61% UK(29-21) , % US(24) $523 $44, % West Europe % Source: China Statistical Yearbook on the Environment, 212; UK Ofwat; US EPA. Exhibit 37: The cost of one wastewater plant with a capacity of 12, m3/d in US Exhibit 38: US municipal wastewater treatment unit operation cost is c.63% higher than that China US cost item Annual costs (USD year) Costs per m 3 (USD cent) Investment costs 76, Operational costs 89, aeration 16, sludge disposal 19, personnel 26, operation 9, maintenance 17, insurance 3,.6 2 Total costs 1,65, % Rmb/t Unit operation cost of municipal wastewater treatment China US Source: Handbook of Biological Wastewater Source: Handbook of Biological Wastewater, China Statistical Yearbook on the Environment, 212 全球投资研究 22

23 Sewage treatment: Membrane technology developing rapidly Activated sludge technology still mainstream treatment method This technology was first introduced in 1914 in Manchester. In simple terms, traditional activated sludge technology refers to introducing air continuously into sewage containing a high volume of dissolved organic matter. The microorganisms in the activated sludge convert the organic pollutants into harmless gas, liquid and solid products; finally, the solids are separated from the liquid, resulting in treated effluent. Traditional activated sludge technology s major advantages are that treatment costs are low and the degree of sewage treatment can be easily adjusted; however, the aeration tank requires a large land area, the process has limited ability to remove nitrogen and phosphorus, and treating the sludge itself is difficult. Exhibit 39: Comparison of the traditional activated sludge and MBR processes Grid Grit chamber Primary settling tank Biochemical pool Secondary sedimentation tank Lift pump Flocculation & sedimentation pool Filtration Disinfection tank Inflow Discharge Sludge Grid Grit chamber Primary settling tank Membrane bioreacting pool Disinfection tank Discharge (High quality Inflow Sludge Source: OriginWater prospectus. Membrane bioreactors (MBR) have some clear advantages Membrane bioreactor (MBR) technology combines membrane separation technology and biological sewage treatment technology. It was first developed during the 196s in the US. The technology is not only stable and reliable, but also meets high water reclamation quality standards. It has no problem with sludge bulking. This significantly simplifies the process and reduces the amount of space required, solving the main deficiencies of traditional technologies. 全球投资研究 23

24 Exhibit 4: Comparison of MBR technology and the three mainstream conventional treatment technologies Item Source: OriginWater prospectus. MBR Oxidation ditch + advanced treatment A2/ +advanced treatment SBR + advanced treatment Technological process Short Long Long Relatively short Systematic stability High High Ordinary Ordinary Effluent quality Good Relatively good Relatively good Relatively good Nitrogen and phosphorus removal Good Relatively good Relatively good Ordinary Resistance to impact load Strong Strong Strong Ordinary Remaining sludge Relatively small Relatively large Large Large Land occupation Relatively small Large Large Relatively large Degree of automation High Ordinary Ordinary Relatively high Exhibit 41: China s membrane market is growing rapidly The membrane market in China and overseas is developing rapidly The Chinese membrane market has grown rapidly since 25. The membrane market totaled just Rmb2mn in 1993, but had grown to around Rmb4bn by 211. According to the 12 th Five-year Plan for Technological Development of High-performance Membranes, the market is expected to be approximately Rmb1bn by 215. Exhibit 42: This growth will likely continue through the 12 th Five-year Plan China's membrane industry scale (Rmb bn) China's membrane industry scale (Rmb bn) CAGR: 27.2% E Source: Membrane Industry Association of China. Source: 12th Five-year Plan for Technological Development of Highperformance Membranes. The overseas membrane market is developing rapidly. Worldwide, there were around 1 membrane projects in 197, a number which had grown to approximately 5, by 2. In 212, the worldwide separation membrane market was approximately US$16.5bn, according to American Membrane Technology Association, it is estimated to reach US$25.7bn by 217, for a CAGR of 9.2%. 全球投资研究 24

25 Exhibit 43: Worldwide membrane projects have increased rapidly Exhibit 44: The worldwide separation membrane market continues to grow Global membrane project amount Global separation membrane scale (USD bn) , CAGR: 9.2% , Source: American Membrane Technology Association. Source: American Membrane Technology Association. Exhibit 45: MBR development is more rapid The development of MBR is significantly faster than the development of the overall membrane market. According to American Membrane Technology Association estimates, MBR market development speed could reach 21.3%, significantly higher than the estimated 9.2% for the membrane market as a whole. Exhibit 46: Municipal sewage treatment accounts for twothirds of the MBR market Global MBR water treatment size (USD bn) Global water treatment area 1 CAGR: 21.3% Others, 36% Municipal waste water, 64%, E Source: American Membrane Technology Association. Source: American Membrane Technology Association. Major foreign membrane companies GE: The MBR leader Improving strength through acquisition of Zenon. GE s water treatment and engineering business employs 8, people worldwide; GE acquired Canada s Zenon Environmental in 26 for US$76 mn. That acquisition valued Zenon very highly, given that the company posted losses of US$6.7 mn in 25 and net profits of US$13.3 mn in 24; the acquisition valued Zenon at a 58.4X 24 P/E. In 211, GE released LEAPmbr, which improved production by 15% and reduced energy consumption by 3%. Business development in China. GE has two large bases in China: the Wuxi Production Base established in 23, with a total of six production lines producing chemical reagents, roll 全球投资研究 25

26 membrane, reverse osmosis membrane, ultrafiltration membrane, total organic carbon (TOC) analysis tools, and electrodeionization (EDI) modules; and the Shanghai R&D facility established in 23, which works in fields including chemical agents, membrane treatment, etc. the reverse osmosis membranes developed there have been successfully used in the drinking water and beverage industry. In 212, GE established water treatment remote monitoring and diagnostics (RMD) in China. RMD is an innovation in comprehensive water treatment monitoring. It combines the latest wired water quality analytic instrument technology and wireless communications to provide continuous water quality data for analysis by GE experts, improving customers water treatment efficiency and stability. Dow: Reverse osmosis leader Dow in the water treatment solution sector: Dow s paint and infrastructure businesses had total sales of US$6,898mn in 212; however, water treatment solutions made up just 14% of that total, for 212 sales revenue of approximately US$966mn. It provides nanofiltration, reverse osmosis, ion-exchange resin and EDI. Dow s FilmTec subsidiary provides reverse osmosis and nanofiltration membranes for use in industrial, municipal and home water purification, and has a leading position worldwide. China is a key market for Dow. In 211, Dow totaled US$1.6bn in Asia Pacific region sales revenue, of which US$4.5bn came from Greater China 43% of Dow s Asia Pacific total, and 7% of its worldwide sales revenue. In 26, Dow acquired Zhejiang Omex Environmental Engineering (OEE), and in 212 built a reverse osmosis membrane element production line in Zhejiang. Siemens Siemens Water Technologies: 5,4 employees worldwide, 2,1 patents. In July 26, Siemens acquired US Filter for US$993mn. US Filter is the North American market leader for industrial and municipal water treatment products and services, with 157 branches worldwide, and approximately 5k municipal clients and 1k industrial clients. In 212, Siemens had environmental industry sales revenue of EUR33.2bn, up 9.9% yoy. Siemens s acquisitions in China. In 26, Siemens acquired CNC Water Technologies of Beijing. CNC has 12 employees and strong ultrafiltration and reverse osmosis membrane businesses. Since 22, CNC has had success in the seawater desalination, industrial wastewater and municipal water treatment fields, working with industries like petrochemical, power generation and steel. Siemens plans to leave the water treatment business. In its 212 annual report, Siemens announced it would withdraw from the industrial water treatment business, because it believed water treatment was a market with significant regional divisions. It will instead focus on fields like IT, in which it has core competitive advantages. Hydranautics Hydranautics: Hydranautics was established in 1963, and its headquarters are in Oceanside, CA. In 1987, it became a part of the Nitto Denko Corporation, and is one of Nitto Denko s fully-owned American subsidiaries. Hydranautics currently has three separation membrane plants worldwide, located in Oceanside, CA, USA; Kusatsu, Shiga, Japan; and Songjiang, Shanghai, China. The American and Japanese factories have integrated assembly lines to assemble membrane elements, while the Chinese factory (Nitto Denko (Shanghai Songjiang) Co. Ltd.) manufactures 4 reverse osmosis membrane elements. Hydranautics membrane products are not very profitable. According to the Nitto Denko 212 annual report, membrane product sales revenue was 18.64bn, and total sales revenue from medical and membrane products was bn, 5.% of total firm operating revenue. Operating income was 359mn, for an operating margin of 1.1%, and accounting for.5% of firm-wide operating income. 全球投资研究 26

27 Mitsubishi Rayon Mitsubishi Rayon was established in 1933 as a manufacturer of synthetic short fibers. It has used the polymer experience gained in the synthetic fiber and resin fields to expand into the hollow fiber membrane, fiber optics and carbon fiber businesses. With its polymer chemistry technology, it has successfully developed ultra-high performance hollow fiber membranes. MWH Global MWH is the world s leading environmental engineering and water resource company, with over 15 years of history. The firm s business scope includes water supply, wastewater management, dam/hydropower construction, port and bridge construction, etc. In 2, the firm invested in Poten Enviro, entering the China market. Business characteristics of overseas membrane companies: Most companies are subsidiaries of large integrated groups. The membrane companies depend on the large MNCs for business expansion. Most companies are equipment providers, and not integrated engineering businesses. Manufacturers of international membrane brands often just manufacture equipment for sale through local agents, with very few participating directly in project construction. However, domestic membrane equipment providers tend to expand from equipment manufacturers to project contractors, increasing revenue and profitability. In China, they focus on industrial water treatment. Membrane equipment makes up only a small portion of total industrial water treatment investment. The project owners are less pricesensitive and more interested in reliability therefore, they generally opt for international brands. However, in the domestic sewage treatment field, owners are very cost sensitive, and have relatively high service requirements. 全球投资研究 27

28 Structural trends: Consolidation, membrane market, coal chemistry Urban sewage operations are entering a consolidation phase New water treatment facility growth is slowing significantly. After 1 years of large-scale construction, China s large and medium cities have relatively complete domestic sewage treatment facilities. According to the 12 th Five-year Plan, city sewage treatment rates will reach 85% in 215, up from 77.5% in 21, a much lower increase than during the 11 th Five-year Plan. Since 211, urban sewage treatment capacity growth has slowed significantly. Exhibit 47: Sewage treatment rate increases will be limited during the 12th Five-year Plan Exhibit 48: Sewage treatment capacity growth in large and medium cities has slowed significantly 9% 8% 7% 6% 5% 4% 3% 2% 1% Urban sewage treatment rate in cities 77.5% 52.% 34.3% 19.7% 85.% Urban sewage treatment capacity (mt) yoy (RHS) % 4.5% 2.6% 8% 7% 6% 5% 4% 3% 2% 1% % E H13 % Source: China Statistical Yearbook on the Environment 212, 12th Five-year Plan for Urban Sewage Treatment and Reclamation Facilities. Source: Ministry of Housing and Urban-Rural Development. There is significant room for industry consolidation. The Chinese sewage treatment industry remains very fragmented. In 212, Veolia, the largest water company had market share of less than 3%, while French companies Veolia and Suez Water have a combined market share of c. 6%. 全球投资研究 28

29 Exhibit 49: Market share of major water firms in China is low (212) Exhibit 5: Market share of major water firms in France is much higher (212) France's main water companies' market shares 3.% 2.5% 2.% 1.5% 1.%.5%.% 2.8% 2.7% 2.6% 1.7% 1.4% 1.1% 1.% 1.%.8%.8% 45% 4% 35% 3% 25% 2% 15% 1% 4% 2% 1% 5% % Veolia Suez Saur Source: ChinaWaterNet. Source: Company data, Annual reports, Goldman Sachs Global Investment Research. Higher sewage discharge standard and reclamation water create significant market space for membrane products Sewage treatment plants in large and medium cities will have to be upgraded. According to the Ministry of Housing s Drainage and Sewage Treatment Bulletin for Chinese Cities (26-21), as of the end of 21, only 15.4% of sewage treatment plant capacity met 1A standards. According to national law, urban sewage treatment facility discharge into drainage areas, lakes, reservoirs, or other closed and semi-closed bodies of water must meet 1A discharge standards. Therefore, many already constructed water treatment facilities will have to be upgraded. During the 12 th Five-year Plan, a total of 26.11mn cu m/d of urban sewage treatment capacity will have to be upgraded 2.38mn in municipal-level cities, 5.27mn in county-level cities, and.46mn in designated towns. Total upgraded capacity will be 7.94mn cu m/d in Eastern China, 13.18mn in Central China, and 4.99mn in Western China. Exhibit 51: Only 2.7% of sewage treatment plants meet 1A discharge standards (21) Exhibit 52: Only 15.4% of sewage treatment capacity meets 1A discharge standards (21) Urban sewage plants amount percentage Urban sewage plants scale percentage Level 3,.9% Others, 3.4% Level 3,.4% Others, 7.8% Level 2, 17.3% Level 1 A, 2.7% Level 2, 28.4% Level 1 A, 15.4% Level 1 B, 57.7% Level 1 B, 48.% Source: Ministry of Housing and Urban-Rural Development. Source: Ministry of Housing and Urban-Rural Development. 全球投资研究 29

