China's Environment: Big Issues, Accelerating Effort, Ample Opportunities, Originally Published on July 13, 2015

EQUITY RESEARCH JULY 13, 2015

Julian Zhu 852.2978.7367 [email protected] Goldman Sachs (Asia) L.L.C.

Yan Yan 852.2978.7143 [email protected] Goldman Sachs (Asia) L.L.C.

Christina He 852.2978.0223 [email protected] Goldman Sachs (Asia) L.L.C.

Claire Wang 86.21.2401.8923 [email protected] Beijing Gao Hua Securities China’s ENVIRONMENT Company Limited Big issues, accelerating effort, ample opportunities

Unprecedented growth has led to record levels of pollution in China’s air, water and soil. Heavy metal contamination affects 12mn tons of grain in China every year, enough to feed 24mn people, equal to the population of Australia. With 60% of the country’s groundwater unfit for human consumption, calls to fight pollution have grown louder across China. All these factors are combining to accelerate China’s environmental initiatives, resulting in unprecedented government spending and ample investment opportunities.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

This report is a modified version of China's environment: Big issues, accelerating effort, ample opportunities, originally published on July 13, 2015. July 13, 2015 China: Environmental Services

Table of contents

Executive summary – The start of China’s cleanup era 3 China’s environment by the numbers 5 Why now? 7 How big is the opportunity? 14 Pollution in China – a primer 23 China: Global growth engine, but also worst polluter 24 Air pollution: Causes and industrial origin 26 Water pollution: Grading and regions most affected 28 Soil & solid waste pollution: Problem significantly underestimated 29 Policy solutions – regulating pollution away 34 Eliminating pollution at its source 35 Lowering emissions per unit of output 36 Increasing clean energy contribution 38 Monetization – charging pollution away 41 Solid waste: Huge upside as little captured yet 42 Water savings and treatment: Higher tariffs needed 44 Air pollution: Emission trading a trillion dollar market 48 Introducing more diversified funding approaches 51 Further lessons – policy, investments, and more 52 Recent policy initiatives 53 Lessons from developed economies 56 China under-invested, but catching up 59 Pollution cleanup: Beijing case study 63 Disclosure Appendix 65

The prices in this report are based on the July 10, 2015 market close unless indicated otherwise.

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Executive summary – The start of China’s cleanup era

Why now and how big is the opportunity? Pg. 7 China’s falling food supply sufficiency and the release of pollution survey data have helped spur rising concerns about pollution among policymakers and the wider population. The increased government regulation of relevant sectors and the inclusion of environmental metrics in local government performance assessments will also add impetus to the drive. Lastly, the opportunity to co-invest with the government should attract significant levels of private capital.

Exhibit 1: Pollution is impacting China’s food security… Exhibit 2: …and a key social concern Causes of mass disturbances (>10,000 people) in China

94% China's grain self-sufficiency ratio Environmental pollution 93% 92% 10% Petition 92% 90% 90% 10% 89% Environmental Labor dispute 88% pollution 88% 88% 10% 50% 86% Land acquisition and urban demolition 86% 10% 84% Conflict between 10% authorities and people 82% 2008 2009 2010 2011 2012 2013 2014 Others

Source: NBS, CEIC, Goldman Sachs Global Investment Research. Source: Beijing News, Report on the Development of China's Rule of Law (2014).

Pollution in China – a primer Pg. 23 China’s resource-heavy growth model has generated disproportionally more pollution compared to its contribution to global output. Air pollution attracts the most attention, but soil contamination (solid waste) is the most pressing environmental problem China faces.

Exhibit 3: China’s pollution is accelerating – smoky air, toxic soil and contaminated water

Best 10 Worst 10 Water quality in 10 major rivers: AIR cities 2014 cities 2014 Haikou Baoding WATER 35.9 days of haze Zhoushan Xingtai (national avg. in 2013) Lhasa Shijiazhuang Good Average Bad Up >100% yoy Shenzhen Tangshan Zhuhai Handan (2012 avg of 17.6 days) Huizhou Hengshui Highest since 1961 Fuzhou Jinan Pearl River Zhemin rivers Huai River Yangtze River Songhua River Hai River 44% of cities had acid rain Xiamen Langfang Kunming Zhengzhou North-west rivers Yellow River Liao River Zhongshan Tianjin South-west rivers

Pollution in South China > North China Forest area: Grassland area: East China and Southwest: the most severe regions 208mn hectares 400mn hectares 218,900 hectares: % coverage rate: % of China's land area: Net loss of arable land in 2010-2013; 22% 2.95mn sqm (31% of total) 31% land is eroded by either wind or water 42%

SOIL FORESTS & GRASSLAND

Note: Data as of 2014 unless otherwise stated. Source: National Soil Pollution Survey, Ministry of Environmental Protection.

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Policy solutions – regulating pollution away Pg. 34 There are three key ways to combat pollution: 1) eliminating pollution at its source; 2) lowering emissions per unit of output; and 3) increasing the contribution of clean energy.

Exhibit 4: Shutting down small mills would reduce steel Exhibit 5: Nuclear is set to be China’s fastest-growing output by 20% but sulfur dioxide (SO2) emissions by 72% primary energy source SO2 emissions vs. steel output of small mills and CISA Primary energy consumption CAGR (%), 5-year periods over members (2013) 2000-2020E, China

SO2 Primary energy consumption CAGR (%) (kg/t steel) 2000-2005 2005-2010 2010-2015E 2015E-2020E 12.0 30%

10.0 25%

8.0 20% Small mills' SO2 emission level is 9.8x higher than Small 15.4% 6.0 large producers 15%

4.0 10% 8.0% 7.5%

2.0 5% 2.2% 2.2% CISA members 0.1% - 0% 20% 40% 60% 80% 100% Nuclear Gas Renewables Oil Total Coal Crude steel output

Source: MEP, CISA. Source: BP Statistical Review, CEC, National Bureau of Statistics (NBS), NEA, Goldman Sachs Global Investment Research.

Monetization – charging pollution away Pg. 41 China’s water tariffs are among the lowest in the world, and we see scope for inflection from their low base. Higher water tariffs should have a major long-term impact on relevant sectors in terms of capacity, costs, competition, profitability and return outlook. Key beneficiaries will likely include leading players in commodities, agriculture, clean energy, autos and catalytic materials.

Exhibit 6: We expect China’s environmental investment Exhibit 7: China’s water tariffs are much lower than those to increase 60% in 2016-2020E from 2011-2015E of developed countries (2011)

Rmb bn US$/ton Water tariff 9,000 8,220 10.0 Wastewater tariff 8.8 8,000 +60% 9.0 Sample countries average 7,000 8.0 7.0 5.8 6,000 5,107 6.0 5.4 4.6 5,000 5.0 4.3 4.0 3.1 4,000 3.0 US$2.97/ton 3.0 2.6 3,000 2.1 2.0 1.8 1.0 0.8 0.7 2,000 1.0 0.5 0.2 Mexico Australia Japan Canada Denmark India Germany Russia France South Korea Italy Spain China 1,000 0.0 UK US - 2011-2015E 2016E-2020E

Source: MEP, Goldman Sachs Global Investment Research. Source: Global Water Intelligence (GWI), 2011 survey.

Further lessons – policy, investments, and more Pg. 52 Current policy landscape. What has the rest of the world done? China’s current investment vs. the world. Beijing – a case study.

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China’s environment by the numbers

LARGEST GROWTH CONTRIBUTOR / WORST POLLUTER UNDER INVESTED BUT CATCHING UP

15% OUTPUT VS. 44%-61% INPUT / 10BN TONS CO 1.7% OF GDP / US$6,798 PER CAPITA INCOME China contributed 15% of global output in 2013, while it consumed 44%-61% of₂ China only invested 1.7% of its GDP in the environmental industry in 2013, the word’s copper, coal, steel, aluminum and cement. China emitted 10bn tons vs. 2.0% for Japan in 1975. Major developed countries enacted a series of of CO in 2013, greater than that of the US (5.35bn tons) and the EU (3.5bn environmental laws when their per capita GDP reached US$5-10k, we tons) combined. (Page 24) believe China is at a new phase (2013 per capita GDP of US$6,798) where ₂ it can and it must increase its investment in environmental protection. (Page "APEC BLUE" TEMPORARY 59)

16 CITIES / 10% TO BECOME THE NEXT PILLAR INDUSTRY

Out of the 161 closely monitored cities, only 16 cities reached the national 2016-2020 TOTAL INVESTMENT est. RMB8.2TRN standards of urban air quality, with a pass rate of 10% in 2014. (Page 27) Assuming China to invest 2.0% of its annual GDP in 2016-2020, in line with the level that US, Germany and Japan had spent at the peak of cleaning up WATER POLLUTION SEVERE their pollution during 1970-80s, it would imply a total investment of RMB8.2 trn in 2016-2020, 60% higher than 2011-2015 and even greater than 60% OF GROUNDWATER UNFIT FOR HUMAN CONSUMPTION Australia's GDP (US$1.4trn) in 2014. (Page 17)

MARKET POTENTIAL UNLIMITED 60% of groundwater in China is unfit for human consumption. About 50% of China's major environmental pollution-related social unrest is water-related. (Pages 28 and 29) RMB5.1TRN VS RMB4TRN ENVIRONMENTAL INVESTMENT VS DEFENSE BUDGET IN 2011-2015 NO OFFICIAL STATISTICS ON SOIL POLLUTION UNTIL 2014

China's total investment (public and private) in the environmental industry is LAND EXCEEDS POLLUTION LIMIT > 900X HONG KONG'S LAND AREA estimated to reach Rmb 5.1 trn in 2011-2015 (the 12th Five-year Plan), greater than the national defense budget of Rmb 4trn for the same period. 16% of China’s surveyed soil exceeds the national pollution standards, including After the announcement of Air Ten and Water Ten, we expect the Soil Ten 19% of arable land (2014). Among the 6.3mn sq. km of land surveyed, 1mn sq. to come in the near term and in total they would trigger investment over km was polluted beyond the national limit, which is 900 times the land size of Rmb8.2 trn in 2016-20. (Page 16) Hong Kong. (Pages 29 and 30) RISING SOCIAL PRESSURE CLOSURE OF MORE POLLUTING CAPACITY

POLLUTION-RELATED SOCIAL INCIDENTS 50% SMALL STEEL MILLS GENERATED 72% SO ₂ The persistent focus on growth has literally made pollution an unavoidable Small steel mills produced c.20% of China’s total crude steel, but generated byproduct of economic growth. Pollution-related mass social incidents 72% of the industry’s sulfur dioxide emissions in 2013. With the toughest accounted for 50% of China 2013 total social incidents, becoming the top factor Environment Protection Law effective 1 January 2015, the permanent behind social instability. (Page 3) closure of more marginal capacity should be expedited. (Pages 20 and 35)

SOIL POLLUTION & FOOD SAFETY CONCERNS WHAT ARE THE TARGETS?

