Hazardous waste treatment market update from industry player
Industry read-across on environmental sanitation; Buy China Everbright Intl
We recently met with management of Sunny Friend (8341TT, not rated), a leaderin hazardous waste treatment (HWT) in Taiwan. In addition to its projects inTaiwan, the company runs a HWT plant in Beijing and has project pipelines inHebei, Jiangsu and Shanxi. The company provides HWT EPC service and technicalservices to companies in China. Key takeaways from our meeting include: 1) HWTmarket is already quite balanced in certain cities; 2) M&A is not an ideal wayto expand in HWT and 3) cement kilns are unlikely to pose a strong threat totraditional incineration.
We had a meeting with management of Tus-Sound Environmental (000826CH,not rated), a major environmental company in China involved in environmentalsanitation and waste and water treatment etc. Beijing Enterprises Water (371HK;
Dongjiang Environmental (895HK), China Everbright Greentech (1257HK) andChina Everbright Intl (257HK) all have direct exposures to HWT, while BeijingEnterprises Water (371HK) has exposure through one of its associates. ChinaEverbright Intl is our sector top pick and we like the stock on 1) earningspotentially beating consensus on fast project ramp-ups; 2) re-rating from higherproportion of earnings from operations and 3) free cashflow improvement with itsWTE business. For more details, please refer to China Environmental - Strongerenforcement, improving cashflow; raising CEI EPS, Target Price; 13Nov.
BEW) and China Everbright Intl (257HK; CEI) have been expanding in this area andBEW may do a spin-off listing of this business in 2018, according to E20news.Key industry read-across includes: market opportunities are likely to grow as theChinese government accelerates privatization, project IRRs are higher than waterprojects as result of there being little capex involved, potential add-on businessincluding waste transfer station management can further boost project returns.Our preferred Buy is CEI, which we like in light of its improving earnings qualityfrom operations, decent growth profile, and undemanding valuation.
Project awards likely to grow further
Environmental sanitation is an emerging business for the listcos as the Chinesegovernment has just started to privatize over the past few years. During the earlieryears, most contracts were awarded through open bidding and those contractsusually lasted between 3to 8years. However, there have been some contractsrecently which last for as long as 20years. Most of the sanitation contractswere awarded through open bidding. Management expect privatization (projectaward) of environmental sanitation to accelerate over the next few years and Tus-Sound does not see competition as being particularly fierce, presumably becauseof the large amount of opportunities in the market. Management sees a lot ofurban-rural integrated projects for environmental sanitation as there is a largeamount of waste in rural areas which has not been properly collected at this stage.SOEs have a strong competitive advantage in this area as result of their stronggovernment relationship.