30 Water reclamation volume will increase significantly during the 12th Five-year Plan. Reclamation refers to water post-sewage treatment which meets set quality standards, and can meet water demand for certain uses. Reclaimed water can be used for irrigation, industrial purposes, non-potable municipal water, water features, etc. As a secondary water source for cities, many countries use reclaimed water to ease urban water shortages. During the 12 th Fiveyear Plan, China plans to construct 26.75mn cu m/d of water reclamation capacity, up 221% from 21, with total investment of around Rmb3.4 bn. Exhibit 53: Reclaimed water will rise sharply during the 12 th Five-year Plan Reclaimed water capacity (mt/d) % E Source: 12th Five-year Plan for Urban Sewage Treatment and Reclamation Facilities. Industrial wastewater treatment and reuse: Coal chemical development is accelerating Water treatment is a key aspect of coal chemical projects. Coal chemical projects produce high volumes of wastewater with a complex composition of pollutants that do not degrade well. In addition, coal chemical projects are concentrated in areas of North China facing water shortages water resources are scarce, and the projects have high water consumption. Without effective treatment, the effluent could create severe pollution. Since 212, coal prices have been on the decline, making coal chemical projects more profitable. Many coal firms have begun to expand their supply chains, actively entering the coal chemical field. Exhibit 54: Coal chemical projects have high water consumption Coal-to-chemical Item Energy conversion efficiency Max unit energy consumption (TCE) Max unit freshwater Min scale consumption (t) Indirect liquefaction of coal 42% mt Coal-to-gas 52% bn m 3 Coal-to-olefin 35% mt Coal-based ammonia 42% mt Coal-to-glycol 25% mt Low quality coal upgrade 75%.15 1mt Source: Technical Specifications for Coal Chemical Pilot Projects during the 12 th Five-year Plan (Draft for Review). 全球投资研究 3

31 Since 213, a number of coal chemical projects have received approvals, creating significant market for the water treatment firms in this area. Based on information in media reports, we put investment in approved projects at Rmb55 bn. After the conclusion of the March NPC and CPPCC meetings, the NDRC centrally approved 1 coal chemical projects. According to a report in Shanghai Securities News on September 2, 213 and an announcement from Guanghui Energy, another seven coal-to-natural gas projects have received approval from the NDRC. According to the 21 st Century Business Herald on August 21, 213, the NDRC has received applications from 14 coal chemical projects with total investment scope of Rmb2 tn. Assuming that half of these are approved by 22, that corresponds to total coal chemical investment of Rmb1tn; assuming 5% spending on water treatment, this implies a potential water treatment market of Rmb5 bn. Exhibit 55: Since March 213, a number of coal chemical projects have been approved Company Region Type Scale Est. investement (Rmb bn) China Power Investment Huocheng Coal-to-gas 6bn m 3 5 Shandong Xinwen Mining Yili, Xinjiang Coal-to-gas 4bn m 3 25 Guodian Group Xing'anmeng Coal-to-gas 4bn m 3 25 CNOOC Datong, Shanxi Coal-to-gas 4bn m 3 25 Xinmeng Energy Inner Mongolia Coal-to-gas 4bn m 3 25 Beijing Enterprises Group Ordos, Inner Mongolia Coal-to-gas 4bn m 3 25 CNOOC New Energy Investment Ordos, Inner Mongolia Coal-to-gas 4bn m 3 25 Hebei Construction & Investment Group Ordos, Inner Mongolia Coal-to-gas 4bn m companies incl. Guanghui Zhundong, Xinjiang Coal-to-gas 3bn m 3 17 Sinopec Zhijin, Guizhou Coal-to-olefin.6mt 2 China Petrochemical and Henan Coal Group Henan Coal-to-olefin.6mt 2 China Coal Energy Yulin, Shanxi Coal-to-olefin.6mt 2 Gansu Huahong Huijin Pingliang Coal-to-olefin.6mt 2 Lu'an Group Shanxi Coal-to-liquid 1.5mt 2 Shenhua Ningxia Coal Group Ningxia Coal-to-liquid 4.5mt 55 Total 55 Source: Media reports and company announcements compiled by Gao Hua Securities Research 全球投资研究 31

32 Lessons from overseas: Incidents, demand drive development Starting in the 194s, environmental pollution in the developed world became more serious; remediation began in earnest in the 196s and 197s when GDP per capita was about US$5,-1, A number of landmark pollution incidents occurred starting in the 194s. Starting in the 194s, developed nations began to see a series of influential pollution incidents for instance, there was the emergence of Los Angeles smog in 1943, London s Great Smog of 1952, Japan s Minamata disease outbreaks of , and the Itai-itai disease Toyama prefecture cadmium poisoning incident. These pollution incidents appearing in series signified that environmental pollution had already become a dangerous social problem for developed nations. Exhibit 56: Developed countries began seeing major pollution incidents since 194s Time Event Cause Effect Los Angeles Photochemical Smog Event US Donora Smog Event London Smog Event Japan Minamata disease event Japan Toyama Itai-itai disease Japan Yokkaichi asthma event Smog caused by vehicle emission absorbed sunlight, leading to chemical reaction and produced photochemical smog. Sulfur dioxide and other harmful substances discharged by factories caused severe air pollution when abnormal weather occurred. Waste gas discharged during industrial production and residential coal-fired heating accumulated over the city and could not be dissipated. Smog caused eye pain, headaches, breathing difficulties, resulting in death in severe cases. It also caused livestock illness, hindered plant growth, and led to building and material erosion. The incident caused 2 deaths, 6, people sick (c.43% of total residents in town). The smog resulted in chest distress and suffocation. It led to over 5, deaths in 5 days and over 8, deaths in 2 months after the smog dispersed. Nitrogen producers discharged industrial wastewater High toxic sustances infringed the brain and other body parts, containing too much mercury, which was converted to damaged nerve cells. The disease caused over 1, deaths. highly toxic substance after eaten by aquatic life. It then Number of sick people up to 1,. entered into human bodies through food chain. Wastewater discharged by zinc smelters contained large amounts of cadmium and caused rice and fish contamination. The substance went into human bodies through the food chain. Waste gas and water discharged by oil companies caused smoggy skies all year round. Aquatic products were not edible. Cadmium causes a huge loss of calcium in the bones, leading to bone atrophy, joint pain and even minor activities can cause fractures. The disease caused more than 2 deaths. Many people had headaches, vomit and other symptoms. Asthma patients surged. The event caused up to 6, people sick and some of them died. Source: Gao Hua Securities Research, consolidated press reports. In the 196s and 197s, developed countries became more aware of the hazards of environmental pollution, and worked to combat them when GDP per capita was about US$5,-1,. Developed countries began to take some measures when the first signs of environmental pollution appeared e.g. the UK s 1876 Rivers Pollution Prevention Act and the American Rivers and Harbors Appropriation Act of 1899 in US but the effects were minor. Following a series of major pollution incidents, these countries established dedicated environmental protection bodies, and enacted a new series of environmental protection laws. In the 196s and 197s, developed countries began systematic environmental pollution mitigation, greatly increasing environmental investment. 全球投资研究 32

33 Exhibit 57: Pollution incidents drove countries to enact environmental protection laws Country Time Law Category Country Time Law Category 1847 Town Improvement Clauses Act Comprehensive 1869 Empire Operation Law Comprehensive 1863 Alkali etc Works Regulation Act Air Pollution 1957 Federal Water Law Water Pollution UK 1876 Rivers (Prevention of Pollutions) Act Water Pollution 196 Fedral River Purification Law Water Pollution Germany 1956 Clean Air Act Air Pollution 1965 Air Purification Law Air Pollution 196 Noise Abatement Act Noise Pollution 1972 Federal Waste Management Law Solid waste 1974 Control of Pollution Act Comprehensive 1976 Federal Natural Conservation Law Comprehensive 1948 The Federal Water Pollution Control Act Water Pollution 1967 Basic Environmental Law Comprehensive Act to Provide Research and Technical Assistance Relating to Air 1968 Air Pollution Control Law US 1955 Pollution Control Air Pollution Japan Air Pollution 1969 Nation Environmental Policy Act Comprehensive 197 Water Pollution Control Law Water Pollution 1972 Clean Water Act Water Pollution 1976 Solid Waste Disposal Act Solid waste Source: Media reports compiled by Gao Hua Securities Research Pollution-related Health Damage Compensation Law Comprehensive Following a series of environmental incidents, Japan entered a phase of large-scale investment in the 197s. Private and public investment in pollution control in Japan grew from 1.% of GDP in 197 to 2.% of GDP in Total investment in pollution prevention grew from 19 bn in 1969 to 1,48.9 bn in 1975, a CAGR of 46%; 8% of which are in the petroleum processing, chemical, steel, transportation and electrical power industries. Investment in pollution prevention went from 2.3% of total industrial investment in 1969 to 13.9% in By the 198s, developed countries pollution problems were largely under control. Exhibit 58: Japan s environmental investment-gdp ratio rose quickly in the 197s Exhibit 59: All industries in Japan significantly increased investment in environmental protection 1.2% 1.%.8%.6% Pollution control investment of private firms Pollution control investment of government 1,2 1, 8 6 Environmental protection investment from all industries (JPY bn) Environmental protection investment / industrial investment (%, RHS) 16% 14% 12% 1% 8%.4%.2% 4 2 6% 4% 2%.% % Source: Development Bank of Japan. Source: Development Bank of Japan. Compared with developed countries, China s environmental investment remains low China s anti-pollution investment remains low. In 211, China s anti-pollution investment was just 1.5% of GDP, and industrial enterprises anti-pollution investment was only 2.4% of total FAI, a significant drop from its 2 level of 6.3%. 全球投资研究 33

34 Exhibit 6: China s anti-pollution investment remains low as a percentage of GDP Exhibit 61: Business investment in pollution mitigation is shrinking as a percentage of total investment Rmb bn Domestic total investment in pollution control % in GDP 2.% 1.8% 1.6% 1.4% 1.2% 1.% Rmb bn Industrial waste treatment investment % of total industrial investment (RHS) 8.% 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% Source: China Statistical Yearbook on the Environment, Wind. Source: China Statistical Yearbook on the Environment, Wind. China s environmental investment is significantly lower than developed countries. In 211, China s environmental investment was just 1.5% of GDP, while major developed countries were at approximately 2% during their pollution clean-up phases. Exhibit 62: China s environmental investment remains quite low Investment/GDP of China and DM during pollution control period 2.2% 2.% 1.8% 1.6% 1.4% 1.2% 1.% US Germany Japan China 211 Source: Gao Hua Securities Research China s environmental protection industry significantly lags developed countries. In 211, the US and Japan filed 66 and 566 PCT patents related to environmental technology, respectively; China filed just 82. 全球投资研究 34

35 Exhibit 63: US government spending on environmental protection has gradually stabilized Exhibit 64: China s environmental PCT patent applications are significantly fewer than developed countries USD mn 8, 7, 6, 5, 4, 3, 2, 1, Source: Wind. US government expenditure on EP and wastewater control yoy (RHS) % Amount US UK South Korea 7 Japan German France Source: Wind. Judging by the experience of developed countries, China has entered a phase of large-scale pollution clean-up Major developed countries enacted a series of environmental laws and regulations when their per capita GDP reached US$5,-1,. Per capita GDP in America was US$1,225 in 1978; the Clean Air Act, Resource Conservation and Recover Act and the Clean Water Act were passed or significantly amended in 197, 1976 and 1977, respectively. Japan s per capita GDP reached US$1,212 in 1981, and Germany s per capita GDP reached US$1,916 in 1979 both countries also passed a series of key environmental laws and regulations in the years immediately prior. Exhibit 65: US passed a number of key environmental laws and regulations in Exhibit 66: Japan passed a number of key environmental laws and regulations in USD 3, US GDP per capita USD 35, Japan GDP per capita 25, 3, 2, 1976, Resource Conservation and Recovery Act 1977, the Clean Water Act 25, 2, 15, 1, 5, 197, the Clean Air Act 1969, National Environmental Policy Act 1972, Federal Water Pollution Control Act 15, 1, 5, 1967, The Basic Environment Law 1968, The Air Pollution Control Law 197, The Water Pollution Control Law 1973, Pollution- Related Health Damage Compensation Law Source: Wind Source: Wind 全球投资研究 35