CONATMINATED GRAINS CAN FEED PEOPLE 24MN REDUCE CO EMISSION BY IN 2015 (> POPULATION OF AUSTRALIA 23.8MN) 3.1% ₂ According to a survey released in Apr 2014, 19% of arable land was contaminated with heavy metals, and 12mt of grains are contaminated by heavy China aims to reduce CO emissions by 3.1%, COD and NH by 2%, SO2 metals each year. Assuming annual consumption of 500kg of grain per capita, and NOx by 3% and 5%, respectively ,in 2015. China also plans to achieve this is enough grain to feed 24mn people, the population of Australia. In 2013, 85% and 80% treatment r₂atios for municipal waste water and solid waste by the discovery of rice tainted with cadmium in Guangdong and Hunan triggered 2015. (Pages 36 and 37) panic buying of Thai rice. (Page 9)

FOOD SECURITY A REAL NATIONAL CONCERN CHANGING ENERGY MIX CHINA'S IMPORTED GRAINS WAS 17% OF DOMESTIC OUTPUT (2014) % FROM NON-FOSSIL 21%->31%->38%

China has already become a major food importer, especially for grain. China’s grain imports more than doubled from 41mt in 2008 to 100mt in 2014, accounting for 17% of China's domestic grain production. Based on our We estimate China's power generation from non-fossil energy will grow estimates, China's food self-sufficiency declined to 86% in 2014 from 93% in from 21% of total generation in 2010, to 31% in 2015E, and ultimately to 2008. (Page 9) 38% in 2020E. Nuclear, wind and solar are likely to see rapid expansion: SCARCE WATER BUT CHEAP PRICE our GS analysts estimate from 2015 to 2020: China's nuclear power generation will grow at a CAGR of 12%; cumulative wind installed capacity up by 7-fold to 210GW; and total solar installation more than doubled to 25%/17% 100GW. (Page 39) Despite China's average water resources per capita being only 25% of the global average, China's current water and waste water tariff is only 17% of the average of comparable countries. (Pages 44 and 45)

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Exhibit 8: Global environmental market snapshot: China market’s potential is tremendous

Canada Population: 35mn Land area: 9mn sq. km GDP: US$1,791bn Western Europe ENV: US$30bn Population: 164mn Japan Land area: 1mn sq. km Population: 127mn GDP: US$7,161bn Land area: 0.4mn sq. km ENV: US$142bn GDP: US$4,487bn ENV: US$72bn

Australia and New Zealand Population: 28mn Land area: 8mn sq. km India GDP: US$1,635n Population: 1,220mn ENV: US$10bn Land area: 3mn sq. km Mexico GDP: US$2,014bn Population: 120mn ENV: US$8bn United States China Land area: 2mn sq. km Population: 317mn Population: 1,356mn GDP: US$1,283bn Land area: 9mn sq. km Land area: 9mn sq. km ENV: US$10bn GDP: US$17,419bn GDP: US$10,364bn ENV: US$200bn ENV: US$20bn

Western Japan United States China Europe

US$ bn US$ bn US$ bn US$ bn 100 Market size 100 Market size 100 Market size 100 89 Market size 72 80 80 80 80 62 60 60 42 60 60 40 23 40 40 35 29 40 20 2 1 20 9 20 5 20 12 - - - - Water Solid waste Remediation Water Solid waste Remediation Water Solid waste Remediation Water Solid waste Remediation

CO2 emissions (mn tons) Air 8,548 1,289 1,259 5,270

NO2 emissions (mn tons of CO2 equivalent) 550 93 26 304

PM 2.5 exposure (annual average microgram per cubic meter) 73 15 22 13

MSW generated MSW generated MSW generated MSW generated 11% 187mn tons 6% 83mn tons 45mn tons 228mn tons Composting 20% Composting 26% Composting Land 35% 1% Composting 41% Landfill 42% Landfill Landfill Landfill Incineration Incineration 79% Incineration 59% Incineration 32% 48% MSW treated MSW treated MSW treated MSW treated 168mn tons 82mn tons 50mn tons 228mn tons

Renewable fresh water per capita (ton per capita) 2,066 3,803 3,251 7,839 Wastewater treatment connection rate Water 75% 97% 76% 74%

Note: GDP, land area and population (2014; Goldman Sachs Global Investment Research or World Bank), ENV (Environmental protection service market size; ECOTEC or USITC, 2010), MSW (municipal solid waste, OECD, 2013), market size refers to environmental protection service (USITC, 2012), emissions (EPA, OECD or World

Bank), revenue (Bloomberg, latest FY).

Source: World Bank, ECOTEC, StEP Initiative, UNU-IAS SCYCLE, OECD, U.S. International Trade Commission, Goldman Sachs Global Investment Research.

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Why now?

• China’s efforts to curb pollution at an inflection point • China’s worst pollution is in its soil, not its air • Government’s evolving role: From investor to regulator • New financing approaches to trigger multiplier effect • Easing employment pressure helping tackle pollution

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Why China can and must clean up now

China’s efforts to curb pollution are at an inflection point – Rising social awareness and pressure have left policymakers no choice but to act now China has maintained its unwavering focus on achieving rapid economic growth, but this has also resulted in severe pollution, which has become a major concern for the Chinese people. In fact, according to the Chinese Academy of Social Sciences, pollution-related concerns were behind half of the large-scale protests in China during 2013, making pollution the leading cause of social instability.

Exhibit 9: Pollution is a key concern for China’s people… Exhibit 10: …and a major factor behind social instability % surveyed who believe the issue is a very big problem, Causes of mass disturbances (>10,000 people) in China, 2014 change, China, 2013 survey

70% Environmental pollution 60% Rising prices

Income inequality 10% Petition 50% Corrupt officials Air pollution 10% Environmental Labor dispute 40% Food safety Water pollution pollution Product quality Old age insurance 10% 50% 30% Medicine safety Land acquisition and Unemployment Corrupt Education urban demolition Crime 20% business Health Worker Traffic care 10% conditions Conflict between 10% 10% authorities and people % % of surveyed who thinkit isa 'very big problem' Electricity shortages 0% Others (6) (4) (2) 0 2 4 6 8 10 12 Change in % since 2012 survey

Source: Pew Research Center. Source: Beijing News, Report on the Development of China's rule of law (2014).

China’s worst pollution problem is in its soil, not its air – Soil pollution is impacting China’s food security Public concern about pollution seems primarily focused on air and water pollution, and this is not surprising given the relatively easier access to information on air and water quality. However, China’s worst pollution problem is in its soil, not its air. China’s soil pollution has been significantly underestimated despite its much broader and more complex impacts on daily life such as the safety of groundwater and heavy metal contamination of agricultural production. More importantly, air pollution can be reduced by simply cutting toxic emissions, while reducing soil pollution requires curbs on pollution as well as a treatment process, which takes more time and demands more investment.

However, there is relatively lower awareness of soil pollution among policymakers and the public. For example, the 12th Five-Year Plan only set aside US$4.8 bn to address soil pollution, which is a fraction of the US$277 bn the State Council allocated to alleviate air pollution in 2013-17. China had no official statistics on soil pollution until April 2014 when part of the results of a national soil pollution survey was released for the first time.

That survey, which was conducted by the MEP and the Ministry of Land and Resources (MLR) and carried out in 2005-2013, found that 16% of China’s soil was polluted beyond acceptable standards, and 19.4% of China’s total arable land (65mn out of 334mn acres) was badly contaminated by heavy metals. As the government estimates 300mn acres of

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arable land is needed to maintain the nation’s food security, declaring the 65mn acres of polluted land unfit for food production would push China’s total arable land 31mn acres (10% of its total arable land) short of its self-defined “red line” of 300mn acres.

Severe soil and water pollution have had a profound impact on China’s food supply and safety. The Ministry of Environmental Protection (MEP) estimates that heavy metal contamination affects 12mn tons of grain in China every year, which is enough to feed 24mn people, equal to the population of Australia. In 2013, the discovery of rice tainted with cadmium in Guangdong and Hunan triggered panic buying of Thai rice.

The rising pollution of China’s arable land and increased land erosion has driven China to become a major food importer, especially for grain. In only seven years (2008-2014), China’s annual grain imports more than doubled from 41.3mt to 100.4mt, accounting for 17% of China’s domestic grain output. More worryingly, China’s grain self-sufficiency declined from 93% in 2008 to 86% in 2014, despite the fact that the number of annual new births was largely stable during the same period.

Exhibit 11: In 2014, imported grain accounted for 17% of Exhibit 12: …and, more worryingly, China’s grain self- China’s domestic grain output... sufficiency has been declining

000 tons 94% Imported grain volume China's grain self-sufficiency ratio 120,000 18% 93% As % of China's domestic grain output 17% 16% 92% 100,000 14% 14% 92% 14% 90% 80,000 12% 12% 90% 11% 89% 10% 10% 88% 60,000 88% 8% 8% 88% 40,000 6% 86% 86% 4% 20,000 84% 2% 0 0% 2008 2009 2010 2011 2012 2013 2014 82% 2008 2009 2010 2011 2012 2013 2014

Source: CEIC. Source: CEIC, NBS, Goldman Sachs Global Investment Research

A series of food safety scandals such as contaminated baby formula in 2008, contaminated strawberries in 2011 and cadmium rice in 2013 have put food safety and pollution on the list of top concerns for many households in China. The ongoing quality degradation of domestic agriculture production, combined with rising social awareness, have boosted demand for clean and safe food, especially dairy products, beef and rice.

Exhibit 13: In 2008-14, China’s imports of milk Exhibit 14: In 2008-2014, China’s imports of meat grew powder/liquid milk grew 9X/40X while births were stable c.2.5X

000 tons mn ppl US$ mn Imported liquid milk volume (LHS) 1000 20 7,000 Imports: Meat and Meat Preparations Imported milk powder volume (LHS) 924 900 854 19 5,932 5,840 Number of births (RHS) 6,000 800 18 700 17 5,000 4,111 600 573 16 4,000 3,409 500 450 15 414 3,000 400 329 14 2,341 2,275 300 248 13 2,000 1,738 195 200 12 101 102 1,000 100 43 11 8 14 17 0 10 0 2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

Source: CEIC, NBS. Source: CEIC, WIND.

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Of course, China’s rapid urbanization, industrialization and rising consumption are key reasons for such strong food import growth, but we believe severe soil pollution and land degradation are having a real impact on China’s long-term food security that could have profound economic and geopolitical consequences for China and the rest of the world.

Government’s evolving role: From investor to regulator – Why we believe the MEP now has a clear mandate to enforce compliance and government investment should have a multiplier effect

The model of government-led investment in environmental protection has proven inefficient. Key changes brought about by the new central government since 2012 have been the shift in the government’s role from an investor to a real regulator through the introduction of new laws and regulations, the reinforcement of existing laws, and the further opening up of the environmental sector to private investment. We believe these moves will help raise the low efficiency of the government’s environmental investment and create a supportive market mechanism that will attract private capital and allow it to lead investment in environmental protection and industry improvements.

Against this backdrop, China has introduced a series of milestone environmental policies and regulations that feature concrete and actionable measures as well as specific targets to be achieved in the next few years. Among them, the Air Ten, the New Environmental Law and the Water Ten are the most important (see Exhibits 89-91 for details).

More importantly, the new government has included environmental metrics in the performance assessment of local government officials, which should promote effective enforcement and implementation of the new laws, regulations and initiatives.

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Exhibit 15: Chinese government’s role change should lead to more (and more efficient) investment in the environment Different strategies to fight pollution (2006-2020)

Pollution prevention Pollution prevention Regulation Quality establishment management

Emission Environment Public reduction improvement service Environment improvement Environment Ecological Ecological improvement conservation Pollution conservation treatment

Risk Risk control control

11th five-year plan: 2006-2010 12th five-year plan: 2011-2015 13th five-year plan: 2016-2020

Introduce private capital Incorporate environment Raise penalty quality in of violation of government officials' Lower legal environmental threshold for regulations scorecard Amend the environmental Environmental crime Increase Law government Set forth investment reduction target

Source: MEP, Goldman Sachs Global Investment Research.

New financing approaches to trigger multiplier effect – New funding opportunities to expedite the cleanup efforts

We expect public-private partnerships (PPP) and third-party treatment (TPT) to increase the capacity and efficiency of public goods supply through the establishment of long-term profit- and risk-sharing schemes with private investment in the form of operating concessions, government purchases, and joint ventures. As a result, we believe more high- efficiency private capital will be attracted to the environmental protection industry, helping create a multiplier effect for government spending.

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Exhibit 16: Private capital mushrooming in water market Exhibit 17: PPP investment by type

% of private investment in China's water market Investment of first batch PPP projects Rmb bn 40% launched by NDRC 34% 35% 80 74 30% 70 60 25% 50 20% 15% 40 32 27 15% 30 10% 20 5% 10 - 0% Wastewater Solid waste Water supply 2006 2013 treatment treatment Note: Only projects launched by May 2015 are included.

Source: PPI World Bank. Source: PPI World Bank.

Easing employment pressure helping tackle pollution – Thanks to China’s changing demographic outlook, regulators should be able to close pollution-generating industrial capacity without repercussions on social stability

Due to moderating labor supply growth, employment pressure has become much less of an issue for the first time since 1978.

Although China has the world’s largest population, it ranks low vs. the United States, India and Japan in terms of its working population growth trend and its working class as a percentage of its total population.

Exhibit 18: Working population trend Exhibit 19: Working population as % of total population

bn 65% Japan US India China Japan US India China 1.2 60% 1.0 55% 0.8 50% 0.6 45% 0.4 40% 0.2 35% 0.0 30% 1980 1987 1994 2001 2008 2015 2022 2029 2036 2043 2050 2057 2064 2071 2078 2085 2092 2099 1980 1987 1994 2001 2008 2015 2022 2029 2036 2043 2050 2057 2064 2071 2078 2085 2092 2099

Source: CEIC, UN. Source: CEIC, UN.

