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Singapore Wastewater Treatment Sector - Be a Part Of The Solution

Shared By Stock Fanatic on Wednesday, November 25, 2015 | 25.11.15

We resume coverage on the wastewater treatment stocks listed in Singapore with an OVERWEIGHT rating. China has been notorious for its incredibly high levels of pollution; however, over the last five years, it has taken definitive steps towards a clean revolution. Its Water Action Plan set out in April indicated that the nation would invest c.CNY5trn by 2020 to improve its water treatment industry. Therefore we expect this sector to thrive and SIIC is our Top Pick.

Demand for wastewater treatment exceeds supply
According to data from the National Bureau of Statistics, the sewage treatment rate is only 77% in China. Increased urbanisation and the relaxation of its one-child policy would continue to boost the demand for wastewater treatment in the long run. As it takes about two years and high capex to build a new treatment plant, we expect excess demand to persist in the sector over the next five years.

New policies to drive growth and profitability
The Chinese Government, having recognised the severity of the country’s pollution issues, has committed to invest c.CNY5trn in environmental protection, as a part of its 12th Five-Year Plan (FYP). This figure is expected to grow, with the introduction of the Water Action Plan and 13th FYP this year.

Some of the key initiatives that may drive the growth and profitability of the sector include:
i) stricter enforcement of environmental laws,

ii) increasing the county sewage treatment rate to 85% and that of overall cities to 95% by 2020, and

iii) water tariff reforms implemented to ensure profitability of wastewater treatment firms.

Consolidation of the market
China’s water sector is highly fragmented, with the top 10 players holding less than 5% of the total market share. In recent years, the market has been swamped with M&As, as the larger players acquire smaller and less profitable firms for expansion. Hence, we prefer bigger players with stronger balance sheets and a first-mover advantages that enable them to embark on acquisition sprees.

Resume coverage on SIIC and China Everbright Water 
We have SIIC Environment Holdings (SIIC SP, BUY, TP: SGD1.18) as our Top Pick in the sector. With a low average tariff of CNY0.90/tonne, we believe SIIC is the key beneficiary of water reforms in China. We also like China Everbright Water (CEWL SP, BUY, TP: SGD0.81) which has a strong balance sheet to help it fulfil its aspiration to be one of the leading wastewater treatment companies in China.

Key Risks:
Ultimately the price of water is controlled by the Government which underlined the need to raise water prices; however, any severe financial crisis may put the environmental issues on the back burner. (Read Report)

Source : RHB Research

Posted on Wednesday, November 25, 2015 | 25.11.15
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