36 China has entered a phase in which it can and must invest heavily to develop environmental protection. China s per-capita GDP was over US$6, in 212, which makes it an upper middle income country according to the World Bank s classifications. China has amassed a number of environmental problems, and needs to invest heavily in environmental protection; in addition, China s economic strength is growing, giving it the ability to invest in environmental protection. Exhibit 67: China s per-capita GDP is increasing, and has reached the environmental investment stage Exhibit 68: How the World Bank classifies countries by income USD 7, 6, 5, 4, China's GDP per capita China is currently revising the Environmental Protection Law Category GNI per capita (USD) Low income country <1,35 Low and middle income countr 1,36-4,85 Upper middle income country 4,86-12,615 High income country >12,616 3, 2, 1, 1979, Environmental Protection Law 1984, Water Pollution Prevention and Control Law 1987, Air Pollution Prevention and Control Law 1995, Solid (& Hazardous) Waste Law Source: Wind, World Bank. Source: World Bank. Marginal utility of traditional consumer products is falling for Chinese consumers. In 212, China s per-capita energy consumption was 2.3 tonne oil equivalent (toe), approaching developed country levels. Mobile phone penetration surpassed 82%, in line with developed countries. Exhibit 69: Per-capita energy consumption in China is approaching developed country levels Exhibit 7: China s mobile phone penetration is in line with developed countries TOE Energy consumption per capita % 12% 1% 8% 6% 4% 2% 124% 15% Mobile phone penetration rate 93% 87% 82% 64% 41% % South Korea West Europe Brazil Japan China Russia India Source: BP Statistical Review of World Energy 213, World Bank. Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research. 全球投资研究 36

37 Clean air and water is becoming a new type of consumption demand. Coastal China GDP per capita is over US$1,, which is classified as high-income, and environmental protection and health have become key issues for consumers. As traditional consumer products marginal utility decreases, green products are becoming more in demand. Exhibit 71: GDP per capita in coastal China is over US$1, in 212 Exhibit 72: China s cancer rates are increasing sharply 16, 14, 12, 1, 8, 6, 4, 2, GDP per capita (USD) 1,4 1,3 1,2 1,1 1, National cancer incidence (1/mn) 1,83 1, Source: Local statistics bureaus. Source: China Ministry of Health. Exhibit 73: CROCI of global peers is c.5%-1% China water companies return is higher than that of global peers. Because China is just entering the phase of heavily investing in environmental protection, while developed countries have passed the period of the end-of-pipe treatment. Exhibit 74: Domestic water treatment companies CROCI (net cash adjusted) is generally above 1% 14% AWK Veolia Suez Pennon Severn Trent United Utilities 5% OriginWater BEWG WBD Tianjin MOTIMO TCEPC 12% 4% 1% 8% 3% 6% 2% 4% 1% 2% % % E 214E 215E -1% Source: Company data, Goldman Sachs Investment Research Source: Company data, Gao Hua Securities Research 全球投资研究 37

38 Exhibit 75: ROE of global peers is stabilizing Exhibit 76: Domestic companies ROE has been increasing 5% 4% AWK Veolia Suez Pennon Severn Trent United Utilities 3% 25% OriginWater WBD TCEPC BEWG Tianjin MOTIMO 3% 2% 2% 1% 15% % -1% 1% -2% -3% 5% -4% -5% % E 214E 215E Source: Company data, Goldman Sachs Investment Research Source: Company data, Gao Hua Securities Research Key industry risks: Funding sources, supervision and competition Local governments may lack financing resources to deal with pollution. In July 213, the National Audit Office began to audit the debt situations of governments at different levels, which will bring to light each locality s debt, and possibly control local government debt, increasing financing difficulty and costs. Solutions: concentrate on local governments with greater purchasing power; projects can be self-financing, without relying on public subsidies or funding. In addition, as the central government strengthens supervision over local government debt, local governments may more actively seek other funding sources for environmental protection. Funding channel issues: it may be possible to get funding for sewage plants, water reclamation plants, incineration plants, desulfurization facilities and purification facilities through franchising their operation, or use the franchise rights as collateral against bond issues. Businesses may lack funding for pollution control. Some heavily polluting industries are short of funds, including the paper industry (13% gross margins, 3.82bn tons of wastewater produced in 211), steel industry (6% gross margins, 1.21bn tons of wastewater produced in 211), textile industry (11% gross margins, 2.41tons of wastewater produced in 211), etc. these industries all have high wastewater emissions, but weak earnings potential. Solutions: select industries with relatively strong earnings potential, or firms with strong funding; improve water recycling, and increase project self-funding. Oversight may be insufficient, and companies may choose to discharge pollutants illegally rather than invest in pollution management. Past environmental data and public sentiment are in conflict: On the one hand, data shows that pollution is decreasing; on the other hand, the public feels that pollution is getting worse, largely because there are concerns that some companies are discharging pollutants in secret. Solutions: Strengthen supervision and use the internet and other channels to encourage the public to participate; as social media becomes more popular, it will be easier to catch illegal dumping by companies. Intensifying industry competition. Over the past two years, a number of policies have been enacted that clearly support the environmental industry; according to the Opinion of the State Council on Accelerating the Development of the Energy-Saving and 全球投资研究 38

39 Environmental Protection Industry, total industry scope is expected to reach Rmb4.5 tn by 215, making it a new pillar industry. This may attract more companies to the field, depressing gross margins. For instance, a few years ago, local governments all supported photovoltaic producers, leading to significant overcapacity in that industry. Solutions: strengthen industry technology and R&D strength, and increase barriers to entry in some sub-fields. 全球投资研究 39

40 Valuation and ratings: Buy OriginWater and WBD PEG is our main valuation method based on back-test results A + H-share back-testing results suggest PEG methodology is most effective. Exhibit 77: A+H-share back-testing results suggest PEG produce highest long alpha PEG Annual Alpha on Long Stocks : Average (21-212) % -6% 11% 27% Alpha on Short Portfolio : Average (21-212) 1% 17% -9% 21% Alpha on Portfolio (Long + Short) : Average (21-212) 19% 6% -1% 52% PE Annual Alpha on Long Stocks : Average (21-212) % -21% -9% 16% Alpha on Short Portfolio : Average (21-212) 15% 8% 5% 31% Alpha on Portfolio (Long + Short) : Average (21-212) 9% -18% -6% 49% PB/ROE Annual Alpha on Long Stocks : Average (21-212) % -25% 4% 5% Alpha on Short Portfolio : Average (21-212) 7% -34% 22% 33% Alpha on Portfolio (Long + Short) : Average (21-212) 2% -53% 25% 35% EV/EBITDA Annual Alpha on Long Stocks : Average (21-212) % -23% 5% 22% Alpha on Short Portfolio : Average (21-212) 32% 19% 19% 57% Alpha on Portfolio (Long + Short) : Average (21-212) 32% -11% 23% 85% Source: Gao Hua Securities Research. We initiate OriginWater and WBD at Buy. We use PEG to value our coverage except for Tianjin Capital. We initiate OriginWater and WBD at Buy. 全球投资研究 4

41 Exhibit 78: We use PEG methodology to value OriginWater, WBD, BEWG and Tianjin MOTIMO and use EV/EBITDA to value TCEPC (A+H Stock Price 214P/E EPS CAGR 214PEG Target Target Target EV/EBITDA 214 EBITDA Target Potential DCF Rating ( ) PEG P/E (Historical Average) (HKD/Rmb mn for H/A) Price Upside based TP OriginWater x 37.%.77x 1.x 37.x N/A 1, % Buy 52.6 WBD x 39.8%.85x 1.x 39.8x N/A % Buy 4.8 BEWG x 25.4%.9x 1.x 25.4x N/A 2, % Neutral 5.1 Tianjin MOTIMO x 43.%.94x 1.x 43.x N/A % Neutral 32. TCEPC (H) x N/M N/A N/A N/A 5.9x 1, % Neutral N/A TCEPC (A) x N/M N/A N/A N/A 13.9x % Sell N/A Note: Priced as of December 9, 213. Target prices are on a 12-month basis. Target prices and share prices for BEWG and TCEPC (H) in HKD, and in CNY for others. Source: Quantum, Gao Hua Securities Research. We use DCF method to cross check and our DCF based 12m TP is in line with the PEG result. Exhibit 79: Our DCF assumptions OriginWater BEWG WBD Tianjin MOTIMO Equity component Equity component Equity component Equity component Equity market premium 6.5% Equity market premium 7.% Equity market premium 6.5% Equity market premium 6.5% Risk free rate 4.5% Risk free rate 2.8% Risk free rate 4.5% Risk free rate 4.5% Beta.9 Beta.9 Beta 1.1 Beta.9 Cost of equity 1.4% Cost of equity 9.2% Cost of equity 11.8% Cost of equity 1.3% Debt component Cost of debt Tax rate After-tax cost of debt Long-run debt-to-capital ratio Debt component Debt component Debt component 6.5% Cost of debt 4.8% Cost of debt 6.% Cost of debt 7.2% 25.% Tax rate 25.% Tax rate 25.% Tax rate 25.% 4.9% After-tax cost of debt 3.6% After-tax cost of debt 4.5% After-tax cost of debt 5.4% 4% Long-run debt-to-capital ratio 4% Long-run debt-to-capital ratio 4% Long-run debt-to-capital ratio 4% WACC 8.2% WACC 6.9% WACC 8.9% WACC 8.3% Terminal growth rate 3.% Terminal growth rate 3.% Terminal growth rate 3.% Terminal growth rate 3.% Source: Gao Hua Securities Research We use EV/EBITDA method to value Tianjin Capital. We use historical average EV/EBITDA instead of PEG methodology as: 1) the company s earnings growth could turn negative under downward pressure from water prices; 2) according to our back-testing EV/EBITDA generated the largest alpha for short portfolios. We initiate Tianjin Capital H/A at Neutral/Sell. 全球投资研究 41

42 Exhibit 8: We use PEG as our main valuation methodology P/E (214E) 45 4 Tianjin MOTIMO y = 9.319x R² = BEWG WBD OriginWater % 25% 3% 35% 4% 45% Buy Neutral Growth ( E) Source: Gao Hua Securities Research. We use P/E methodology to cross check. Current P/E of OriginWater, WBD and BEWG are all below historical averages but MOTIMO and Tianjin Capital A/H are higher. Exhibit 81: Historical P/E Forw ard P/ E OriginWater WBD BEWG Tianjin MOTIMO TCEPC (H) TCEPC (A) Historical Max Historical Min Historical average Historical median Historical Stdev Current ( ) Note: Historical period refers to entire period since listing except for BEWG (from 29) and TCEPC (from 28) to account for differences in business scope. Source: Bloomberg, Gao Hua Securities Research. Our earnings estimates vs. Wind consensus. Our 214E earnings forecasts for water companies are above consensus except for Tianjin Capital. We are generally more optimistic than the market and expect the government and corporates will accelerate their investment in the sector. Our below-consensus view on Tianjin Capital is mainly due to the downward revision we expect for wastewater treatment fees. 全球投资研究 42

43 Exhibit 82: Our earnings forecasts are above consensus except for TCEPC Rmb/ share OriginWater WBD BEWG MOTIMO TCEPC 214 GH estimated EPS consensus EPS Difference 3% 19% 12% 3% -24% 215 GH estimated EPS consensus EPS N/A Difference 6% 21% 21% 8% N/A Note: EPS for BEWG is in HKD. N/A = Not Available. Source: Wind, Bloomberg, Gao Hua Securities Research 全球投资研究 43