Since the global financial crisis in 2008, China has posted steady growth in terms of annual jobs creation. Also important to note, despite the relatively weak economic growth in 2014, China achieved its full-year job creation target of 10mn by September and added 13mn jobs for the full year. Much of this new jobs creation is coming from services- and internet- related “new economy” companies.

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Exhibit 20: Post the global financial crisis in 2008, China Exhibit 21: New jobs growth from manufacturing and has achieved steady growth in annual jobs creation mining was outpaced by that from the services sector 2003-2013 10-year new job growth rate

Annual urban job creation 14.00 8.0% 250% as % of total urban jobs Construction 7.0% Property 211% 13.00 6.0% IT 180% 12.00 Leasing and business service 130% 5.0% Lodging and catering 77% 11.00 4.0% Manufacturing 76% 3.0% 42% 10.00 Retail 2.0% Mining 30% 9.00 -39% 1.0% Agriculture Total urban jobs growth 65% 8.00 0.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -58% -8% 42% 92% 142%192%242%292%

Source: CEIC. Source: NBS.

This demographic development trend offers China precious leeway to reform its economic growth model and remedy its environmental ecosystem without facing tremendous employment pressure.

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How big is the opportunity?

• An addressable market worth Rmb8.2 trn by 2020 • Soil remediation, solid waste and wastewater treatment have the biggest growth potential • Key beneficiaries include leaders in commodities, agriculture, clean energy, autos and catalytic materials

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A multi-trillion dollar opportunity across multiple sectors

Greening up is supportive to L-T growth, investable and profitable The US and Japan have shown that, although environmental cleanups can put pressure on economic growth over the short term, the technology innovation and transition to a more sustainable growth model brought about by cleanup initiatives lead to significant upgrades to the structure of economies over the long term. We believe China is likely to follow the same development trajectory. If managed properly, China’s green-up efforts will help it develop a bigger environmental protection and energy conservation industry through innovation. Greening up should also help China move further up the global manufacturing value chain by phasing out low-valued-added polluting capacity.

Exhibit 22: Greenup vs. growth – the US Exhibit 23: Greenup vs. growth – Japan

1969, National Environmental Policy Act 1968, The Air Pollution Control Law Annual GDP Annual GDP 1970, The Clean Air Act growth growth 1967, The Basic Environment Law 1972, Federal Water Pollution Control Act 1970, The Water Pollution Control Law 25% 15% 1976, Resource Conservation and Recovery Act 1973, Pollution-Related Health Damage Compensation Law 1977, The Clean Water Act 13% 20%

11% 15% 9% 10% 7%

5% 5%

3% 0% 1%

-1% -5%

-3% 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 -10% 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Note: Green bars stand for time periods when environmental protection laws Note: Green bars stand for time periods when environmental protection laws were enacted. were enacted.

Source: CEIC. Source: CEIC.

In this section, we analyze the direct and indirect investment opportunities brought about by China’s cleanup efforts over the next 5-10 years.

China environment: An Rmb8.2 trn addressable market by 2020 – Sizing up the overall potential and implications by subsector We estimate environmental protection and cleanup will grow into a Rmb8.2 trn market in 2016-2020 (the period covered by the 13th Five-Year Plan).

China’s environmental investment/GDP ratio of 1.5% is lower than the ratios held by the major developed countries when they ramped up their anti-pollution efforts about 40 years ago. Moreover, given the relative severity of China’s pollution problem, we believe it will need to invest relatively quickly to clean up its pollution over the next 5-10 years. Assuming China invests 2.0% of its annual GDP during the 13th Five Year Plan period (2016-2020) – in line with spending by the United States, Germany and Japan at the peak of their respective pollution cleanup phases during the 1970-80s – would imply a total government investment of Rmb8.2 trn in 2016-2020, representing a 60% increase from 2011-2015.

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Exhibit 24: China has under-invested in environmental Exhibit 25: …and we expect spending to rise 60% in protection, but it has been catching up… 2016E-2020E from 2011-2015E

Rmb bn China's total investment in pollution control (LHS) Rmb bn 1,000 2.0% % of GDP (RHS) 9,000 8,220 8,000 +60% 800 1.8% 7,000

600 1.6% 6,000 5,107 5,000 400 1.4% 4,000 3,000 200 1.2% 2,000 0 1.0% 1,000 2001 2010 011 2 2012 2013 2002 2003 2004 2005 2006 2007 2008 2009 2000 - 2011-2015E 2016E-2020E

Source: China Statistical Yearbook on the Environment, Wind. Source: MEP, Goldman Sachs Global Investment Research.

The changing of the Chinese government’s role from that of an investor to a supervisor and promoter of PPPs and TPT should create an investment multiplier effect, i.e., the government’s direct investment in this industry, combined with the supportive investment environment, should attract more private capital into the environmental protection industry, creating a multi-trillion dollar industry value chain covering pollution/emission reduction, ecosystem (water and soil) treatment, alternative energy and system monitoring business.

We expect such massive investment by the government, combined with its new initiatives to encourage and attract private investment, will create an Rmb8.2 trn addressable market over the next five years. We believe soil remediation, solid waste treatment and water treatment have the biggest growth potential. While air pollution controls should lead to even stricter emission reduction measures, such controls do not involve a treatment process, so we expect investment opportunities to focus on air quality monitoring equipment and

technology, the reduction of carbon dioxide (CO2), sulfur dioxide (SO2), and nitrogen

dioxide (NOx) emissions, and carbon trading.

Goldman Sachs Global Investment Research 16

July 13, 2015 13,July Goldman Sachs Global Investment Research Exhibit 26: We forecast China to invest Rmb8.2 trn in environmental protection during the 13th Five-Year Plan, up 60% from the 12th Five-Year Plan Soil and solid waste should see the largest investment, accounting for 56% of the total China's 13th Five Year Plan - Environment Protection Investment Outlook

Environmental investment in 13th FYP Soil / Solid waste

13th FYP: Rmb8.2trn Beneficiaries: Rmb bn Solid waste investment by segment (13th FYP) mt National industrial solid waste -LHS YoY - RHS investment de-NOX; 3,500 40% 1,800 de-SOX; Rmb1.7trn 35% 1,600 Others, de-dust; emission 3,000 in Air 1,456 reduction 30% 1,400 Waste Rmb4.6trn technology, 2,500 processing equipment and 25% 1,200 equipment, in Soil & Rmb1.9trn in Soil 884 materials 2,000 20% Solid Water 1,000 remeidiation, 685 15% WTE waste 1,500 800 operation, 10% 1,000 600 500 5% Beneficiaries: 400 500 Hazardous Beneficiaries: 0% Soil remediation; WTE waste, solid waste treatment; hazardous Water supply and treatment; 200 0 -5% construction, 600 waste treatment waste water treatment 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 474 Investment growth: 13th FYP vs. 12th FYP - -200% 0% 200% 400% 600% 800% 1000%

Environmental investment in 11th/12th/13th FYP Water

US$/ton Water tariff Wastewater tariff Rmb trn Environmental Investment 13th FYP investment in environment , Rmb bn 1,800 9 Water supply and China water/wastewater tariffs are 0 1,600 Municipal WWT are the 4.5 4.3 8 Water supply two largest subsectors in significantly below those of 1,400 4.0 developed countries. 7 China's water market. 1,200 3.5 6 3.0 1,000 3.0 2.6 5 2.5 800 4 Municipal Rmb8.2 trn 2.0 600 WWT 3 1.5 400 Seawater Wastewater 2 desalination Industrial WWT 1.0 200 recycling Rural WWT 0.5 1 Rmb2.4 trn Rmb5.1 trn 0.5 0 0 0% 50% 100% 150% 200% 250% 300% 350% 400% 0.0 11th FYP 12th FYP 13th FYP UK US Japan China 2006 2010 2015 2020 Investment growth: 13th FYP vs. 12th FYP Rmb8bn central gov't budget in environment (2015) Air

China's Carbon Trading Market will start operation by 2016. We CO2 trading value potential: China vs. EU estimate the initial trading volume to reach 3-4bn tonnes per annum, suggesting a market size of Rmb100bn by 2020. EU 2011 mt CO2 emissions: US vs. China (peak) US$148bn 10,000 Biomass United States China 13% 2005 8,000 US$7.9bn China: Environmental Services Energy-saving Pollution Anti-haze in Heavy metals and recycling pollution control JJJ area 6,000 2020 56% 44% 19% remediation China 6% Rmb100bn 4,000 River pollution remediation 2,000 6%

0 2015 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Rmb16bn

Source: MEP, Goldman Sachs Global Investment Research. 17

July 13, 2015 China: Environmental Services

We compared the investment opportunities of the various environmental protection subsectors by looking at their growth potential (volume and prices outlook) and competitive landscape (entry barriers and market concentration). We believe hazardous waste treatment offers the most attractive potential due to its significantly underestimated market size and the high entry barrier represented by its strict licensing system. On the other hand, despite the meaningful upside opportunities to both its volume and pricing outlook, we expect the water supply and treatment market to remain competitive, keeping its investment return relatively low.

Exhibit 27: The comparison of environmental protection subsectors Market analysis of three sub-sectors: Soil, air and water pollution remediation

• Volume growth potential • Threat from existing players • Soil and solid waste • Soil and solid waste • Air • Air • Water • Water • Threat from new entrants • Soil and solid waste • Air • Water

Growth Competition

Investibility Profitability

• Unit price upside • Number of listed companines • Soil and solid waste • Soil and solid waste • Air • Air • Water • Water • Cost saving potential • Soil and solid waste • Air • Water

Soil and solid waste

Water

Air

Note: Grey stars represent the relative favorability of each industry’s position.

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 18 July 13, 2015 China: Environmental Services

Environmental survey, monitoring and assessment equipment The environmental equipment manufacturing sector is another key industry best positioned to grow as a result of China’s upcoming investment in environmental cleanup and protection. In order to reduce pollution across the ecosystem, as a prerequisite, China needs a comprehensive information system to gauge the magnitude of the current pollution situation. Therefore, we see significant growth potential for manufacturers of pollution monitoring, survey and assessment equipment as well as equipment and facilities used to reduce pollution. In 2005-2014, China’s environmental equipment sales surged 12X to Rmb257 bn, and we forecast the industry to grow its revenue by another 20% yoy to Rmb308 bn in 2015E. Based on our expectation of 60% environmental protection investment growth in the 13th Five-Year Plan (2016-20E) from the 12th Five-Year Plan period, we believe environmental equipment manufacturers are poised to sustain their strong growth momentum. We expect industry leaders such as Sound Environmental and Focus Technology are best positioned to reap this strong growth potential.

Exhibit 28: The number of environmental protection Exhibit 29: …so have revenues for the industry equipment sold has increased rapidly…

Rmb bn 700,000 Number of environmental protection 140% Revenue from sale of environmental protection equipment sold 300 equipment 60% 600,000 120% YoY (RHS) YoY (RHS) 100% 250 50% 500,000 80% 200 40% 400,000 60% 150 30% 300,000 40% 20% 100 20% 200,000 0% 50 10% 100,000 -20% 0 0% 2005 2006 2011 2012 2013 0 -40% 2007 2008 2009 2010 2014 2006 2007 2008 2013 2014 2005 2009 2010 2011 2012

Source: Wind. Source: Wind.

Other industries: Implications and impact – Commodities, agriculture/food safety, clean energy, auto and catalytic materials Aside from the direct environmental protection industry, we also see investment opportunities in other industries like commodities, agriculture and auto manufacturing where pollution and pollution control are reshaping the industries in terms of capacity, cost, competition, profitability and return outlook. On the other hand, stricter environmental protection standards will bring new growth opportunities to industries including clean energy and catalytic materials, etc.

Commodities – Industry leaders compliant with environmental regulations are set to benefit

– Stricter emission standards to expedite marginal capacity curtailment and push up the industry cost curve

As the major source of pollution in China, the commodities industry is set to undergo significant transformation under the country’s renewed efforts to clean up the environment. We expect stricter emission standards to reshape China’s commodities industry in terms of cost, capacity, competition, profitability and return outlook.

Goldman Sachs Global Investment Research 19 July 13, 2015 China: Environmental Services

To a large extent, China’s decade-long overcapacity is also due to its failure to ensure marginal producers meet environmental protection standards. For example, a key reason why small private steel producers have been able to survive and even thrive in the past decade has been the cost advantage they have reaped from not complying with emission control requirements. Going forward, when Chinese regulators begin to make sure each and every producer meets emission control standards, most small private commodities producers will have to: 1) increase their investment in emission control facilities, equipment and technology; and 2) cope with rising operating costs when turning on such facilities. This should lead to faster elimination of marginal capacity, helping ease the prolonged oversupply situation and benefiting industry leaders that have been compliant with environmental regulations.