44 OriginWater (37.SZ, Buy): Industry leader, consolidation ability Source of opportunity We initiate OriginWater with a Buy rating and a 12-month target price of Rmb5.59. The firm has strong resource consolidation capability and has become a leader in the domestic membrane sector leveraging its technology, capital and market leadership. OriginWater has taken full advantage of its capital edge since its listing in 21, and has established joint ventures in its key markets, further expanding its market. In line with higher sewage water treatment standards in China and construction of water reclamation facilities, we see the membrane market growing from Rmb3bn in 21 to Rmb1 bn in 215E, providing further room for OriginWater s development. Catalyst Higher discharge standards in China and construction of water reclamation plants provide more room for development. Currently, less than 2% of sewage treatment plants in terms of size have reached national first 1A standard. We believe a large number of sewage treatment plants will need to upgrade to satisfy the state standards; Reclaimed water volume will grow 221% from 12.1mt per day to 38.85mt per day during the Twelfth Fiveyear Plan period (Exhibit 53). We see the membrane industry market growing from Rmb3 bn in 21 to c. Rmb1 bn in 215E, which provides ample room for OriginWater development. Strong resource consolidation capability helps accelerate business expansion. OriginWater has set up multiple JVs with other water treatment companies to expand nationwide. It has cooperated with Tsinghua University and Chinese Research Academy of Environmental Sciences to enhance its technological strength. In addition, the company has formed the Zhongguancun Water Treatment Industry Alliance with seven organizations including Bank of Beijing. During , OriginWater enjoyed a revenue CAGR of 78%, a growth rate that is well above the sector average. Incentive plan will enhance its industry-leading position. With management holding stakes in the company, it has implemented ESO plans for key managerial and technical staff since its listing. We believe this will help it maintain its leading position in the industry. Valuation We initiate OriginWater at Buy. We estimate E EPS of Rmb.97/1.37/1.9, implying a 214E PEG of.77x, below the sector average of.86x. We derive a 12-month target price of Rmb5.59 based on a target PEG of 1X, implying 29.8% upside. Investment Profile Low Growth Returns * Multiple Volatility Percentile 2th 4th 6th 8th 1th Beijing Originwater Technology Co., Ltd. (37.SZ) Asia Pacific Industrials Peer Group Average High Growth Returns * Multiple Volatility * Returns = Return on Capital For a complete description of the investment profile measures please refer to the disclosure section of this document. Key data Current Price (Rmb) month price target (Rmb) 5.59 Market cap (Rmb mn / US$ mn) 34,527.3 / 5,686. Foreign ownership (%) -- 12/12 12/13E 12/14E 12/15E EPS (Rmb) EPS growth (%) EPS (diluted) (Rmb) EPS (basic pre-ex) (Rmb) P/E (X) P/B (X) EV/EBITDA (X) Dividend yield (%) ROE (%) CROCI (%) Price performance chart Dec-12 Mar-13 Jun-13 Sep-13 Beijing Originwater Technology Co., Ltd. (L) Shanghai SE A Share Index (R) 2,6 2,5 2,4 2,3 2,2 2,1 2, Share price performance (%) 3 month 6 month 12 month Absolute (7.2) Rel. to Shanghai SE A Share Index (8.2) (1.1) 6. Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 12/9/213 close. Key risks Project delays due to financial constraints of its key clients, most of which are companies controlled by local governments. The companies may need to provide financing support for its JVs with local governments. INVESTMENT LIST MEMBERSHIP Asia Pacific Buy list 全球投资研究 44

45 Beijing Originwater Technology Co., Ltd.: Summary financials Profit model (Rmb mn) 12/12 12/13E 12/14E 12/15E Balance sheet (Rmb mn) 12/12 12/13E 12/14E 12/15E Total revenue 1, , ,483. 6,291.8 Cash & equivalents 1,94.2 1, ,7.8 2,114.1 Cost of goods sold (1,12.6) (1,938.2) (2,813.3) (3,965.6) Accounts receivable , , ,758. SG&A (163.) (233.5) (336.2) (471.9) Inventory R&D Other current assets.... Other operating profit/(expense) (53.) (7.2) (9.5) (117.4) Total current assets 2, , , ,375. EBITDA , ,84.3 Net PP&E Depreciation & amortization (27.9) (36.8) (49.6) (67.5) Net intangibles EBIT ,243. 1,736.8 Total investments 1,1.9 1,1.9 1,1.9 1,1.9 Interest income Other long-term assets , , ,351.4 Interest expense (5.5) (42.7) (59.) (78.5) Total assets 5,26.5 6, ,2.2 11,733.3 Income/(loss) from uncons. subs Others Accounts payable , , ,371.7 Pretax profits ,68.7 1,5.5 2,78.2 Short-term debt.... Income tax (12.4) (155.3) (217.4) (3.6) Other current liabilities Minorities (33.3) (51.) (71.6) (99.1) Total current liabilities 1, , , ,928.9 Long-term debt Net income pre-preferred dividends , ,678.5 Other long-term liabilities Preferred dividends.... Total long-term liabilities Net income (pre-exceptionals) , ,678.5 Total liabilities 1, , ,842. 3,866.9 Post-tax exceptionals.... Net income , ,678.5 Preferred shares.... Total common equity 3, ,71.7 5, ,478.4 EPS (basic, pre-except) (Rmb) Minority interest EPS (basic, post-except) (Rmb) EPS (diluted, post-except) (Rmb) Total liabilities & equity 5,26.5 6, ,2.2 11,733.3 DPS (Rmb) Dividend payout ratio (%) BVPS (Rmb) Free cash flow yield (%) Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E Sales growth CROCI (%) EBITDA growth ROE (%) EBIT growth ROA (%) Net income growth ROACE (%) EPS growth Inventory days Gross margin Receivables days EBITDA margin Payable days EBIT margin Net debt/equity (%) (47.) (35.6) (25.5) (16.7) Interest cover - EBIT (X) NM NM NM 16.3 Cash flow statement (Rmb mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E Net income pre-preferred dividends , ,678.5 D&A add-back P/E (analyst) (X) Minorities interests add-back P/B (X) Net (inc)/dec working capital (211.) (161.3) (187.9) (249.8) EV/EBITDA (X) Other operating cash flow (63.8) (153.5) (222.4) (316.) EV/GCI (X) Cash flow from operations ,279.3 Dividend yield (%) Capital expenditures (95.7) (155.7) (224.1) (314.6) Acquisitions.... Divestitures.... Others (574.4) (595.) (832.2) (1,15.) Cash flow from investments (67.) (75.7) (1,56.3) (1,464.6) Dividends paid (common & pref) (32.3) (33.2) (5.9) (71.4) Inc/(dec) in debt (1.) Common stock issuance (repurchase) Other financing cash flows (49.9)... Cash flow from financing (14.3) Total cash flow (425.3) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. 全球投资研究 45

46 Core drivers of growth/catalysts The Beijing government is actively upgrading its sewage treatment plants and constructing water reclamation facilities In March 213, the Beijing government announced The Three-year Plan of Accelerating Sewage Treatment and Water Reclamation Facilities Construction ( ). According to the Plan, the Beijing government will build 47 water reclamation facilities, upgrade 2 sewage treatment plants, construct and rebuild 1,29km of wastewater pipeline, construct 14 sludge treatment facilities, 17 sewage treatment facilities at key draining exits along rivers, and 42 sewage treatment facilities at major villages/communities in the suburbs in the next three years. Exhibit 83: Key sewage treatment projects by 215 in Beijing Category Water reclamation plant construction Pipeline network construction Sludge harmlessness Temporary waste treatment project Source: Beijing Municipal Government. Project The city will build 47 water reclamation plants, with effluent complying with surface water IV standard. Upgrade and rebuild 2 wastewater treatment plants, with additional treatment capacity of 2.28mn cu m/d. Build and reconstruct wastewater pipeline of 1,29km and build 484km of reclaimed water pipeline. Build 14 sludge harmelessness facilities with new treatment capacity of 3,995t/d. Before planned water treatment plants go online, increase wastewater treatment capacity of 19k cu m/d by making the best use of existing plants and building temporary waste treatment projects. Exhibit 84: Construction schedule of Beijing s water treatment facilities in Region Status Completed 8 13 Central downtown Under construction 2 13 Started 11 Approved Completed New Town Under construction 7 22 Started 17 2 Approved 9 Completed Village and town Under construction 2 3 Started 9 8 Approved 8 Source: Beijing Municipal Government. Higher standards for sewage discharge imply further market opportunities. On the one hand, the discharge standards of domestic sewage at major communities will be lifted from Grade 1B to Grade 1A; on the other hand, there is still room for improvement for the current discharge standards. If the national discharge standards for domestic sewage are tightened, or some heavily polluted regions follow Beijing s practice and carry out more stringent local standards, then membranes will be more widely used, boosting OriginWater s business, in our view. 全球投资研究 46

47 Exhibit 85: Beijing s discharge standards are much higher than national standards Exhibit 86: Sewage discharge national standards (1A) are lower than grade V ground water standards mg/l Beijing A National Level 1 A mg/l Surface V National Level 1 A COD Ammonia nitrogen Total phosphorus COD Ammonia nitrogen Total phosphorus Source: Beijing Municipal Government. Source: Beijing Municipal Government. Stronger production capability of membrane modules will improve the company s self-sufficiency ratio and GPM. As of end-212, OriginWater s micro-filtration membrane capacity is 4mn sqm per year, and 2mn sqm for ultra-filtration membrane; in 213E, the company s reverse osmosis membrane capacity will reach 5, sqm per year. As a result, OriginWater will become one of the few companies in the world to offer a full series of membrane products. We believe the company is well positioned to increase its industrial water treatment market share and improve its GPM. Competitive advantages Industry-leading technological and R&D capability. In 23, OriginWater played a leading role in drafting Technical Specification for Application of Integrated Submerged Membrane Bioreactors for Sewage Treatment, which was later released as an industry standard. Its cooperation with Tsinghua University on new technology and applications of low-energyconsuming membrane bioreactor sewage reclamation won second prize in the National Awards for Scientific and Technological Progress in 29. Meanwhile, the company s R&D investment rose from Rmb13.42 mn in 29 to Rmb62.58 mn in 212. The number of patents it holds has increased from 8 in 29 to 62 in 212. Exhibit 87: OriginWater s R&D has been substantial Exhibit 88: OriginWater s patents held kept growing quickly R&D (Rmb mn) R&D as percentage of rev. (RHS) 6% 5% 4% 3% 2% 1% Patent for invention Utility model Design patent % Source: Company data. Source: Company data. 全球投资研究 47

48 Solid track record: To date, OriginWater has built 36 water reclamation factories with capacity over 1, cubic meters per day each, and combined capacity has reached 3.45mt per day. OriginWater is by far the largest player among its domestic peers. Gaobeidian Water Reclamation Factory in Beijing, OriginWater s largest water reclamation facility, has processing capacity of 1mn cubic meters per day. Exhibit 89: Solid track record of OriginWater Project Size (m 3 /d) Technology Year Gaobeidian water reclamation plant and reclaimed water use project 1,, CMF 211 Xiaohongmen water reclamation plant and reclaimed water use project 6, CMF 211 Nanjing East wastewater treatment plant phase 3 15, MBR 212 Urumqi Midong water reclamation plant project 15, MBR 212 Kunming Ninth wastewater treatment plant project 15, MBR 211 Beijing Qing River water reclamation plant phase 2 15, MBR 29 Hubei Shiyan Shending River wastewater treatment plant reconstruction 11, MBR 28 Kunming Tenth wastewater treatment plant project 1, MBR 211 Beijing Wenyu River reclamation project phase 2 1, MBR 29 Beijing Shunyi Olympic supporting project 1, MBR 27 Source: Company data. Capital is key to accelerating business growth. From 21, OriginWater used its IPO proceeds to set up JVs with urban investment or water companies in multiple regions in China. This has helped the company s membrane technology penetrate new markets in other regions and laid a solid foundation for its future growth. Exhibit 9: OriginWater expands its market by setting up JVs Exhibit 91: OriginWater s growth accelerated since its listing in 21 Listed in Apr 21, invested: Nanjing Urban Construction Water Beijing OriginWater Boda invested in: Yunan Water Hunan OriginWater Wuxi OriginWater Liyang Inna Mongolia Dongyuan 212 invested in: Ordos Aoyuan OriginWater Yucheng Zhonghuan Guohong Beijing Jingjian Water 213 invested in: Shandong OriginWater Guangdong Haiyuan Shanxi Tai Steel OriginWater Net profit (Rmb mn) Listed in Apr, 211 6% 17 43% % 345 yoy (RHS) % % 8% 63% 6% 4% 2% % Source: Company data. Source: Company data. Resource consolidation capability. With its technical know-how and expertise, OriginWater has cooperated extensively with universities, research organizations, local governments and companies to tap into new markets by consolidating technical, market and capital resources. In 全球投资研究 48

49 May 21, OriginWater, along with Beijing Drainage Group, Tsinghua University, BMEDI (Beijing General Municipal Engineering Design & Research Institute), Bank of Beijing, China General Technology Group and Beijing Machinery and Electricity Institute formed the Zhongguancun National Sewage Reclamation Industry Alliance. This alliance covers the whole production chain, including water company, engineering company, equipment company, financing organization, research institute, etc. In 212, OriginWater set up a JV with the China Research Academy of Environmental Sciences. OriginWater holds a 21% stake and is the second-largest shareholder of the JV, which was granted a Grade A certificate of Environmental Impact Assessment. According to OriginWater s announcement on Oct. 25, 213, it plans to acquire a 5.4% stake in Wuhan Sanzhen (6168.SS), and plans to invest Rmb14.7mn (49% stake) to set up a JV with Wuhan Sanzhen in order to enter the water market in Wuhan. Risks Multi-region strategy poses challenges for management. As of end-june 213, OriginWater had 29 subsidiaries scattered across Beijing, Jiangsu, Shandong, Shanxi, Hunan, Inner Mongolia, Xinjiang, Jilin, Yunnan, Hubei and Guangdong. It therefore faces risks such as higher management costs and loss of talent in case of inefficient management. Financial constraints of local governments may drag on the company s growth. Even as a leading company in the membrane engineering industry, OriginWater s growth also hinges on the penetration pace of the membrane technology in the sewage reclamation industry. OriginWater potentially faces difficulties of slow progress in its membrane business or prolonged receivable days due to financial constraints of local governments or stricter central government surveillance. Debt risk from subsidiaries. According to its 213 interim report, the company provides Rmb55mn (Rmb5mn for consolidated and Rmb5mn for non-consolidated subsidiaries) of debt guarantee to its subsidiaries. The subsidiaries are currently generating decent cash flow, but in case of any operational issue, the debt risk involved may impact the company s earnings. Company history and profile OriginWater has become the largest MBR solution provider in China. Established in 21 by Mr. Wen Jianping, OriginWater offers MBR technology to build or upgrade sewage treatment and reclamation facilities. The company s services range from technical solution design and engineering design to systems integration, and it also manufactures/provides key membrane modules and materials. OriginWater was listed on the GEM Board at Shenzhen Exchange in April 21, with IPO proceedings of Rmb2.45 bn. Rapid development of all three business segments. The largest segment is total sewage treatment solutions, providing overall technical solutions to build sewage treatment or reclamation facilities by adopting its leading membrane technology. The second largest segment is water supply and drainage engineering services via the platform of Beijing Jiu an Construction and Investment Group, which started in 211. In addition, the company entered the water dispenser business from 21. 全球投资研究 49

50 Exhibit 92: Sewage treatment overall solution is still the largest revenue contributor Exhibit 93: and enjoys a relatively high GPM Operation revenue (Rmb mn) Wastewater overall solution, 1,396.38, 79% Water supply and sewerage engineering, 341.9, 19% Water purifier, 31.31, 2% % Overall technical solution of wastewater treatment Water supply and drainage engineering Water dispenser Source: Company data. Source: Company data. Business expansion from Beijing to other regions. In 27, most of OriginWater s revenues were from Beijing, while in 212, revenues from outside Beijing reached Rmb815mn, accounting for 46% of total revenue. The share of operating profit from outside Beijing also reached 46% in 212. Exhibit 94: Revenues from outside Beijing grew quickly Exhibit 95: The share of operating profit from outside Beijing increased as well Rmb mn Beijing Other regions 2, 1,8 1,6 1, ,2 1, Source: Company data. Beijing Other regions 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Source: Company data. 全球投资研究 5

51 WBD (355.SZ, Buy): Coal chemical policy loosening is a tailwind Source of opportunity We initiate coverage of WBD at Buy with a 12-month target price of Rmb4.52. As a leading firm in water treatment for the coal chemical industry, WBD is poised to benefit from a positive shift in coal chemical policies. As coal chemical projects are largely located in northwestern regions that are rich in coal resources but deficient in water resources, water treatment has become a key element of coal chemical projects. Catalyst The coal chemical industry is likely to accelerate as a result of a positive shift in government policies towards coal chemicals. The National Energy Administration gave initial approval to 13 coal chemical projects in 1H213, and another 8 coal chemical projects were approved in September (Exhibit 55). These point to a positive shift in government policies regarding coal chemicals. Sharp falls in coal prices since mid-212 have led to rising profitability for coal chemical projects, which in turn boosted enthusiasm for investing in these projects. As coal chemical projects are largely located in northwestern regions that are rich in coal resources but deficient in water resources, water treatment has become a key element of coal chemical projects. WBD takes a leading position in water treatment for the coal chemical and petrochemical industries. WBD has offered water treatment services to Shenhua Ningxia Coal Group s coal to olefin project, China Coal s coal to methanol and acetic acid project, Shaanxi Coal s coal tar project, and CNPC s petrochemical projects. As the coal chemical industry takes a turnaround, WBD s net profits grew 64% yoy in 1H213. The water operation business will become the future growth engine. WBD is currently providing managed operations or BOT services for five projects of companies including Shenhua Ningxia Coal Group and CNPC s Qingyang Petrochemical. WBD will further expand this segment going forward as: 1) such business can provide more stable revenue, and 2) managed operations or BOT will create closer ties between WBD and project owners. Valuation We initiate coverage of WBD at Buy with a PEG-based 12-month target price of Rmb4.52. We estimate 213E-15E EPS of Rmb.71/1.2/1.38, and 214E PEG of.85x, lower than the industry average of.86x. Based on target PEG of 1X, we derive a 12-month target price of Rmb4.52, implying 17.8% upside potential. Investment Profile Low Growth Returns * Multiple Volatility Percentile 2th 4th 6th 8th 1th Beijing Water Business Doctor Co., Ltd (355.SZ) Asia Pacific Industrials Peer Group Average High Growth Returns * Multiple Volatility * Returns = Return on Capital For a complete description of the investment profile measures please refer to the disclosure section of this document. Key data Current Price (Rmb) month price target (Rmb) 4.52 Market cap (Rmb mn / US$ mn) 7,87.7 / 1,296.2 Foreign ownership (%) -- 12/12 12/13E 12/14E 12/15E EPS (Rmb) EPS growth (%) EPS (diluted) (Rmb) EPS (basic pre-ex) (Rmb) P/E (X) P/B (X) EV/EBITDA (X) Dividend yield (%) ROE (%) CROCI (%) Price performance chart Dec-12 Mar-13 Jun-13 Sep-13 Beijing Water Business Doctor Co., Ltd (L) Shanghai SE A Share Index (R) 2,6 2,5 2,4 2,3 2,2 2,1 2, Share price performance (%) 3 month 6 month 12 month Absolute.4 (1.9) 18.9 Rel. to Shanghai SE A Share Index (.7) (3.1) 92.5 Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 12/9/213 close. Key risks WBD has relatively high client concentration, with large SOEs like Shenhua, China Coal and CNPC as major clients. 全球投资研究 51

52 Beijing Water Business Doctor Co., Ltd: Summary financials Profit model (Rmb mn) 12/12 12/13E 12/14E 12/15E Balance sheet (Rmb mn) 12/12 12/13E 12/14E 12/15E Total revenue , ,934.9 Cash & equivalents 1, , Cost of goods sold (447.1) (628.6) (961.8) (1,458.2) Accounts receivable ,136.1 SG&A (4.) (51.2) (71.5) (96.7) Inventory R&D Other current assets.... Other operating profit/(expense) (11.8) (17.8) (25.3) (34.5) Total current assets 1, , , ,23. EBITDA Net PP&E ,121.1 Depreciation & amortization (12.9) (15.7) (21.1) (27.1) Net intangibles EBIT Total investments.... Interest income Other long-term assets Interest expense (.3)... Total assets 2, , ,84.2 3,352.9 Income/(loss) from uncons. subs..... Others (.3) (.3) (.3) (.3) Accounts payable Pretax profits Short-term debt.... Income tax (15.1) (25.) (37.9) (55.6) Other current liabilities Minorities.... Total current liabilities Long-term debt.... Net income pre-preferred dividends Other long-term liabilities Preferred dividends.... Total long-term liabilities Net income (pre-exceptionals) Total liabilities ,65.2 Post-tax exceptionals.... Net income Preferred shares.... Total common equity 1, , ,41.9 2,275.9 EPS (basic, pre-except) (Rmb) Minority interest EPS (basic, post-except) (Rmb) EPS (diluted, post-except) (Rmb) Total liabilities & equity 2, , ,84.2 3,352.9 DPS (Rmb) Dividend payout ratio (%) BVPS (Rmb) Free cash flow yield (%) 1.1 (.9) (1.6) (1.5) Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E Sales growth CROCI (%) EBITDA growth ROE (%) EBIT growth ROA (%) Net income growth ROACE (%) EPS growth Inventory days Gross margin Receivables days EBITDA margin Payable days EBIT margin Net debt/equity (%) (7.8) (6.2) (46.) (32.7) Interest cover - EBIT (X) NM NM NM NM Cash flow statement (Rmb mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E Net income pre-preferred dividends D&A add-back P/E (analyst) (X) Minorities interests add-back.... P/B (X) Net (inc)/dec working capital 16.3 (85.6) (126.) (17.4) EV/EBITDA (X) Other operating cash flow (37.9) EV/GCI (X) Cash flow from operations Dividend yield (%) Capital expenditures (129.6) (17.6) (259.9) (29.2) Acquisitions.... Divestitures.1... Others Cash flow from investments (126.6) (17.6) (259.9) (29.2) Dividends paid (common & pref) (22.9) (34.3) (56.8) (81.) Inc/(dec) in debt.... Common stock issuance (repurchase).... Other financing cash flows (.2)... Cash flow from financing (23.1) (34.3) (56.8) (81.) Total cash flow 3.3 (17.8) (185.2) (196.1) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. 全球投资研究 52

53 Future drivers of growth: An acceleration in the approval of coal chemical projects will push for an expansion in the water treatment market. The National Development and Reform Commission (NDRC) has given initial approvals to more than 2 coal chemical projects since the beginning of 213, and a large number of new types of coal chemical projects are in the stage of planning. These new types of coal chemical projects, especially coal to olefin and coal to gas projects, may secure more support from the government. We expect investment on coal chemical projects could add up to Rmb1tn by 22, which would translate into around Rmb5bn investment in water treatment for environmental protection purposes. Exhibit 96: A glance at major planned coal chemical projects Project Investor Size (mt, bn cu m) CTL Lu'an Group 1.5mt CTL project Lu'an Group 1.5 Shenhua Ningxia Coal Industry Group 4.5mt CTL project Shenhua Ningxia Coal Industry Group 4.5 Yitai Group.16mt indirect CTL project Yitai Group.16 Yitai Group 2mt indirect CTL project Yitai Group 2 Total Coal consumption (mt) Coal to gas China Power Investment Corporation 6bn cu m coal to gas project China Power Investment Corporation 6 Shandong Energy Xinwen Mining Group 4bn cu m coal to gas project Shandong Energy Xinwen Mining Group 4 China Guodian Corporation 4bn cu m coal to gas project China Guodian Corporation 4 CNOOC 4bn cu m coal to gas project CNOOC 4 Xinmeng Energy 4bn cu m coal to gas project Xinmeng Energy 4 Beijing Enterprises Group 4bn cu m coal to gas project Beijing Enterprises Group 4 CNOOC New Energy Investment 4bn cu m coal to gas project CNOOC New Energy Investment 4 Hebei Consutrction & Investment Group 4bn cu m coal to gas project Hebei Consutrction & Investment Group 4 7 companies incl. Guanghui 3bn cu m coal to gas project 7 companies incl. Guanghui 3 Guanghui Energy 5mn cu m LNG project Guanghui Energy.5 Datang Group 4bn cu m coal to gas project Datang Group 4 13 Datang Group Fuxin 4bn cu m coal to gas project Datang Group 4 Inner Mongolia Huineng 1.6bn cu m coal to gas project Inner Mongolia Huineng Total Coal to Olefin Sinopec Group.6mt coal to olefin project Sinopec Group.6 Sinopec and Henan Coal.6mt coal to olefin project Sinopec and Henan Coal.6 China Coal Energy.6mt coal to olefin project China Coal Energy.6 Gansu Huahong Huijin.6mt coal to olefin project Gansu Huahong Huijin.6 Shenhua Group.6mt coal to olefin project Shenhua Group.6 Shenhua Ningxia Coal Industry Group.5mt coal to olefin project Shenhua Ningxia Coal Industry Group.5 Datang Group Duolun.46mt coal to olefin project Datang Group.5 Xinwen Mining Group Yinan base 1.8mt methyl to.6mt olefin project Shandong Energy Xinwen Mining Group Guodian Pingzhuang Nileke base 1.8mt methyl to.6mt olefin project Guodian Pingzhuang Qinghua Group 6mt methyl to 2mt olefin project Qinghua Group Datang Group 1.8mt methyl to.6mt olefin project Datang Group Total Coal to Glycol Xinjiang Baotailong Coal Chemical Co., Ltd. 1mt glycol project Xinjiang Baotailong Coal Chemical Co., Ltd Wanbei Coal-Electricity Group Co., Ltd.1mt coal to glycol project Wanbei Coal-Electricity Group Co., Ltd Shanxi Xiang Mine Hongtong Coal Chemial Co., Ltd..2mt coal to glycol project Shanxi Xiang Mine Hongtong Coal Chemial Co., Ltd Shaanxi Yanchang Petroleum Co., Ltd. Yulin.8mt coal to glycol project Shaanxi Yanchang Petroleum Co., Ltd Yutian Chemical.6mt coal to glycol project Yutian Chemical Dan Chemical.4mt coal to glycol project Dan Chemical Xinxing Cathay International Group and Wulan Group.5mt coal to glycol project Xinxing Cathay International Group and Wulan Group Total 7.6 Source: Media reports and company data compiled by Gao Hua Securities Research. Prospects of more orders and growth in profits. WBD s net profits grew 64.2% yoy in 1H213. As of September 3, 213, WBD has 22 ongoing projects, including 15 engineering projects, 5 projects in the category of managed operations, and 2 investment projects. We expect WBD is likely to secure more orders along with the approval of coal chemical projects and their tendering in the future. We also estimate a significantly higher growth of full-year earnings in 全球投资研究 53