Exhibit 30: Smaller steel mills pollute much more relative Exhibit 31: Environmental pressure should help ease to their steel production than larger mills (2013) China’s decade-long cement/steel overcapacity In 2013, small steel mills produced c.20% of China’s steel but 72% of the industry’s SO2 emissions

SO2 20% Steel capacity yoy Cement capacity yoy (kg/t steel) 12.0 Steel demand yoy Cement demand yoy 15% 10.0

8.0 Small mills' SO emission 2 10% Small level is 9.8x higher than 6.0 large producers

4.0 5%

2.0 0% - CISA members 20% 40% 60% 80% 100% Crude steel output -5% 2010 2011 2012 2013 2014 2015E 2016E

Source: MEP, CISA. Source: Digital Cement, Mysteel, Goldman Sachs Global Investment Research.

Agriculture/food safety – Pollution (soil contamination in particular) impacting China’s food security

– Chinese demand for safe and organic food is likely to rise further, affecting the global supply-demand balance

Please refer to page 9 for details.

Clean energy – China aims to lift clean energy to 38% of total primary energy capacity by 2020

– Nuclear to be the fastest-growing new energy segment China will continue to reduce the role of coal in its primary energy consumption by promoting the development of clean energy including nuclear power, hydro, wind, solar, biofuel and natural gas. Our Energy Research Team estimates the share of coal-fired power generation will decline to 62% of China’s total power generation in 2020 from 79% in 2010. This would require power capacity of wind, nuclear, solar, natural gas and biofuel to grow multiple times from now to 2020. In terms of primary energy mix, among the clean energy basket, nuclear should be the fastest-growing primary energy, contributing 3% of total primary energy consumption in 2020E, up from 1% in 2013. Currently China has 23 operating nuclear power plants with 27 under construction, ranked first globally in terms of capacity under construction (as of June 30, 2014).

Goldman Sachs Global Investment Research 20 July 13, 2015 China: Environmental Services

Exhibit 32: Nuclear to be the fastest-growing primary Exhibit 33: Changing energy mix – China vs. OECD energy source in China Primary energy consumption breakdown, OECD, non-OECD, Primary energy consumption CAGR (%), 5-year periods over China, 2013 and 2020E 2000-2020E, China

Primary energy consumption CAGR (%) Primary energy consumption breakdown (%) 2000-2005 2005-2010 2010-2015E 2015E-2020E 100% 30% 2% 5% 1% 3% 8% 8% Nuclear 22% 9% 25% 80% 14% 26% 18% 9% Natural Gas 18% 20% 60% 9% 15.4% 30% Renewables 15% 40% 37% 67% 10% 58% Oil 8.0% 7.5% 20% 38% 5% Coal 2.2% 2.2% 19% 0.1% 0% 0% Nuclear Gas Renewables Oil Total Coal OECD Non-OECD China China 2013 2013 2013 2020E

Source: BP Statistical Review, CEC, National Bureau of Statistics (NBS), NEA, Source: BP Statistical Review, CEC, NBS, National Development and Reform Goldman Sachs Global Investment Research. Commission (NDRC), NEA, Goldman Sachs Global Investment Research.

Auto and catalytic materials – China is about two stages, or seven years, behind Europe on its commercial vehicles emission standards

– China’s emission standard upgrades should push up the cost of vehicles while benefiting suppliers of emission equipment and materials

In 2013, the transportation sector accounted for 22% of global CO2 emissions, and major

developed nations are under pressure to reduce vehicle CO2/kg 30%-40% by 2025. As the

country with the biggest annual auto sales volume and the most CO2 emissions, China is now under particular pressure to upgrade its commercial vehicle emission standards in a bid to tackle its emission reduction and air quality control challenges.

Exhibit 34: The transportation sector accounts for a large Exhibit 35: Vehicle emissions account for 31% of Beijing’s slice of global CO2 emissions PM2.5 pollution Greenhouse gas emissions by sector (2013) Beijing PM2.5 pollution source mix Others, 9% Residential, Industrial External 6% production sources and Electricity, 18% others 42% 14%

Industry, Dust Motor 21% 14% vehicles 31%

Coal Transport, combustion 22% 23% Beijing PM2.5 source breakdown (2013)

Source: METI. Source: Beijing Environmental Protection Bureau.

Goldman Sachs Global Investment Research 21 July 13, 2015 China: Environmental Services

Based on the current European emissions control standard, China is about two stages, or seven years behind. Given this gap and the increasing air pollution control policy tailwinds in China, our China Auto Research Team expects to see a strong emission upgrade cycle from commercial vehicles and off-road machinery in the coming decade (2015-2024). Our team also expects China to gradually upgrade its emissions standards to Euro VI (where Europe is now) by 2023, creating a Rmb100 bn emission upgrade market by 2024 at a CAGR of 14% from 2016. Such strong secular growth should benefit Weifu A/B, a leader in the emission upgrade products segment (engine optimization and after-treatment products).

Exhibit 36: China lags global peers in terms of commercial vehicle emission standards Emission standard comparison

US EPA2004 US EPA2007 US EPA2010 PM (g/kW▪h)

Technology solution for 0.16 Euro V (2008) Euro IV (2005) Euro III (2000) US EPS2007: Technology solution . EGR/DPF for Euro IV: 0.12 . EPA concerns: 1) the lack . SCR of a national infrastructure to supply urea at diesel 0.08 retail stations; and 2) the lack of a mechanism to ensure that urea is added 0.04 in use. NOx NOx 5 4 3 2 1 1 2 3 4 5 (g/kW▪h) (g/kW▪h) 0.04

0.08

0.12

National V National IV (2014E): National III (2008) 0.16 ( 2018E) c.30% Nox reduction and c.80% PM reduction; c.8-9 JP 2003 JP 2005 JP 2009 years lagging Euro’s compliance PM (g/kW▪h)

Source: EPA, MEP, Gao Hua Securities Research.

Catalytic and new materials: Another key beneficiary from emission standard upgrades would be catalytic materials, which are widely used in vehicle exhaust purification, industrial organic exhaust gas purification and catalytic combustion. In 2003-2012, Chinese rare earth catalytic materials consumption posted a CAGR of 21%, according to the Chinese Society of Rare Earths, primarily driven by China’s efforts to upgrade its emissions standards.

Goldman Sachs Global Investment Research 22 July 13, 2015 China: Environmental Services

Pollution in China – a primer

• China: Global growth engine, but also worst polluter • Air pollution: Causes and industrial origin • Water pollution: Grading and where it’s worst • Solid waste: Problem significantly underestimated

Goldman Sachs Global Investment Research 23 July 13, 2015 China: Environmental Services

Pollution in China – a primer

China: Global growth engine, but also worst polluter China’s economy is large but heavily dependent on inputs of natural resources, particularly energy. In 2013, while contributing 15.4% of global output, China consumed 44%-61% of the world’s copper, coal, steel, aluminum and cement. Over the past 30 years, China has also been consuming a relatively large amount of energy per unit of GDP. This resources- and energy-intensive growth model has resulted in China generating disproportionally more pollution relative to its contribution to global output, making it the world’s worst polluter. According to the US Energy Information Administration, in 2006 China surpassed the US in carbon-dioxide emissions from energy, and in 2015 China’s emissions will be double that of the US. The Economist estimates China’s cumulative emissions from energy between 1990 and 2050 are around 500bn tons, roughly the same as the emissions of the rest of world from the beginning of the industrial revolution to 1970.

Air pollution is the environmental issue that attracts the most attention in China, but water and soil pollution are much more complex problems. While air pollution can be reduced simply by cutting toxic emissions, reducing water and soil pollution requires curbs on pollution as well as a treatment process, which takes more time and demands more investment.

Exhibit 37: China’s consumption of various commodities Exhibit 38: China’s energy intensity of GDP 2013 data Primary energy consumed per dollar of GDP (Btu pa, 2005 USD)

70% China consumption as % of world total (2013) 90 World North America 60% 80 China South Korea 70 Japan United Kingdom 50% 60

40% 50

30% 61% 40 53% 49% 49% 30 20% 44% 20

10% 10

0 0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Cement Coal Steel Aluminum Copper

Source: Digital Cement, SXCoal, Mysteel, Goldman Sachs Global Investment Source: EIA. Research.

Exhibit 39: Global carbon dioxide emissions by country Exhibit 40: Carbon dioxide emissions: US vs. China % of world total carbon dioxide emissions million metric tons

80% China US EU India Russia Japan 9,000 United States China 70% 8,000 5% 4% 5% 7,000 60% 9% 3% 6% 6,000 50% 12% 5,000 18% 40% 4,000 16% 30% 3,000 24% 2,000 20% 1,000 26% 10% - 11 % 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 0% 1992 2012

Source: EIA. Source: EIA.

Goldman Sachs Global Investment Research 24 July 13, 2015 China: Environmental Services

Exhibit 41: China’s efforts to curb pollution are at an inflection point

43% Hebei produces 23% of China’s crude steel (2014) and it is one of Heilongjiang the regions with the worst air 57% pollution (Air quality was off-grade for 200 days (57%) in 2014) Jilin

Xinjiang Liaoning Gansu Inner Mongolia Beijing

Tianjin Hebei Shandong Qinghai Ningxia Shanxi

Shaanxi Henan Pan-Yangtze Jiangsu Tibet 69% River region had 111 days (31%) Anhui Shanghai Sichuan Hubei with off-grade air 31% quality in 2014 Chongqing Zhejiang Jiangxi Hunan Guizhou Fujian Soil/River contamination level Yunnan Taiwan Low Guangxi Moderate Guangdong Intermediate Hong Kong High Macao Pearl River Delta had 67 days (18%) Soil pollution in South West region is 82% mainly caused by massive mining with off-grade air Hainan and refining of non-ferrous metals quality in 2014 e.g., lead, zinc, tungsten. 18%

SOIL FORESTS & GRASSLAND

Note: Data are based on 2014 China Annual Environmental Report unless otherwise stated.

Source: National Soil Pollution Survey, Ministry of Environmental Protection.

Goldman Sachs Global Investment Research 25 July 13, 2015 China: Environmental Services

Air pollution: Causes and industrial origin Air pollution is an atmospheric phenomenon, mostly observed as haze, which occurs when the concentration of smoke, dust, sulfur compounds, nitrogen oxides and carbon dioxide reaches a level that is harmful to human health or the environment. China uses an Air Quality Index (AQI) to measure air quality, and any reading above 100 is considered pollution.

Exhibit 42: China’s Air Quality Index (AQI) and health implications

Numerical Air Quality AQI and Color Health concerns Precautions value Index Air quality is considered satisfactory, and 0-50 First Good Green None air pollution poses little or no risk Air quality is acceptable; however, for some pollutants there may be a moderate Unusually sensitive people should 51-100 Second Moderate Yellow health concern for a very small number of consider reducing outdoor activities people who are unusually sensitive to air pollution. Unhealthy for Members of sensitive groups may The elderly, children and those with 101-150 Third Sensitive Orange experience health effects. The general heart or lung disease should avoid Groups public is not likely to be affected. prolonged outdoor exercises

The elderly, children and those with Everyone may begin to experience health heart or lung disease should avoid 151-200 Fourth Unhealthy Red effects; members of sensitive groups may prolonged outdoor exercises; the rest experience more serious health effects. should reduce outdoor exercises

The elderly, children and those with Health warnings of emergency conditions. Very heart or lung disease should stay 201-300 Fifth Purple The entire population is more likely to be unhealthy indoors; and the rest are suggested to affected. reduce outdoors activities Entire population should be warned of Health alert: everyone may experience outdoor activities; the elderly and >300 Sixth Hazardous Maroon more serious health effects children are suggested to avoid physical exhaustion

Source: MEP.

Exhibit 43: How is haze formed?

SO2 NOx Secondary VOCs Organic PM Aerosol

Power/Cement/Steel VOCs H2O2

NOx H Primary HO2 VOCs H2SO4 Particle SO2 PM Transportation NO

SO2 NO2 NOx Secondary Inorganic Particle Agriculture Interfacial Reaction

Haze

Source: China PM2.5 (www.pm2.5.org.cn), Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 26 July 13, 2015 China: Environmental Services

China’s air quality has deteriorated rapidly since 2012 as evidenced by the surging number of haze days. There were 35.9 haze days on average in China during 2013, the highest level since 1961. In 2013, among 74 monitored cities, the number of days with very unhealthy or hazardous air quality totaled 677, making 2013 the worst year for air pollution in the past 50 years. In 2014, out of 161 monitored cities, only 16 reached the national standards of urban air quality, with a pass rate of 10% (4% in 2013).