54 Exhibit 97: WBD s earnings have been rising rapidly 213 than the 31% seen in 212. This is likely to be another catalyst for its share price performance. Exhibit 98: Project constructions are the main source of profits Rmb mn Net profits yoy (RHS) 18 7% 65% 16 6% 14 5% 12 4% 31% 3% 1 23% 2% 8 1% 6-4 (1%) 2 (2%) (24%) (3%) E Products sales 5% Project Operation 31% Technology service 4% Project Construction 6% Source: Company data, Gao Hua Securities Research. Source: Company data. Exhibit 99: Summary of WBD s new contracts since the beginning of 213 Date Project Downstream sector Source: Company data. China Coal Yulin Energy methyl comeprehensive use project, operation management Ning dong Energy chemical base coal chemical heavy salt water treatment CNPC North China petro chemical quality upgrade and safety environmental protection technology PC contract Shaanxi Coal Tianyuan Chemical wastewater treatment project Coal chemical: methyl based olefin Coal chemical: zero emission of heavy salt water Amount (Rmb mn) Execution cycle Petro chemical Coal chemical: medium temperature coal tar lightweight Note Operation Management 15-2 yrs BOT 389 Oct 213-Dec 214 The completion of the Jiangsu project could help boost gross margins. WBD is building a production base for non-standard equipment in Yancheng, Jiangsu, which is scheduled to come into operation at the end of 213. The availability of non-standard equipment is likely to increase WBD s gross margin, which could serve as another catalyst for its share price. Core business and industry trends: treatment of industrial water The key business of WBD is to offer clients water pollution controls throughout the process of industrial production, providing a series of services like water supply, sewage treatment and reclamation under an all-in-one service model. In addition, WBD has extended its services beyond the construction of a water system to later-on operations of the system. It will organize a team of professionals to offer managed operations of the water system throughout the life cycle of the system, which could be called full life cycle services. 全球投资研究 54

55 Exhibit 1: WBD offers a full range of industrial water treatment services Water supply Water intake, delivery, quality treatment and distribution engineering during industrial production and employees' daily life Wastewater, rainwater and water from accidents collection, delivery, treatment, reclamation and disposal engineering during industrial production and employees' daily life Drainage Industrial water treatment system full range service Water reclamation Reclamation of wastewater after advanced treatment engineering during production and employees' daily life Source: Prospectus of WBD s share offering. Coal chemical development: mismatch in distribution of water and coal resources Large amounts of water are required to develop modern coal chemical projects. However, China not only faces a severe shortage of water resources, but also has a mismatch in distribution of water and coal resources. There is a shortage of water resources where coal resources abound, and there is lack of coal resources where water resources are rich. China s coal chemical projects are currently concentrated in Inner Mongolia, Shanxi, Shaanxi and Xinjiang, where there is a severe water shortage. Exhibit 11: Water resources are concentrated in southern regions that lack coal resources Exhibit 12: Coal resources are mainly located in Shanxi and Inner Mongolia where water resources are scarce bn m 3 Top 15 regions rich in water resources bn tonne Top 15 regions rich in coal resources Source: China Statistical Yearbook 212. Source: China Statistical Yearbook 212. Coal chemicals have certain cost advantage. According to estimates in the report Asia Chemicals: The next decade (part 2): Coal to chemical expansion accelerates China s import substitution by the GS Asia-Pacific chemical industry team published on June 5, 213, cash cost of coal-based polyethylene in China is around US$926/ton, about US$424/t cheaper than naphtha-based olefins, indicating that there is a significant cost advantage here. 全球投资研究 55

56 Exhibit 13: 213E marginal cash costs in China (US$ per ton) 16 Coal to Methanol Costs Methanol to Olefins (MTO) Costs Polyethylene conversion costs Cost of coal (6.7 tons) Utilities, Catalysts, Chemicals Non feed Operating cost Total Cost of Methanol (3 tons) MTO Cost Olefins Cash Cost Polyolefin conversion cost HDPE/LLDPE Cash Cost Naphtha based PE Cash Cost Source: Goldman Sachs Global Investment Research. Exhibit 14: Cost curve of projects in planning, assuming completion by Production cost of ethylene (US$/ton) with CTO 12 8 Southeast Asia Ethane China CTO Southeast Asia North America Blended Europe Northeast Asia New CTO projects push out total global ethylene capacity by 5%, driving total inefficient capacity to 35mn tons or 16% of total global capacity (vs 14% without China CTO). Middle East US Ethane 4 We expect global ethylene demand to reach around 18mn tons by 217 at a pace of 3.6% CAGR Cumulative ethylene capacity (mn tons) Source: Goldman Sachs Global Investment Research. 全球投资研究 56

57 Key water treatment processes for coal chemical projects Wastewater from coal chemical projects is mainly created by the process of coking, gas purification and the recovering and refining of chemical products. COD of blended wastewater could reach 3,-7,mg/L, with ammonia and nitrogen at 2-5mg/L. The discharge of such wastewater is usually large in volume and contains a lot of organic pollutants that don t degrade well. Such industrial wastewater is highly concentrated and treatment of such water is not an easy task. Exhibit 15: Technologies for treatment of coal chemical wastewater Item Pretreatment Biochemical treatment End treatment Water reclamation Technology Adjustment, degreasing and efficient clarification of water quality and volume MBRR, BAF, CASS, UASB Biological activated carbon adsorption recycling technology, photoelectric catalytic oxidation technology, sand filtration technology Wetland eco-technology, membrane separation technology, high salinity water resources comprehensive utilization technology, electrodialysis desalination technology Source: Company data. Competitive advantages and disadvantages: Integrated services WBD offers all-in-one and full life cycle services, which are the outstanding competitive edge for WBD. Now the common case is that different service providers are in charge of water supply, drainage and reclamation i.e. architectural design firms in charge of water supply and environmental companies in charge of drainage and reclamation. WBD link the three parts of water supply, drainage and reclamation, and as a result launched integrated services. WBD also extended its services beyond the construction period to a full life cycle, and introduced managed operation of water systems, which gives WBD a head start within the industry. Technological strength WBD has accumulated a huge mass of data about the water samples in petrochemical and coalchemical industry, and carried out R&D on related wastewater treatment technology, such as the moving bed bio-reactor (MBBR) for processing low concentration petrochemical wastewater, and the desalting technology for wastewater from petrochemical and coal chemical industries. WBD has built a base for equipment R&D and production in Yancheng, Jiangsu, and has a water treatment technology center in Ningxia, specially focusing on R&D on wastewater treatment for coal chemical projects. In 213, WBD was named a Beijing High Polluting Chemical Wastewater Reclamation Engineering and Technology Research Center, dedicated to studying resolutions for treatment of coal chemical wastewater. Together with Beijing Normal University, Beijing Forestry University, Dalian University of Technology, University of Science and Technology Liaoning, and Beijing Bluestar, WBD has set up a platform for the integration of industry, university and research and for technological exchanges, in an effort to facilitate sharing and efficient industrialization of technologies. 全球投资研究 57

58 Abundant project experience WBD has already undertaken large projects for treatment of coal chemical and petrochemical wastewater for many big SOEs like Shenhua, China Coal, Shaanxi Coal and CNPC, and has accumulated a lot of experience in this field. Exhibit 16: Key projects of WBD Project Size Contract (Rmb mn) Shenhua Ningxia coal-toolefin project water treatment EPC project Desalted water 57,6m 3 /d, Water directly going to drain 4,m 3 /d, wastewater treatment and reclamation:26,m 3 /d 176 Shenhua Ningxia coal-toolefin phase 2 water treatment system China Coal Shanxi Yulin methanol acetic acid phase 1EPC contracting Circulating water 8,m 3 /h, Desalted water 1,m 3 /h, Water directly going to drain 1,5m 3 /h,wastewater 12m 3 /h 37 Wastewater 65 m 3 /h, Reclamation 1,75 m 3 /h, Desalted water 1,8 m 3 /h 513 CNPC Fushun petro- Circulating water 11, m3/d, Condensate refining 19,2 chemical ethylene project m3/d, Wastewater 24, m3/d 396 water treatment EPC project CNPC Daqing Petrochemical 1.2mtpa ethylene project Wastewater 26,4 m 3 /d, Wastewater reclamation 14,4 m 3 /d 139 Source: Company data. Risks Heavy reliance on big clients. WBD is mainly engaged in industrial water treatment for petrochemical and coal chemical industries, and therefore is heavily reliant on big clients like CNPC and Shenhua. WBD said in the share offering prospectus that 7.6%/98.8%/99.5% of its revenue came from Shenhua Group or CNPC subsidiaries in Loss of staff and intensified industry competition. As treatment of industrial wastewater is technologically demanding, talents that have professional expertise and rich experience are vital to the company growth. As industry competition intensifies, WBD will come under pressure in maintaining business growth and be subject to risks from loss of employees. Potential lack of funding for continued investment in coal chemical projects. The NDRC has given initial approval to more than 2 coal chemical projects since 213, which greatly boosted the enthusiasm for developing the coal chemical industry. However, as a result of factors such as capital, market, and environmental policies, some coal chemical projects have a lot of uncertainties. If some companies make no further investments in the coal chemical industry due to a lack of funding, this will negatively impact WBD s business. Company history and profile WBD is an environmental company with a focus on offering integrated solution of a comprehensive sewage treatment system specially for petrochemical, coal chemical and power generation companies. WBD was established in 1998 and headquartered in Beijing, and has multiple subsidiaries in Ningxia, Jilin, Jiangsu and Liaoning, including Ningxia WBD, Jilin Solid Waste Disposal Company, Jiangsu WBD, Anshan branch, Qingyang branch and Ningxia branch. WBD has carried out nearly a hundred projects, such as reclamation of industrial sewage, industrial wastewater treatment, managed operations. 全球投资研究 58