Exhibit 44: 2013/14 air quality in monitored cities Exhibit 45: Sources of air pollution in Beijing

2013 2014

4% 10% Others, 15%

Auto, 31% Dust, 14%

Industrial, 96% 90% 18% Coal-fired, 22%

Qualified Unqualified Qualified Unqualified

Note: Based on survey result released on 2014-2015.

Source: China Statistical Yearbook on the Environment. Source: Beijing Environmental Protection Bureau.

A newly released (April 2015) study of air pollution sources in nine major cities showed the major sources of pollution are motor vehicles, industrial production, coal, and dust, accounting for 85%-90% of particulate matter (PM) found in the air. Motor vehicles represent the primary source of pollution in Beijing, Hangzhou, Guangzhou, and Shenzhen, while in Shijiazhuang and Nanjing it is coal, and in Tianjin, Shanghai and Ningbo the primary sources are dust, motor vehicles, and industrial production.

China’s investment-driven, energy- and resources-heavy growth model means the biggest pollution sources are electricity generation and the production of industrial materials (cement, steel, chemicals, metals and other resources). Power generation, building materials (mainly cement) and steel production are the top three emitters of several key

pollutants, including sulfur dioxide (SO2) as well as nitric oxide and nitrogen dioxide (NOx), and dust.

In 2013, China’s total SO2 emission amounted to 16.89mn tons, of which power generation,

steel and cement production contributed 43%, 14% and 12%, respectively. China’s total NOx emissions amounted to 14.7mn tons in 2013, of which power generation, building materials and steel production contributed 61%, 19% and 7%, respectively. In the same year, power generation, building materials and steel production accounted for 70% of China’s total dust emissions.

Goldman Sachs Global Investment Research 27 July 13, 2015 China: Environmental Services

Exhibit 46: China’s electricity industry is the biggest Exhibit 47: …while electricity and building materials are discharger of NOX and SO2 (2013)… the main source for CO2 and dust (2013)

NOX SO2 CO2 Dust

70% 60% 61% 49% 60% 50% 50% 43% 40% 40% 30% 26% 25% 30% 19% 19% 20% 20% 14% 12% 8% 10% 7% 8% 10% 6% 6% 10% 4% 0% 0% Electricity Building Steel Chemical Electricity Building Steel Chemical materials materials

Source: China Statistical Yearbook on the Environment. Source: China Statistical Yearbook on the Environment.

Water pollution: Grading and regions most affected To classify the level of water pollution, a system of grades (I to V) is used. Water classified as Grade IV-V is considered unfit for human consumption. According to the MLR, 60% of groundwater in China exceeded Grade IV in 2013, and, more worryingly, this figure was up five percentage points from 2011.

As of 2012, 67% of the water resources in in China’s key river basins was Grade I-III and 15.7% was worse than Grade V 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. China began its “three rivers and three lakes” pollution control scheme in 1995 but after a 20-year effort these regions continue to suffer from severe water pollution.

Exhibit 48: Chinese rivers by pollution level % of evaluated length with worse than Grade V water

Southwestern Rivers 0.3% Northwestern Rivers 3% Zhujiang River 7% Southeastern Rivers 7% Yangtze River 12% Songhuangjiang River 12% National Total 16% Huaihe River 24% Liaohe River 27% Yellow River 27% Taihu Lake 37% Haihe River 46% 0% 10% 20% 30% 40% 50%

Source: China Statistical Yearbook on the Environment, 2013.

Goldman Sachs Global Investment Research 28 July 13, 2015 China: Environmental Services

As a result of the rapid deterioration in China’s water quality, in recent years about half of China’s major environmental pollution-related social protests and unrest have been related to water pollution and contamination.

Exhibit 49: Water pollution-related unrest has become a key social instability factor China’s major water pollution incidents

2006-2007 2008-2009 2010-2011 2012-2013 2014

Jan 06, Hunan Xiang River Jan 08, Hunan Chenxi May 10, Heilongjiang Feb 12, Guangxi Longjiang Apr 14, Lanzhou tap water cadmium pollution; arsenic pollution Bayan tap water pollution; cadmium pollution; mercury pollution; Apr 06, GD Wuchuan Mar 08, Guangzhou Jul 10,Jilin Songhuajiang Feb 12, "cancer village" in Aug 14, Chongqing water pollution; Zhongluo Tan water chemical pollution. downstream of Jiangxi Wushan reservoir pollution; Sep 06, Hunan Yueyang pollution; Jul 10, Zijin Mining water Copper mining area; Sep 14, waste water drinking water Jun 08, Yunnan pollution; May 12, Sanyou Chemical pollution in Tengger Desert, exceedingarsenic; Yangzonghai arsenic Jun 11, Guangdong pollution; Inner Mongolia; Dec 07, Guizhou Duliu pollution; Huazhou water pollution; Jan 13, Shanxi Changzhi Nov 14, Hunan Xiang River River arsenic pollution; . Oct 08, Sichuan Ya'an Jun 11, Zhejiang Xin'an aniline leak; heavy metal contamination; river pollution; River phenol pullution; Mar 13, dead pigs floated Dec 14, Hunan Taoyuan Feb 09,Jiangsu Yancheng Jul 11, Sichuan Fujiang in Huangpu River of village Al waste water phenol pollution; water pollution; Shanghai; pollution; Aug 11, Jiangxi Ruichang Jul 13, Guangxi Hejiang Dec 14, Guangxi Daxin water pollution; water pollution. chromium poisoning. Aug 11, Yunnan Qujing cadmium pollution.

Source: News info complied by Goldman Sachs Global Investment Research.

Soil & solid waste pollution: Problem significantly underestimated China had no official statistics on soil pollution until April 2014 when part of the results of a national soil pollution survey was released for the first time. That survey, which was conducted by the MEP and the MLR and carried out in 2005-2013, found that 16% of China’s soil was polluted beyond acceptable standards, and 19.4% of China’s total arable land (65mn out of 334mn acres) was badly contaminated by heavy metals. As the government estimates 300mn acres of arable land is needed to maintain the nation’s food security, declaring the 65mn acres of polluted land unfit for food production would push China’s total arable land 31mn acres (10% of its total arable land) short of its self-defined “red line” of 300mn acres.

Goldman Sachs Global Investment Research 29 July 13, 2015 China: Environmental Services

Exhibit 50: How toxic is China’s soil? Heavy metal contamination has threatened China’s arable land security’s “red line”

7.0% of surveyed 48 points contaminated with Cd cadmium Cadmium

4.8% of surveyed 28 Ni points contaminated Nickel with nickel

83% contaminated 2.7% of surveyed 33 As points contaminated with with inorganic Arsenic chemicals arsenic

29 of surveyed 2.1% Cu points contaminated with Copper copper 16.1% of surveyed land exceeds of surveyed 80 general pollution limits 1.6% points contaminated with Hg mercury Mercury

1.9% of surveyed points contaminated with DDT 17% contaminated with organic chemicals or composites 1.4% of surveyed points contaminated with PAHs

Source: The National Soil Pollution Survey released April 17, 2014.

Soil pollution and contamination is more acute in Southern China than in the North due to the heavy concentration of China’s metals smelting industry in the South. The Yangtze River Delta, the Pearl River Delta and Northeast China are especially polluted because of their high exposure to heavy industry. Excessive levels of heavy metals are also found in the Southwest and Central South, which are the main regions for metals mining and smelting. The levels of cadmium, mercury, arsenic and lead in the soil increases from the Northwest to the Southeast and from the Northeast to the Southwest.

Goldman Sachs Global Investment Research 30 July 13, 2015 China: Environmental Services

Exhibit 51: Pollution levels for China’s arable land, grassland, woodland and unused land

Major pollutants

48 28 29 33 80 82 28 48 33 Cd Ni Cu As Hg Pb Ni Cd As Cadmium Nickel Copper Arsenic Mercury Lead Nickel Cadmium Arsenic

6% 7% 9% Heavily 9% Heavily polluted % of 14% 12% polluted polluted Moderately Moderately polluted area by 19.4% 10.4% polluted pollution Mildly Mildly 71% polluted Arable land Grassland 73% polluted level Slightly Slightly polluted polluted polluted polluted

9% 13% 8% Heavily Heavily 10% polluted 11.4% 10% 12% polluted Moderately 16% Moderately polluted Unused land Woodland polluted Mildly Mildly 74% polluted polluted polluted polluted 59% Slightly Slightly polluted polluted

48 33 48 28 Cd As Cd Ni Cadmium Arsenic Cadmium Nickel

Source: National Soil Pollution Survey published April 17, 2014.

In addition to heavy metal contamination, the surging volume of solid waste has been another key pollution concern for China. Solid waste includes industrial waste, municipal solid waste and waste electrical and electronic equipment (WEEE).

Industrial waste production has been increasing rapidly along with China’s strong economic growth over the past 30 years. In 2013, China’s industrial solid waste volume amounted to c.3.3 bn tons, representing a 2001-2013 CAGR of 11.4%, according to the China Statistical Yearbook on the Environment, 2014.

The steel, power generation, metals and mining, coal and chemicals industries are the major producers of industrial solid waste. In 2013, these five industries produced c.2.8 bn tons of industrial solid waste, or 88.7% of the national total.

Goldman Sachs Global Investment Research 31 July 13, 2015 China: Environmental Services

Exhibit 52: Rapid growth of China’s industrial solid waste Exhibit 53: Top industrial solid waste producers, 2013

mt National industrial solid waste -LHS 3,500 40% Non- Coal YoY - RHS 3,000 ferrous 13% 30% metal 2,500 16% Chemicals Non- 2,000 20% 9% Electricity metallic 1,500 10% & heat products 1,000 19% 3% 0% 500 Others 4% 0 -10%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Ferrous metal 36%

Source: China Statistical Yearbook on the Environment, 2014. Source: China Statistical Yearbook on the Environment, 2014.

Municipal solid waste has also grown rapidly as a result of the ongoing urbanization efforts. China’s urban waste volume increased at a CAGR of 3.1% in 2000-2012 while the US posted an increase of only 0.2% during the same period. China’s hazardous waste increased even faster at 13.8% in 2001-2011 vs. a 1.7% decline for the US. With China’s further urbanization and its per-capita GDP continuing to grow, we expect China’s municipal solid waste to continue to rise rapidly in the next 5-10 years, creating the pressing need for China to invest in the construction of more treatment capacity.

Exhibit 54: Municipal solid waste growth in China vs. US Exhibit 55: Hazardous waste growth in China vs. US

MSW CAGR(2000-2012) HW CAGR(2001-2011) 3.5% 3.1% 15.0% 13.8% 3.0% 2.5% 10.0% 2.0% 5.0% 1.5%

1.0% 0.0% 0.5% 0.2% -1.7% 0.0% -5.0% US China US China

Source: Ministry of Environmental Protection of China, EPA. Source: Ministry of Environmental Protection of China, EPA.

WEEE is an environmental challenge but also the next urban mine After almost three decades of mass production of electrical and electronic devices and equipment, China has entered a strong “phasing out” period. The tremendous growth of WEEE has become a new and critical challenge to China’s already fragile city environment ecosystem, but it also creates new growth potential for the treatment and recycling business.

China is the second-largest generator of WEEE after the US. According to China’s Resources Integrated Utilization Report of 2014, published by the National Development and Reform Commission (NDRC), China phased out 114.3mn scrap TVs, refrigerators, washing machines, air conditioners and computers in 2013, representing 38.3% yoy growth.

Goldman Sachs Global Investment Research 32 July 13, 2015 China: Environmental Services

Exhibit 56: 2014 global Waste Electrical and Electronic Equipment (WEEE) generation– China already the second largest producer behind the US

Unit: kt Russian Federation 1,231 United Kingdom Canada 1,511 Germany 725 1,769

Japan 2,200

Australia 468

United States France 7,072 1,419 Italy 1,077 China 6,033

India 1,641

Brazil 1,412

Source: StEP Initiative, UNU-IAS SCYCLE.