59 BEWG (371.HK, Neutral): Rapid expansion via M&A Investment view We initiate on BEWG at Neutral with a 12-month target price of HK$4.9. Leveraging its SOE background, BEWG is able to expand its business nationwide at lower financing costs. In addition, the company has flexible mechanism like a private firm and is aggressive in M&A. BEWG has accelerated its M&A efforts since 213 and we expect this trend to continue in the next 3 years. Core drivers of growth SOE background as the operating arm for Beijing Enterprise Group s water business. With its SOE background, the company can expand business across the country more easily, and obtain loans from domestic banks or finance via overseas debt markets at lower financing costs. BEWG has highly flexible incentive mechanism like a private company. With a 8.88% stake held by management and the ESO plan since 211, BEWG has been growing much faster than its peers in terms of both revenue and net profit. The company is likely to expand rapidly through continuous M&As. Year-to-date, BEWG announced its acquisition of Veolia Water s assets in Portugal, 26 water facilities from Beijing Environment Development, 36 water facilities from Standard Water, and 9 projects from Salcon Water, with a combined capacity exceeding 4mt per day, well above its guidance of 2mt at the beginning of this year. We expect the company to keep expanding in the next 3 years. Risks to the investment case Upside risk: If the capacity expansion is higher than expectation, the stock price will continue to outperform. Downside risks: The net debt/equity ratio was.98 at the end of June-213, the finance cost will go up if the interest rates go up or the RMB depreciates. There are many factors that may influence M&A processes; therefore sometimes the scale of acquisition might be lower than market expectation. Valuation We initiate our coverage of the stock with a Neutral rating. Currently BEWG is trading at 22.9X 214E P/E, lower than its historical average of 24.9X. The implied 214E PEG is.9x, slightly higher than sector average of.86x. Our target price of HK$4.9 is based on 1X PEG, implying 11.% upside potential. Investment Profile Low Growth Returns * Multiple Volatility Percentile 2th 4th 6th 8th 1th Beijing Enterprises Water Group Limited (371.HK) Asia Pacific Industrials Peer Group Average High Growth Returns * Multiple Volatility * Returns = Return on Capital For a complete description of the investment profile measures please refer to the disclosure section of this document. Key data Current Price (HK$) month price target (HK$) 4.9 Market cap (HK$ mn / US$ mn) 37,22.7 / 4,798.1 Foreign ownership (%) -- 12/12 12/13E 12/14E 12/15E EPS (HK$) EPS growth (%) EPS (diluted) (HK$) EPS (basic pre-ex) (HK$) P/E (X) P/B (X) EV/EBITDA (X) Dividend yield (%) ROE (%) CROCI (%) Price performance chart Dec-12 Mar-13 Jun-13 Sep-13 Beijing Enterprises Water Group Limited (L) Hang Seng Index (R) 27,5 26,5 25,5 24,5 23,5 22,5 21,5 2,5 19,5 Share price performance (%) 3 month 6 month 12 month Absolute Rel. to Hang Seng Index Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 12/9/213 close. 全球投资研究 59

60 Beijing Enterprises Water Group Limited: Summary financials Profit model (HK$ mn) 12/12 12/13E 12/14E 12/15E Balance sheet (HK$ mn) 12/12 12/13E 12/14E 12/15E Total revenue 3, , , ,683.9 Cash & equivalents 4,29.9 5,62.8 4, ,451.5 Cost of goods sold (2,29.4) (3,573.) (4,486.8) (5,194.1) Accounts receivable 8, , , ,93.7 SG&A (439.6) (677.5) (863.9) (1,24.1) Inventory R&D Other current assets 1, , , ,162.3 Other operating profit/(expense) (127.4) (55.9) (55.6) (79.6) Total current assets 13, , , ,776.5 EBITDA ,562. 2, ,881.9 Net PP&E , , ,217.8 Depreciation & amortization (69.7) (123.8) (317.6) (495.9) Net intangibles 2, , , ,56.4 EBIT , , ,386.1 Total investments 2, , , ,795.4 Interest income Other long-term assets 11, , , ,94.6 Interest expense (494.3) (639.5) (735.6) (783.7) Total assets 31, , , ,254.8 Income/(loss) from uncons. subs. (1.4)... Others Accounts payable 6, , , ,384.3 Pretax profits 1,91.8 1, , ,57.2 Short-term debt 2,81.3 1,81.3 1,81.3 1,81.3 Income tax (224.6) (345.5) (485.9) (628.2) Other current liabilities Minorities (116.7) (179.7) (252.7) (326.7) Total current liabilities 9, , , ,21.4 Long-term debt 8, , , ,988. Net income pre-preferred dividends ,156. 1, ,12.3 Other long-term liabilities 2, , , ,919.8 Preferred dividends.... Total long-term liabilities 11,3.1 15, , ,97.7 Net income (pre-exceptionals) ,156. 1, ,12.3 Total liabilities 2, , , ,19.1 Post-tax exceptionals.... Net income ,156. 1, ,12.3 Preferred shares.... Total common equity 8, , , ,931.1 EPS (basic, pre-except) (HK$) Minority interest 2, , ,85.6 3,214.6 EPS (basic, post-except) (HK$) EPS (diluted, post-except) (HK$) Total liabilities & equity 31, , , ,254.8 DPS (HK$) Dividend payout ratio (%) BVPS (HK$) Free cash flow yield (%) (4.7) (4.7) Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E Sales growth CROCI (%) EBITDA growth ROE (%) EBIT growth ROA (%) Net income growth ROACE (%) EPS growth Inventory days Gross margin Receivables days EBITDA margin Payable days EBIT margin Net debt/equity (%) Interest cover - EBIT (X) Cash flow statement (HK$ mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E Net income pre-preferred dividends ,156. 1, ,12.3 D&A add-back P/E (analyst) (X) Minorities interests add-back P/B (X) Net (inc)/dec working capital (1,88.6) (3,62.3) (1,485.4) (1,445.8) EV/EBITDA (X) Other operating cash flow 171. (138.2) (232.7) (391.3) EV/GCI (X) Cash flow from operations (772.8) (1,741.) ,87.8 Dividend yield (%) Capital expenditures (38.4) (114.9) (146.5) (173.7) Acquisitions (56.5) (2,.) (2,.) (2,.) Divestitures.... Others (14.9)... Cash flow from investments (559.9) (2,114.9) (2,146.5) (2,173.7) Dividends paid (common & pref) (27.3) (151.4) (233.1) (327.9) Inc/(dec) in debt 4,95.7 3,. 1,. 1,. Common stock issuance (repurchase). 2, Other financing cash flows (919.7) Cash flow from financing 2, , Total cash flow 1, ,33. (837.8) (331.6) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. 全球投资研究 6

61 Core drivers of growth/catalysts Fast growth via M&A. BEWG s capacity per day has grown from 1.77mt in 29 to 7.29mt in 212, a CAGR of 6%; in mid-213, its capacity has further increased to 8.13mt. The company plans to acquire over 2mt of capacity every year, and has made multiple announcements of acquisitions ytd which will add total capacity of more than 4mt per day. Exhibit 17: Rapid expansion of BEWG s operation, E mt/d Scale in operation yoy (RHS) % % % 39% E Source: Company data, Gao Hua Securities Research. 全球投资研究 61

62 Exhibit 18: BEWG has announced a number of acquisitions ytd Time Counterparty Project Category Location Size (mt/d) Jan-13 Management Committee of Dalian City Jinzhou Economic Development Zone Supporting infrastructure construction BT project on western of Changdao in Jinzhou Economic Development Zone in Dalian City Jan-13 Kunming Tien Lake Investment Co., Ltd. Eleventh Sewage Treatment Plant in Kunming City BT Jan-13 Beihai City Road and Harbour Construction Investment and Development Co, Ltd. and Beihai City Finance Bureau Project of Tieshan Harbour Nos. 5, 6 surface drainage Feb-13 7 sewage treatment plants in Dongguan City Mar-13 Mar-13 Mar-13 Mar-13 Mar-13 Jun-13 Jun-13 Management Committee of Dawa Country Lingang Economic Development Zone People s Government of Pangjin City Dawa Country Nanning Dashatian Water Supply Co., Ltd Pi County Tuojiang River Comprehensive Improvement Leading Group Office Veolia Water Jilin Bei Ke Water Ltd. Dawa Country Lingang Economic Development Zone sewage treatment plant BOT project Pangjin City Dawa Country sewage treatment plant TOT&BOT project Increase capital agreement of Nanning City Dashatian Water Supply Co., Ltd Water environmental renovation project of Tuojiang River Valley in Pi County Four concession agreements, three operation and maintenance contracts and maintenance of sewage and drainage networks Project of Northen Dongcheng sewage treatment in Dongying Gongzhuling City water supply project BT BT Dalian, Liaoning Kunming, Yuannan Dongguan,Guang dong.6.57 BOT Panjin, Liaoning.125 TOT,BOT Panjin, Liaoning.4 Investment- Cooperation TOT, operation management BOT Nanning, Guangxi.165 Chengdu, Sichuan Portugal Dongying, Shandong.4.65 Jun-13 Project of lift pump station of Longtou, Binhe, Nanjuetang in Qionghai City, Hainan province Operation management Qionghai, Hainan.57 Jun-13 Hubin Sewage Treatment Plant and supporting pipline BOT Yueyang, Hunan.25 Jun-13 3 sewage treatment plants in Xinzhuang, Guiyang City TOT Guiyang, Guizhou.12 Jul-13 Jul-13 Eshan Yi Nationality Autonomous County People s Government Beijing Construction Engineering Group Co.,Ltd Eshan Yi Nationality Autonomous County Sewage Water Treatment Plant 26 wastewater treatment plants and 1 water reclamation plant under construction TOT Yunnan.1 Mainland China Jul-13 Standard Water Ltd. 36 water projects TOT Mainland China projects, including tap water plant, tap water company, Sep-13 Salcon Berhad and Salcon Water Asia wastewater treatment plant, with total capacity of 1.25 tonnes. Note: BT=Build-Transfer; TOT=Tansfer-Operate-Transfer; BOT=Build-Operate-Transfer Mainland China Source: Company data, Gao Hua Securities Research. Room for organic growth still exists. Although opportunities for newly built water facilities have decreased significantly, the upgrade of existing water plants and construction of new water treatment facilities in lower-tier cities still provides room for growth. Exhibit 19: BEWG still has water plants under construction Water plants under construction H13 Total Wastewater treatment Reclaimed water 1 2 Tap water Sea water desalination Source: Company data. 全球投资研究 62

63 Competitive advantages/disadvantages Economies of scale: low operating costs. BEWG aims to improve acquired projects profitability through better management: one way is to allocate water facilities to its regional headquarters to lower operational costs; another way is to lower labor costs by personnel sharing within a region. Meanwhile, the company can lower its raw material costs through unified procurement, given its industry-leading scale. Exhibit 11: BEWG s GPM of water business is much higher than peers 1H213 water affairs operational GPM 7% 65.3% 6% 56.5% 5% 4% 4.% 37.8% 3% 2% 21.8% 1% % BEWG Chongqing Water TCEPC Beijing Capital Wuhan Sanzhen Industry Holding Source: Company data, Gao Hua Securities Research. Market-oriented operation with low finance costs thanks to SOE background BEWG has expanded its business across China, and its water factories are located in various regions in China, with South China accounting for the largest in terms of revenue. Exhibit 111: BEWG has water facilities around China Exhibit 112: Revenue of water business comes more from South China 1H213 water plants amount by region 1H213 water plant revenue by region Shandong 9 East 86 North 11 Shandong 96 East 16 North 116 Nouth 3 West 197 West 39 South Source: Company data. Source: Company data. BEWG enjoys much faster growth in terms of revenue and net profit than most SOEs. 全球投资研究 63

64 Exhibit 113: BEWG enjoys much faster revenue growth than peers Exhibit 114: Its net profit growth is also leading peers 3% 25% 2% 15% BEWG Wuhan Holding Beijing Capital TCEPC Chongqing Water 2% 15% 1% BEWG Wuhan Holding Beijing Capital TCEPC Chongqing Water 1% 5% 5% % -5% H13 % -5% H13-1% -1% Source: Wind. Source: Wind. Its interest rate is lower. BEWG enjoys relatively low interest rates given its access to both the domestic and overseas loan/bond markets (Chongqing Water Group s low blended interest rate is because it took out low-rate government aid loans from Japan and France in 199s). Exhibit 115: Financing costs comparison among peers 12.% Average financing cost 1.% 1.% 8.% 7.6% 6.% 4.8% 4.% 3.7% 3.1% 2.%.% TCEPC Wuhan Industry Holding Beijing Capital BEWG Chongqing Water Source: Company data, Gao Hua Securities Research. ESO plan. As of the end of 212, three directors of the Board, including the CEO, held a 1% stake in Tenson Investment Limited, which owns 8.88% (685mn shares) of BEWG. In addition, an ESO plan was approved at BEWG s shareholder meeting in June 211, specifying that management could be granted stock options of up to 685mn shares in the future. On April 24, 213, the company granted 4mn stock options. 全球投资研究 64