Goldman Sachs Global Investment Research 33 July 13, 2015 China: Environmental Services

Policy solutions – regulating pollution away

• Eliminating pollution at its source • Lowering emissions per unit of output • Increasing clean energy contribution

Goldman Sachs Global Investment Research 34 July 13, 2015 China: Environmental Services

Eliminating pollution at its source

China’s metals and mining industry is a major contributor to air pollution, water contamination, dust and soil degradation. Marginal producers have a particularly adverse effect on the environment due to their lack of compliance with environmental regulations. For instance, in 2013, small steel mills produced c.20% of China’s total crude steel, but generated 72% of the industry’s sulfur dioxide emissions. Aside from air pollution, water contamination has become even more acute due to the fact that environmental regulations were not effectively observed and enforced during the significant capacity expansion in the metals smelting and refining industry over the past decade.

Exhibit 57: Smaller steel mills pollute much more relative Exhibit 58: Nonferrous metals production is a major to their steel production than larger mills (2013) source of heavy metal pollution in industrial wastewater In 2013, small steel mills produced c.20% of China’s steel but Major heavy metal pollutants in industrial wastewater (2013) 72% of the industry’s SO2 emissions

SO2 100% (kg/t steel) 11% 9% 11% 12.0 9% 11% 80% 10.0 28% 13%

34% 8.0 60% Small mills' SO2 emission level is 9.8x higher than Small 32% 6.0 large producers 40% 70% 4.0 20% 44% 29% 2.0

0% - CISA members Mercury (Hg) Cadmium (Cd) Lead (Pb) 20% 40% 60% 80% 100% Nonferrous metal refining Nonferrous metal mining Chemicals Others Crude steel output

Source: MEP, CISA. Source: MEP.

China introduced its toughest environmental protection policies in September 2013, and the new Environment Protection Law became effective January 1, 2015. This should expedite the permanent closure of more marginal capacity of cement, steel, metals and chemicals, etc., leading us to expect that prolonged industrial resources overcapacity should begin to ease from 2015 onward.

Exhibit 59: Stricter environment protection policies with new cement/steel capacity elimination targets in North China

Cement Steel Capacity limit as % of 2014 Capacity as % of 2014 Capacity limit as % of 2014 Capacity as % of 2014 mtpa by 2017 production closure production by 2017 production closure production Tianjin 5.0 52% 20 87% Hebei 60 56% 60 32% Shandong 150 91% 50 78% 10 16% Shanxi 4 8% 6.7 15%

No new project approvals for steel, cement, aluminum capacity in Beijing, Tianjin, Hebei and nearby regions

Source: Ministry of Environmental Protection of the People’s Republic of China, local government websites, CEIC, NBS.

Stricter emission standards should lead to: 1) a significant increase in capex and opex for marginal commodities producers; and 2) increased and faster exiting of small capacity from supply. This should lead to a higher industry cost curve and a better supply-demand balance, benefiting industry leaders.

Goldman Sachs Global Investment Research 35 July 13, 2015 China: Environmental Services

Lowering emissions per unit of output

Reducing emissions per unit output Emission intensity has been gradually declining for coal-fired power plants in China due to: 1) a growing proportion of new/more efficient power plants; 2) still-falling unit coal consumption for coal-fired power generation; and 3) mandated and widespread usage of emission reduction equipment installed at power plants.

In February 20013, The MEP announced stricter emission controls for six pollution- intensive industries covering 47 specific cities in 19 provinces and regions. The MEP will apply such controls to coal-fired power plants as well as the steel, cement, nonferrous metals, petrochemicals and chemicals industries.

Furthermore, China announced in 2011 its goal to reduce its carbon intensity (CO2 emission per unit of real GDP) by 17% in 2015 from 2010 levels. As outlined in the 12th Five-Year Plan, China aims to cut 2015 carbon intensity by 17% to around 223g/Rmb, from 269g/Rmb in 2010.

Exhibit 60: China’s CO2 emission intensity has been Exhibit 61: Carbon intensity: China vs. other nations declining since 2005, and is set to decline more (2010)

CO2 emission per unit real GDP (g/Rmb) CO2 emission per unit real GDP in PPP (g/international dollar)

340 800

320 600 300

280 400

260 to cut by 17% 200 240

220 0

200 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2015E

Source: IEA, State Council, World Bank, Goldman Sachs Global Investment Source: IEA, World Bank. Research.

As part of its anti-pollution efforts, China has also installed stricter standards for SOX and

NOX emissions. The implementation of these higher standards means that smaller players will need to increase investment to comply with the regulations and thereby incur higher operating costs, leading to further competitive costs differentiations between big and small players.

Under the emissions reduction plans, China aims to achieve the following targets in 2015:

Atmospheric emissions: To reduce emissions of CO2 by 3.1%, chemical oxygen demand

(COD) and ammonia nitrogen (NH) by 2%, and SO2 and NOX by 3% and 5% from their respective levels in 2014 (Premier Li Keqiang – 2015 Government Work Report).

Under the emissions reduction plan announced in September 2013, China aims to cut total

SO2 and NOX emissions in 2015 by 6% and 15% from 2011 levels.

Goldman Sachs Global Investment Research 36 July 13, 2015 China: Environmental Services

Exhibit 62: China to aggressively cut emissions of SO2 and NOX

SO2 and NOx emission (mn tn) 25 24 to cut by 15% 22 to cut by 6% 11% Non-metallic mineral 9% 21 20 processing 20 9% 28% 11% Others 15 4% 34% 12% Ferrous metal 10 processing

Heat generation 5 45% 37%

2011 2015 2011 2015 Thermal power 0 generation SO2 NOx

Source: MEP, CEIC.

Wastewater: Achieve treatment ratios of 85%/70% in cities/counties; to add 159k km of pipeline and 45.69mn t/d of wastewater treatment (WWT) capacity; to upgrade 26.11 mt/d of WWT capacity (12th Five-Year Plan for Urban Sewage Treatment and Reclamation Facilities).

Solid waste: Achieve a municipal waste innocuous treatment ratio of 80% by 2015 and 100% treatment ratios for direct-controlled municipalities, provincial capitals and independent planning cities (Note on Improving City Living Waste Processing).

Goldman Sachs Global Investment Research 37 July 13, 2015 China: Environmental Services

Increasing clean energy contribution

Less fossil (dirty) energy, more non-fossil (clean) energy Given that coal consumption is the single-largest contributor to China’s air pollution, in 2013 the government announced a cap on coal consumption of less than 65% of the total primary energy consumption mix by 2017, down from 67% in 2012. The total annual coal consumption in China’s most developed regions (Beijing-Tianjin-Hebei area, Yangtze River Delta and the Pearl River Delta) should decrease before 2016 by sourcing more electricity from other regions, increasing the use of natural gas, etc. Effective September 2013, for any new industrial projects in those regions, no new captive coal-fired power plants are allowed. Specific announced coal consumption caps include mandated reductions from 2012 by 2017 in Beijing (13mt), Tianjin (10mt), Hebei (40mt) and Shandong (20mt).

China has also announced increased investments in nuclear power, hydro, wind, solar and biofuel. Non-fossil energy consumption should rise to 14% of China’s total annual energy consumption in 2017 from 9% in 2012, according to our China Energy Research Team’s estimates.

Exhibit 63: Weaker for longer: China coal demand growth Exhibit 64: China energy structure: 2013 vs. 2020E % power generation installed capacity by energy source

mn tonnes China coal demand (LHS) Nuclear 2013 Nuclear 2020E 4,000 12% 1% 3% yoy growth (RHS) Solar Solar Gas Wind Gas 1% 4% 6% 5% 3,500 10% 6%

3,000 8% Wind 2,500 Hydro 12% 6% 23% Coal 2,000 51% 4% Coal 1,500 65% Hydro 23% 2% 1,000

500 0%

0 -2% 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Source: SXCoal, NBS, Goldman Sachs Global Investment Research. Source: China Electricity Council, Goldman Sachs Global Investment Research.

To address its reliance on coal-fired power generation (the single-largest source of pollution), China has begun to diversify its source of energy by promoting the use of clean energy including hydro, nuclear, wind and solar, etc. On the other hand, falling equipment costs (thanks to manufacturing scale), subsidies and technology have improved the relative economics of clean energy, solar in particular.

Our China Energy Research Team forecasts the share of coal-fired power generation will drop to 62% of total power generation in 2020 from 79% in 2010. During the same period, our team expects power generation from wind, nuclear and solar to grow multiple times.

Goldman Sachs Global Investment Research 38 July 13, 2015 China: Environmental Services

Exhibit 65: We expect non-coal energy to grow from 21% of total power generation in 2010 to 38% in 2020 China’s installed power capacity mix (2010 and 2020E)

Coal Hydro Wind Natural gas Nuclear Solar Others

Total generation Insignificant Insignificant 683GW 216GW 30GW 26GW 11GW capacity amount amount

Insignificant Insignificant % of capacity 71% 22% 3% 3% 1% 2010 amount amount

% of power Insignificant Insignificant 966GW 79% 17% 1% 2% 2% generation amount amount

2010-2015E generation capacity 5% 8% 32% 18% 23% N/M N/M CAGR (%)

Total generation Insignificant 882GW 311GW 118GW 60GW 30GW 40GW capacity amount

Insignificant % of capacity 61% 22% 8% 4% 2% 3% 2015E amount

% of power Insignificant 1,440GW 69% 19% 4% 4% 3% 1% generation amount

2015E-2020E generation capacity 0% 5% 12% 9% 12% 20% N/M CAGR (%)

Total generation Insignificant 900GW 400GW 210GW 90GW 53GW 100GW capacity amount

Insignificant % of capacity 51% 23% 12% 5% 3% 6% 2020E amount

% of power Insignificant 1,754GW 62% 19% 6% 5% 6% 2% generation amount

Source: China Electricity Council, Goldman Sachs Global Investment Research.

Nuclear: Our China Energy Analyst, Franklin Chow, expects China’s nuclear power generation to grow at a 2015-2020 CAGR of 15%. By 2020, he estimates that nuclear, as the fastest-growing primary energy, will contribute 3% of total primary energy consumption in China, up from 1% in 2013. China now has 23 operating nuclear power plants, ranked sixth globally in terms of installed capacity (as of June 30, 2014). According to the China Nuclear Energy Association (CNEA), China has 37 nuclear power plants under construction, ranked first globally in terms of capacity under construction (as of June 30, 2014.).

Goldman Sachs Global Investment Research 39 July 13, 2015 China: Environmental Services

Exhibit 66: Nuclear to be the fastest-growing primary Exhibit 67: Changing energy mix – China vs. OECD energy source in China Primary energy consumption breakdown, OECD, non-OECD, Primary energy consumption CAGR (%), 5-year periods over China, 2013, and 2020E 2000-2020E, China

Wind: Our China New Energy Analyst, Frank He, estimates China will grow its cumulative wind installed capacity seven-fold to 210GW in 2020 from 30GW in 2010. This significant investment in upgrading China’s existing transmission network and building ultra-high voltage transmission lines should facilitate the rapid expansion of China’s wind power industry.

Solar: Our China Energy Research Team expects China will continuously lead global solar installation in 2015, maintaining over 10GW of annual installation. Our Energy team forecasts China will grow its total solar installation to 100GW by 2020E, or 6% of total energy generation capacity. Our team also believes that, driven by lower power generation costs and supportive policies, solar power is reaching “grid parity” in the EU, the US, China and Japan.

Goldman Sachs Global Investment Research 40 July 13, 2015 China: Environmental Services

Monetization – charging pollution away

• Solid waste: Huge upside as little captured yet • Water savings and treatment: Higher tariffs needed • Air pollution: Emission trading a trillion dollar market • Introducing more diversified funding approaches

Goldman Sachs Global Investment Research 41 July 13, 2015 China: Environmental Services

Solid waste: Huge upside as little captured yet

According to the MEP’s 2011 Report on the National Environmental Protection Industry, China’s solid waste treatment market was valued at about Rmb18.2 bn, accounting for only 9% of overall environmental protection industry revenue. In the US, however, revenues from solid waste management amounted to US$40.7 bn in 2012, accounting for 37% of revenues for the US’s environmental protection industry. As the vast majority of China’s solid waste goes untreated, we believe China’s solid waste treatment industry is significantly underestimated. Now that the country has begun to implement new regulations and laws covering solid waste treatment and is likely to announce the Soil Ten regulation (Action Plan of Soil Pollution Prevention) soon, we see huge growth potential.

Exhibit 68: China’s solid waste treatment accounted for Exhibit 69: US solid waste management accounted for 9% of EP services in 2011 37% of EP services in 2012

Remediation Analytical Solid Waste 9% Services 1% Water Pollution Treatment Treatment 9% Resource 36% Recycling Equipment 5% Consulting& Solid Waste Engineering Management Environmental 19% 37% Monitor Instrument 3% Water Treatment Air Pollution Noise & Works Treatment Vibration Hazardous 45% Control Product 28% Waste Mgmt 2% 6%

Source: 2011 China Environment Protection Related Industry Report. Source: US Department of Commerce.

China needs significantly higher prices for solid waste treatment. In 2013, China’s GDP per-capita reached US$6,800, placing it among the upper mid-income countries. However, China’s solid waste treatment charges are sharply below those in countries with similar income levels. For instance, China’s unit landfill charge is ~Rmb75/ton (US$12/ton) vs. US$25-65/ton for upper mid-income countries. The tariff of waste to energy (WtE) is around Rmb250/ton in China (summing up the Rmb80/ton treatment fee and electricity sales at Rmb0.65/KWh per 280KWh/ton), vs. the US$60-US$150/ton level in the upper mid-income countries.

Exhibit 70: Waste treatment fee across different income levels

Low Income Lower Mid Income Upper Mid Income High Income countries countries countries countries Income (GNI/capita) US$10725 Waste generation (ton/capita/yr) 0.22 0.29 0.42 0.78 Collection efficiency (percentage collected) 43% 68% 85% 98% cost of collection and disposal(US$/t) Collection 20-50 30-75 40-90 85-250 Sanitary landfill 10-30 15-40 25-65 40-100 Open dumping 2-8 3-10 NA NA Composting 5-30 10-40 20-75 35-90 Waste-to-Energy NA 40-100 60-150 70-200 Anaerobic Digestion NA 20-80 50-100 65-150

Source: World Energy Council.

Goldman Sachs Global Investment Research 42 July 13, 2015 China: Environmental Services

China WtE a Rmb100bn market by 2020. In 2014, China’s urban waste collection volume totaled 173mn tons, and we forecast the market to grow at a 3% CAGR to 200mn tons by 2020. Assuming a WtE tariff in line with the global average of US$100/ton and a WtE treatment ratio of 85%, we estimate a Rmb104.2 bn market size by 2020, representing a CAGR of 24%.

Much work also to be done on soil remediation. The soil remediation industry in the US has gone through four stages: 1) embryonic stage (1980s); 2) infancy stage (1993-2001); fast-growing stage (2001-2004); and 4) consolidation stage (2005 to present).

China’s soil remediation industry is still in the embryonic stage, but the technological foundation needed for future growth has been put in place over the past five years. China’s land area is 27 times larger than Japan’s, whose current market is valued at ¥200 bn-¥300 bn p.a. (about Rmb10 bn-Rmb15 bn). We estimate the output of China’s soil remediation industry to reach Rmb685 bn in 2016-2020, representing 585% growth compared to 2011- 2015. The State Council is now reviewing the Soil Ten (Action Plan of Soil Pollution Prevention). When the plan is announced, we expect the development of China’s soil and underground water remediation industry will benefit significantly and be positioned to develop into a subsector worth of hundreds of billions of renminbi.

Exhibit 71: Soil remediation in US: Four stages Exhibit 72: Brownfield problems in Japan (2003) Soil remediation investment/GDP by year

1.0% Remediation Total land area • Size: 36mn ha 0.8% cost

0.6% Potentially • Size: 272,000 ha contaminated sites • Asset value: US$800bn 0.4% Contaminated • Size: 113,000 ha US$140bn 0.2% sites • Asset value: US$360bn 0.0% Potential • Size: 28,000 ha US$35bn Embryonic Infancy stage Fast-growing Consolidation brownfields • Asset value: US$90bn stage stage stage

12th Five-year Plan 13th Five-year Plan Note: “Brownfield site” refers to real estate that may be difficult to expand, redevelop or reuse due to the presence or potential presence of a hazardous substance, pollutant, or contaminant.

Source: Shanghai IE Expo conference materials. Source: 2003 survey from Soil Environment Management Division of Environmental Management Bureau of MoE Government of Japan.

Goldman Sachs Global Investment Research 43 July 13, 2015 China: Environmental Services

Water savings and treatment: Higher tariffs needed

Prices rationalization and discovery suggests further market upside One key reason for China’s chronic and deteriorating environmental system is its chronic low pricing of utilities, from water supply to water treatment, from farming land use rights

to resources taxes, and its very low CO2 and NOx emission charges. Cleaning up pollution across the ecosystem will require a rationalization of utilities prices, meaning users and polluters will need to pay more realistic costs so that suppliers of pollution reduction services are appropriately incentivized to provide good environmental protection and improvement services. Such utilities prices rationalization and discovery imply tremendous opportunities for environmental improvement solutions providers to grow and monetize.

One key example of price rationalization and discovery would be water tariff and wastewater treatment charges. Although China’s average water resources per capita amounts to only 25% of the global average (according to the UN’s 2008 survey), and China has been raising water tariffs for the past decade, water prices in Chinese major cities are still significantly below the global averages. China’s average water and wastewater treatment tariff is only around 17% of the global average (2013).

Exhibit 73: China’s wastewater tariff Exhibit 74: China’s water tariffs are much lower than those in developed countries (2011)

Rmb/t US$/ton Water tariff 3.5 Residential water tariff in major Chinese cities 10.0 Wastewater tariff 8.8 Municipal sewage tariff in major Chinese cities 9.0 Sample countries average 3.0 8.0 2.5 7.0 5.8 6.0 5.4 2.0 4.6 5.0 4.3 4.0 3.1 1.5 3.0 US$2.97/ton 3.0 2.6 1.0 2.1 2.0 1.8 1.0 0.8 0.7 0.5 1.0 0.5 0.2 Mexico Australia Canada Japan Denmark India Germany Russia France South Korea Italy Spain China 0.0 UK US 0.0 May May May May May Jan Jan Jan Jan Sep Sep Sep Sep ------08 10 12 14 08 10 12 14 07 09 11 13 15

Source: H20-China. Source: Global Water Intelligence (GWI), 2011 survey.

We believe China’s artificially low water tariffs are likely to increase soon. In January 2015, the NDRC set the following targets to be achieved by 2016:

1. Urban wastewater treatment (WWT) tariff to be no less than Rmb0.95/ton for residential use and Rmb1.40/ton for non-residential use.

2. Major counties’ WWT tariff to be no less than Rmb0.85/ton for residential use and Rmb1.20/ton for non-residential use.

If the local tariff already meets the above standard but is still not high enough to compensate for operators’ costs, we think WWT tariff should be further raised to warrant acceptable profitability for WWT service providers.

For areas where a WWT tariff is not established, the NDRC advocates collection by 2015 and the construction of a WWT plant within the following three years.

Goldman Sachs Global Investment Research 44 July 13, 2015 China: Environmental Services

According to H2O-China, China’s current average residential wastewater tariff and industrial wastewater tariff are Rmb0.85/ton and Rmb1.16/ton, respectively, for the 20 largest cities, which are 10% and 17% below the new standards. Hence, we believe the WWT tariff faces further upside.

Exhibit 75: Current residential and industrial WWT tariffs are 10%/17% below new standard China’s municipal and industrial sewage tariff in the 20 major cities vs. new standard

Rmb/t Municipal sewage tariff in major Chinese cities 1.50 Industrial sewage tariff in major Chinese cities 1.40

1.30 Current vs. new standards: Rmb0.24/t upside 1.20

1.10

1.00 Current vs. new standards: 0.90 Rmb0.1/t upside 0.80

0.70

0.60

0.50 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15

Source: H20-China, Goldman Sachs Global Investment Research.

What China can do China’s current water tariff is too low, in our view. In 2013, China’s per-capita water consumption was 55.3 cubic meters while its per-capita water tariff was Rmb156 based on the Rmb2.83/ton average water tariff in 28 major cities. This suggests that China’s water tariff is only around 0.6% of the average disposable income, sharply below the 1.7% in the US and the 2.5%-3% suggested by the Study on the Urban and Rural Water Shortage Problem released by China’s Ministry of Housing and Construction.

WWT tariff has significant upside. WWT facilities require significant investment. The WWT tariff accounted for 61.4% of the overall water tariff in the US in 2013. By comparison, China’s average WWT tariff is Rmb0.85/ton, less than 30% of its overall water tariff. In order to further increase China’s WWT ratio, a much higher WWT tariff is a prerequisite.

Goldman Sachs Global Investment Research 45 July 13, 2015 China: Environmental Services

Exhibit 76: Water tariff as a percentage of per-capita Exhibit 77: WWT tariff accounts for only 29.2% of total personal disposable income in 2013 water charges in China vs. 61.4% in the US in 2013

2.0% Water charges/disposable income 80% WWT tariff/water charges 1.7% 70% 61.4% 1.5% 60%

50%

1.0% 40% 29.2% 0.6% 30% 0.5% 20%

10%

0.0% 0% China US China US

Source: MEP, EPA. Source: MEP, EPA.

Exhibit 78: WWT tariff in major Chinese cities in 2013

Rmb/ton 1.6 1.4 1.2 1.0 Average Rmb0.85/t 0.8 0.6 0.4 0.2 0.0 Changsha Shijiazhuang Shenyang Nanchang Kunming Nanjing Xi'an Hefei Taiyuan Shanghai Chongqing Tianjin Beijing Jinan Shenzhen Lanzhou Guiyang Wuhan Guangzhou Fuzhou Hangzhou

Source: H2O-China.

We believe water tariff reform should stimulate a huge investment opportunity, and the WWT market offers even more attractive opportunities. We estimate China’s ongoing water tariff reform will add Rmb136 bn of upside to the current market for the WWT industry. Our estimate is based on the following assumptions:

1. Total water tariff would account for 1.5% of disposable income.

2. WWT tariff ~50% of total water price, resulting in Rmb3.66/ton based on 2013 disposable income and water consumption.

Goldman Sachs Global Investment Research 46 July 13, 2015 China: Environmental Services

Exhibit 79: China’s WWT: We see Rmb136 bn upside for the WWT market

Unit Calculation Per capita disposable income (2013) Rmb 27,000 x 1.5% Per capita water charges Rmb = 405 Per capita water consumption ton / 55.3 Implied unit water tariff Rmb/ton = 7.32 WWT tariff as % of total water tariff % x 50% Implied WWT tariff Rmb/ton = 3.66 Current WWT tariff Rmb/ton — 0.85 Upside to WWT tariff = 2.81 Wastewater treatment volume (2013) bn ton 48.5

Upside to current WWT market Rmb bn 136

Source: Wind, CEIC, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 47 July 13, 2015 China: Environmental Services

Air pollution: Emission trading a trillion dollar market

Global warming has attracted huge attention and raised serious concerns world-wide. The United Nations Framework Convention on Climate Change (UNFCCC) was opened for signature on May 22, 1992, and countries that are signatories to the convention continue to meet annually to review the progress made toward implementing their targets. In 1997, the Kyoto Protocol was adopted, and the EU promised to reduce greenhouse gas emissions 20% by 2020 from its 1990 levels.

The US and China together released a Joint Announcement on Climate Change in 2014, in

which the US promised to reduce CO2 by 26%-28% from its 2005 level by 2025, and China

agreed to reach a CO2 emission peak before 2030. As per the pledge made by China as part

of the UNFCCC and the Kyoto Protocol, China has announced plans to cut its CO2 emissions by 40%-50% in 2005-2020.

Exhibit 80: CO2 emissions: US vs. China Exhibit 81: Emission targets for major countries mt

9,000 United States China Country Target Base year Target year 8,000 China Peak emission around 2030 NA 2030 7,000 6,000 US Cut emission by 26%-28% 2005 2025

5,000 Russia Cut its emission 25%-30% 1990 2030 4,000 Switzerland Cut emission by 50% 1990 2030 3,000 Japan Cut emission by 20% 2005 2030 2,000 1,000 UK Cut emission by 80% 1990 2020 - 2002 2004 2006 2008 2010 2012 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 EU Cut greenhouse gas emissions by 20% 1990 2020

Source: EIA. Source: Media reports compiled by Goldman Sachs Global Investment Research.

CO2 Emission Trading Scheme in the EU and US The Emission Trading Scheme (ETS) in the EU was launched in 2005 as the world’s first

international company-level “cap-and trade” system to reduce CO2 emissions in a cost-

effective way. When the program was launched in 2005, 321mnt CO2 was traded for a total consideration of US$7.9 bn. By 2011, this market had grown significantly to 7.9bn tons for a total consideration of US$147.9 bn in 2011.