65 Risks Upside Risk Upside risk: If the capacity expansion is higher than expectation, the stock price will continue to outperform; Downside Risks Overhang in its future M&A progress. The company s growth might be lower than expected if it fails to find suitable targets for acquisition. Risks in interest rate and exchange rate. At the end of June-213, the total bank loans and bond of BEWG were HK$17.4bn (which included US$5mn of bond), and the net debt/equity ratio is.98. If the interest rates go up significantly, or RMB depreciates, the finance cost of BEWG will go up. Company profile Previously known as Shang Hua Holdings, BEWG (371.HK) changed to its current name in 28. In the same year, it acquired several companies including Zhongkecheng, Shenzhen Huaqiang Innovation, and Guigang Water Supply Company to enter the water business. BEWG is engaged in construction and operation of water facilities and other environmental improvement projects. Exhibit 116: Revenue breakdown of 1H13 Exhibit 117: Gross profits breakdown of 1H13 Comprehensive treatment project construction 48% Water plant construction as BOT contracts 15% Comprehensive treatment project construction 34% Water plant construction as BOT contracts 4% Water supply 4% Wastewater and reclamation treatment 31% Water environmental treatment technology 2% Water supply 8% Wastewater and reclamation treatment 49% Water environmental treatment technology 5% Source: Company data Source: Company data 全球投资研究 65

66 MOTIMO (3334.SZ, N): Tech edge, possible catch-up post listing Investment view We initiate coverage of MOTIMO at Neutral with a 12-month target price of Rmb As an early starter in the field of the membrane technology on the back of Tianjin Polytechnic University, MOTIMO leads in the user satisfaction survey. As the firm got listed in 212 and subsequently boosted its capital strength, we believe it is likely to raise its membrane annual capacity to more than 4mn sq m from the current 1.5mn sq m (based on its existing capacity and those projects under construction), and also enhance its market expansion nationwide. We expect the firm s growth to accelerate going forward. Core drivers of growth MOTIMO has a technological edge, and takes a leading position in the user satisfaction survey conducted by MOTIMO, major shareholder of which is Tianjin Polytechnic University, is an early starter in the R&D of the membrane technology; MOTIMO has taken a leading position in the survey of the nation s more than 1 sewage treatment plants by ChinaWaterNet, and its ranking rose to the top in 212. MOTIMO enjoys an apparent edge in Tianjin, and also expands beyond. Tianjin, where MOTIMO is located, is extremely short of water resources, and the city s Haihe River watershed is suffering from severe pollution. Hence, there is an urgent need to enhance sewage treatment and increase the use of reclaimed water. MOTIMO is also actively expanding outside Tianjin and revenue contribution from regions beyond Tianjin exceeded 5% in 212. Improved capital strength post listing in 212 bodes well for likely acceleration in growth. MOTIMO used the IPO proceeds to invest in two production lines, raising its annual capacity to more than 4mn sq m from the current 1.5mn sq m. Raised funds were also used to set up a joint venture in Zhejiang, as well as five offices nationwide for market expansion. Risks to the investment case Upside risk: The company may use the IPO proceeds to acquire other players in the membrane market. Downside risk: In contrast to private firms like OriginWater, MOTIMO is a state-controlled company. In case MOTIMO fails to put in place a flexible incentive mechanism, it could trigger a loss of employees. The financial investors may reduce their holdings and put pressure on the stock price. Investment Profile Low Growth Returns * Multiple Volatility Percentile 2th 4th 6th 8th 1th Tianjin MOTIMO Membrane Technology Co., Ltd (3334.SZ) Asia Pacific Industrials Peer Group Average High Growth Returns * Multiple Volatility * Returns = Return on Capital For a complete description of the investment profile measures please refer to the disclosure section of this document. Key data Current Price (Rmb) month price target (Rmb) Market cap (Rmb mn / US$ mn) 5,541.9 / Foreign ownership (%) -- 12/12 12/13E 12/14E 12/15E EPS (Rmb) EPS growth (%) EPS (diluted) (Rmb) EPS (basic pre-ex) (Rmb) P/E (X) P/B (X) EV/EBITDA (X) Dividend yield (%) ROE (%) CROCI (%) Price performance chart Dec-12 Mar-13 Jun-13 Sep-13 Tianjin MOTIMO Membrane Technology Co., Ltd (L) Shanghai SE A Share Index (R) 2,6 2,5 2,4 2,3 2,2 2,1 2, Share price performance (%) 3 month 6 month 12 month Absolute Rel. to Shanghai SE A Share Index Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 12/9/213 close. Valuation We initiate coverage of MOTIMO at Neutral. We estimate 213E-15E EPS of Rmb.53/.79/1.14, and 214E PEG of.94x, higher than the industry average of.86x. Based on the PEG valuation framework and a target PEG of 1X, we derive a 12-month target price of Rmb33.92, imply 6.5% upside potential. 全球投资研究 66

67 Tianjin MOTIMO Membrane Technology Co., Ltd: Summary fina Profit model (Rmb mn) 12/12 12/13E 12/14E 12/15E Balance sheet (Rmb mn) 12/12 12/13E 12/14E 12/15E Total revenue Cash & equivalents Cost of goods sold (177.6) (277.1) (427.3) (626.6) Accounts receivable SG&A (42.6) (62.3) (88.) (118.) Inventory R&D Other current assets.... Other operating profit/(expense) (1.5) (12.6) (15.8) (19.9) Total current assets , ,366.1 EBITDA Net PP&E Depreciation & amortization (5.6) (8.3) (12.5) (18.7) Net intangibles EBIT Total investments.... Interest income Other long-term assets Interest expense (2.3) (1.) (1.) (1.) Total assets ,39.4 1, ,66.4 Income/(loss) from uncons. subs..... Others Accounts payable Pretax profits Short-term debt Income tax (1.3) (16.1) (23.8) (34.4) Other current liabilities Minorities Total current liabilities Long-term debt.... Net income pre-preferred dividends Other long-term liabilities Preferred dividends.... Total long-term liabilities Net income (pre-exceptionals) Total liabilities Post-tax exceptionals.... Net income Preferred shares.... Total common equity ,83.7 EPS (basic, pre-except) (Rmb) Minority interest EPS (basic, post-except) (Rmb) EPS (diluted, post-except) (Rmb) Total liabilities & equity ,39.4 1, ,66.4 DPS (Rmb) Dividend payout ratio (%) BVPS (Rmb) Free cash flow yield (%) (1.7) (.4) (1.3) (1.6) Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E Sales growth CROCI (%) EBITDA growth ROE (%) EBIT growth ROA (%) Net income growth ROACE (%) EPS growth Inventory days Gross margin Receivables days EBITDA margin Payable days EBIT margin Net debt/equity (%) (61.3) (5.6) (34.2) (18.4) Interest cover - EBIT (X) 43.8 NM NM NM Cash flow statement (Rmb mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E Net income pre-preferred dividends D&A add-back P/E (analyst) (X) Minorities interests add-back (.1) (.2) (.3) (.5) P/B (X) Net (inc)/dec working capital (91.1) (83.4) (158.3) (29.7) EV/EBITDA (X) Other operating cash flow EV/GCI (X) Cash flow from operations (19.) 19.9 (5.8) 11.3 Dividend yield (%) Capital expenditures (29.2) (44.7) (67.9) (98.7) Acquisitions.... Divestitures.... Others.... Cash flow from investments (29.1) (44.7) (67.9) (98.7) Dividends paid (common & pref). (11.6) (18.2) (26.9) Inc/(dec) in debt (32.2)... Common stock issuance (repurchase) Other financing cash flows (2.2)... Cash flow from financing (11.6) (18.2) (26.9) Total cash flow 375. (36.3) (91.8) (114.2) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates. 全球投资研究 67

68 Drivers of growth and catalysts IPO proceeds that are invested in projects will substantially expand capacities of membrane products. Projects financed through IPO proceeds will begin production in end- March 214, raising the firm s annual capacity to 4.65mn sq m in 214 from the current 1.5mn sq m. Exhibit 118: Projects financed through IPO proceeds will significantly expand the firm s capacities of membrane products Project Investement (Rmb mn) Capacity (mn m 3 ) Commissioning time Industrialization of high peferformance PVDF hollow fiber membrane using composite thermally induced phase separation method March, 214 Industrialiazation of sea water disalination pretreatment film and equipment March, 214 Total Current capacity 1.5 Source: Company data. Motimo has stepped up market expansion for membrane engineering: It has used funds raised from IPO to make offsite investment, incl. establishing Zhejiang Motimo Membrane Technology Environment Engineering Co. Ltd. (6% stake) with Rmb18mn in Aug. 212, to explore the sewage treatment market for the textile and dyeing industry in Zhejiang. In February 213, it decided to invest Rmb4mn in Tianjin Redsun Water Co. for a stake of 33.33%. In addition, it signed an EPC contract with Tianjin Redsun to sell reclaimed water to Sinopec Tianjin, with daily processing capacity at 3k tons. The contract was worth Rmb1.68mn, with Rmb48.96mn for equipment and Rmb51.72mn for construction. Motimo has seen the growth of its sales revenue and gross profits trending up after its listing in July 212, and in particular, there has been an apparent acceleration in the membrane engineering business. Exhibit 119: Since its listing in July 212, revenue from its membrane engineering business has accelerated Exhibit 12: Gross profit for the engineering business also began to pick up 12% Membrane engineering revenue yoy growth 12% Membrane engineering GP yoy growth 1% 8% 8% 6% 4% 4% 2% % 211 1H H13 % 211 1H H13 Source: Wind. Source: Wind. 全球投资研究 68

69 Key competitive advantages: Brand advantage: Motimo s brand awareness and product use has been rising among clients. According to the client survey by ChinaWaterNet, the ranking of Motimo has significantly climbed in terms of user satisfaction and usage referral rate, and rose from the industry s second in 21 to the top in 212 in both metrics. Its score for user satisfaction rose from 82.3 to 85.1, ranking the first, while its usage referral rate climbed from 37% to 44%, with its ranking again up to the top from the second. Exhibit 121: Top 1 brands for membrane components and units in terms of user satisfaction in 21 Exhibit 122: Top 1 brands for membrane components and units in terms of user satisfaction in 212 Satisfaction score of 21 Satisfaction score of 212 Dow Tianjin MOTIMO Hydranautics TORAY GE Asahi Kasei Litree Koch Memstar Zhaojin Motian Tianjin MOTIMO Dow GE Hydranautics Litree TBMC OriginWater Canpure Asahi Kasei Mitsubishi Source: ChinaWaterNet. Source: ChinaWaterNet. Exhibit 123: Usage referral rate for different brands in 21 Exhibit 124: Usage referral rate for different brands in 212 Brand usage referral rate of 21 Dow 38% Tianjin MOTIMO 37% TORAY 22% GE 2% Asahi Kasei 15% Hydranautics 15% Zhaojin Motian 13% Koch 8% Siemens 7% Memstar 5% % 5% 1% 15% 2% 25% 3% 35% 4% Source: ChinaWaterNet. Brand usage referral rate of 212 Tianjin MOTIMO 44% Dow 28% Hydranautics 26% Litree 23% GE 23% Asahi Kasei 16% TBMC 16% OriginWater 13% Norit 11% Koch 9% % 1% 2% 3% 4% 5% Source: ChinaWaterNet. In light of the distribution of survey respondents, conclusions of the survey are quite representative. 全球投资研究 69

70 Exhibit 125: Breakdown of survey respondents by company type Exhibit 126: Breakdown of survey respondents by department type Equipment firm, 8% Designing institute, 12% Water supply firm, 8% Investment firm, 18% Company type Others, 2% Discharge/wastewater plant, 27% Engineering firm, 25% Purchase/Supply, 12% Admin/Management, 8% Sales/Marketing, 15% Department type Others, 2% Manufacturin g/quality, 25% R&D/Designing, 38% Source: ChinaWaterNet. Source: ChinaWaterNet. Engineering track record: MOTIMO products are widely used among industrial clients, which is a proof of recognition for its product quality. Its accumulated engineering volume currently stands at around 1.77mt, around 49% for municipal sewage and 51% for industrial sewage. Generally speaking, treatment of industrial sewage has stricter requirements for the membrane product quality. The wide use of MOTIMO s membrane products among industrial clients is proof that its product quality is relatively high. Exhibit 127: MOTIMO s membrane products have been widely used among industrial clients Textile, 14, 1% Food, 1, 1% Sea water desalination, 7, % Others, 98, 6% Domestic sewage, 44, 2% Petro-chemical, 63, 3% Steel, 127, 7% Chemical, 236, 13% Municipal Wastewater, 863, 49% Electricity, 312, 18% Source: Company data, Gao Hua Securities Research. Technological strength: MOTIMO has a relatively full command of the manufacturing process for different membrane products (spinning solution, melt spinning and spin coating) and of the membrane engineering process (SMF, CMG and MBR). 全球投资研究 7