Exhibit 82: EU Emission Trading Scheme summary

EUA P-CER S-CER ERU Sum

Trading volume 2012 7,903 339 1,686 715 10,642 (mn tons) 2013 8,651 264 445 899 10,259 Trading value 2012 77,016 1,120 5,878 1,456 85,479 2013 52,348 149 251 102 52,849 (US$ mn) Note: EUA = European Union Allowance ; P-CER = Primary Certified emission reduction units; S-CER = Secondary Certified emission reduction units; ERU =. Emission Reduction Unit

Source: Bloomberg New Energy Finance.

Goldman Sachs Global Investment Research 48 July 13, 2015 China: Environmental Services

US greenhouse gas emission schemes include the Regional Greenhouse Gas Initiative (RGGI), the Western Climate Initiative (WCI) and the Chicago Climate Exchange (CCX). The RGGI is the first mandatory market-oriented scheme designed to reduce the overall volume of greenhouse gas emissions. It targets a 10% reduction in US greenhouse gas emissions in 2009-2018. The WCI aims to reduce emissions by 15% in 2005-2020. Different from the above two schemes, the CCX is a voluntary program, and members enrolled in the CCX have to make voluntary but legally binding promises.

Exhibit 83: Comparison of ETS in California, EU-ETS, and Quebec

California's GHG cap-and-trade program EU's Emissions Trading System Quebec's Carbon Market

Population (mn) 38 500 8 Gross Regional Product (US$tn) 1.9 16 0.3 Participating Jurisdictions California 30 nations Quebec CO , NO , CH4, PFCs, SF6,NF3, other CO , CH4, NO , SF6, PFCs, NF3, other Greenhouse Gases Covered CO , NO , SF6, and PFCs starting in 2013 fluorinated greenhouse gases fluorinated greenhouse gases ₂ ₂ ₂ ₂ Power,₂ heat₂ and steam production, and oil, iron and steel, cement, glass, pulp and Power and industrials in 2013; plus ground paper 2005-2012; plus CO from Power and industrials in 2013; plus ground Sectors Covered transportation and heating fuels in 2015 petrochemicals, ammonia, aviation and transportation and heating fuels in 2015 aluminum, NO from acid production,₂ and PFCs from aluminum starting in 2013 ₂ Target 17% below 2013 emissions by 2020 21% below 2005 levels by 2020 20% below 1990 levels by 2020. 2013 Allowance Budgets (mt) 163 2,039 24 Emissions Target (mt) 334 (2020) 1,643 (2020) 51 (2020) Note: GHG = Greenhouse gas.

Source: the Center for Climate and Energy Solutions (C2ES).

China’s carbon trading likely to be a Rmb100 bn market by 2020 China’s rapid economic development and coal-oriented energy consumption structure has

significantly increased its CO2 emissions. In 2013, China’s CO2 emissions reached 10bn tons,

even greater than CO2 emissions in the US (5.35bn tons) and the EU (3.5bn tons) combined.

As per the pledge made by China as part of the UNFCCC and the Kyoto Protocol, China has

announced plans to cut its CO2 emissions by 40%-50% in 2005-2020.

The State Council issued its 12th Five-Year Work Plan on Greenhouse Gas Emission Control at end-2011, and it initiated the idea of establishing a carbon trading market. In October 2011, Pilot programs were approved in Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong and Shenzhen. By 2014, all approved schemes had been launched, covering 1,919 companies with total allocated volume of 1.2bn tons. In November 2014, the NDRC unveiled National Carbon Trading Implementation Rules. By November 2014, accumulated trading value was Rmb500 mn with 13.75mn tons traded at an average price of Rmb36.4/ton.

Goldman Sachs Global Investment Research 49 July 13, 2015 China: Environmental Services

Exhibit 84: Scope and scale of each carbon trading pilot in China (2014)

Market size (bn Emission% Region Coverage tons allowance) covered

Guangdong 0.39 Power, cement, steel, petrochemical 58% Hubei 0.32 Power, cement, chemical, metals, autos, paper, steel, petrochemical 40% Power, cement, chemical, metals, autos, paper, steel, petrochemical, construction Shanghai 0.14 50% materials, ruber, aviation, airport, hotel Beijing 0.06 Power, steam, manufacturing, public facilities 40% Tianjin 0.11 Power, steam, cement, steel, petrochemical, refinery, commerial property 60% Chongqing 0.03 Electrolytic aluminum, cement, steel, calcium carbide, caustic soda n.a. Shenzhen 0.03 Power, industry, property 38%

Source: Media reports compiled by Goldman Sachs Global Investment Research.

Exhibit 85: CO2 trading prices comparison Exhibit 86: CO2 trading value potential: China vs. EU

US$/ton California China 2 CO e 2011 25 (peak) EU US$ 148bn

20 2005 US$ 7. 9 b n 15 2020 China Rmb 10 100bn

5 2015 Rmb 0 16bn Apr-11 Apr-12 Apr-13 Apr-14 Apr-15

Source: California Carbon Dashboard. Source: Shanghai IE Expo conference materials.

At the 2015 China Carbon Forum, Mr. Jiang Zhaoli, director of domestic policy and implementation of the NDRC’s Climate Department, said China’s Carbon Trading Market will kick off by 2016. The national scheme will cover 5 + 1 industries, power, metallurgy, nonferrous metals, construction materials, chemicals, and aviation, covering enterprises with annual emissions exceeding 26 kt. We estimate China’s total carbon trading amount will reach 3-4bn tons p.a. by 2020,

implying a carbon trading market size of Rmb100 bn (based on a CO2 trading price of

Rmb30/t as of May 2015). However, given that China’s CO2 emissions are already almost three times the size of the EU’s (10bn tons of trading volume in 2013), we expect significant

upside to China’s CO2 trading market over the next decade.

Goldman Sachs Global Investment Research 50 July 13, 2015 China: Environmental Services

Introducing more diversified funding approaches

As a result of the government’s changing role in the environmental cleanup, China has opened up the industry to the private sector to secure enough funding and attract good competition by introducing many initiatives. The Public Private Partnership (PPP) is one of the key milestone initiatives:

• Detailed Guidelines for the Development of Urban Facilities by PPP have been laid out by: 1) Guidance on Encouraging Social Investment with Investment and Financing Mechanism in Key Sectors released by the State Council; and 2) Guidelines on Development of Public–Private Partnership Projects released by the NDRC.

• On April 9, 2015, the MEP and the Ministry of Finance issued a joint statement to promote PPP funding in water treatment.

Public-Private Partnership (PPP) and Third Party Treatment (TPT)

Exhibit 87: Public–Private Partnership (PPP) model

Public Private Partnership Approval, Build, (PPP) Operating Operation, concesssion Management

Setup Investment

Public Private

Source: Goldman Sachs Global Investment Research.

In order to improve pollution reduction efficiency and achieve optimal results from investment, China’s government has been proactively promoting the Third-Party Treatment (TPT) model, which allows polluters to contract out their pollution to professional third- party pollution control services providers. On the other hand, it also allows the government to better supervise and monitor the progress of pollution reduction efforts.

Exhibit 88: Public Private Partnership (PPP) and Third Party Treatment (TPT)

Third-party treatment (TPT) Public-private partnership (PPP)

Polluters cost saving by adopting professional treatment Private capital introduction Business Regulators cost saving by centralizing monitoring targets Longer time-horizon model Environmental protection market unlocked Efficiency improvement

Tariff hike PPP promotion nationwide Policy Fiscal support PPP implementation enforced support Capital market Launch of a series of policies

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 51 July 13, 2015 China: Environmental Services

Further lessons – policy, investments, and more

• Recent policy initiatives • Lessons from developed economies • China under-invested, but catching up • Pollution cleanup: Beijing case study

Goldman Sachs Global Investment Research 52 July 13, 2015 China: Environmental Services

Recent policy initiatives

Since 2013, a number of key laws, regulations and initiatives have been passed with immediate effect, empowering the MEP to act with force:

September 2013: The Air Pollution Action Plan (Air Ten).

Exhibit 89: Air pollution control action plan

Overall To reduce PM10 density by 10% for prefecture level cities and above, and PM2.5 density by 25%/20%/15% for Beijing- target Tianjin-Hebei (BTH), Yangtze River Delta (YRD) and Pearl River Delta (PRD), respectively. Key measures 1 Reduce multiple pollutant emission a) Accelerate conversion of coal into gas/electricity. Replacing small coal boilers (<10 tonnes/hour). Target to complete the conversion by 2015 in BTH, YRD and PRD. b) Promote public transport system and restrict no. of vehicles in first-tier cities. Full upgrade of gasoline from Euro III to Euro IV by 2013 and diesel from Euro III to Euro IV by 2014. Euro V gasoline shall be in place in BTH, YRD and PRD by 2015 and nationwide by 2017. c) Accelerate the rollout of new/clean energy vehicles including gas vehicles. Target to have over 60% of new buses in Beijing, Shanghai and Guangzhou coming from new/clean energy vehicles. 2 Optimize industrial structure, promote upgrade and transformation of overcapacity industris. 3 Accelerate technological upgrade to facilitate environment protection. Promote recycling and energy-saving economy. 4 Transformation of energy consumption structure a) Aim to lower the weight of coal to below 65% by 2017, which would be replaced by natural gas and non-fossil fuel energy. Coal power plant will no longer be permited. b) Increase the supply of natural gas, coal-to-gas and CBM. Develop gas power plant as a buffer for peak season, however no new gas power plant project shall be built in principle. Accelerate the conversion of coal facility to gas for companies in BTH, YRD and PRD. 5 Strictly enforce environmental assessment when planning for the overall industrial development blueprint 6 Bring market mechanism to play and better environmental economy policies 7 Establish a complete legal system and strictly enforce the regulation and management 8 Establish a regional coorperation mechanism and manage the environmental protection in the region from a high level 9 Establish a monitoring and early warning system to tackle highly polluted weather 10 Government should take the leadership and liaise with multiple parties to participate in environmental protection

Source: State Council website.

January 2015: The new Environment Protection Law (effective January 1, 2015) introduced many actionable and measureable rules and targets such as linking environmental protection targets to local government officials’ performance assessment and introducing a daily penalty for violation of environmental regulations.

Exhibit 90: Key highlights of the new Environmental Protection Law

1. Total emission control: suspend new project approval in over emission Complete regions Stricter Stricter Penalty Supervision 2. Daily penalty and legal liability Penalty 3. Empower MEP with the authority to Mechanism halt production or even shut down polluting millsBetter Incentives 4. Incentives: link environmental targets to government official assessment More Information 5. InformationDisclosure disclosure: regularly More Better disclose environmental condition and Information encourage publicComplete participation, Supervision including Incentives Disclosure public interestMechanism litigation on environmental issues 6. Closing legal loopholes of the previous Law

Source: News information complied by Goldman Sachs Global Investment Research, www.chin5e.com.

Goldman Sachs Global Investment Research 53 July 13, 2015 China: Environmental Services

April 2015: The Water Pollution Control Action Plan (Water Ten)

Exhibit 91: Water Pollution Control Action Plan

Overal By 2020, 70% of the water in China’s seven major watersheds and 93% of the drinking water sources in prefecture-level target cities are to meet an acceptable standard. By 2030, the Plan raises these targets to 75% and 95%, respectively. The Plan also calls for the reduction of the prevalence of “black and odorous water bodies” in prefecture-level cities to less than 10% by 2020, and the elimination of this problem by 2030. Key measures 1 Pollutant Discharge Control a) Industrial Production. The Plan anticipates the imposition of cleaner production standards for ten major industries: papermaking, nitrogen-based fertilizers, steel, nonferrous metals, textiles, agricultural products, pharmaceuticals, leather tanning, pesticides, and electroplating. The Plan also promises inspection and closure of facilities in these and other industries if they continue to use highly polluting production methods. b) Wastewater Treatment. The planned Pollutant Discharge Control program includes a nationwide infrastructural expansion of both industrial and municipal wastewater treatment facilities. The Plan states that all clusters of concentrated industrial development must have centralized wastewater treatment facilities with water quality monitoring equipment installed by the end of 2017. By 2020, all the counties and major towns should have installed sewage treatment system, and the sewage treatment rate should reach 85% and 95% for counties and cities, respectively.

c) Sludge treament. The installed sludge treatment equipment should be udgraded to meet with the standard by end of 2017, and the sludge treatment rate in prefecture-level cities should be no less than 90%. 2 Economic Restructuring a) Utilization rate of recycled water should be more than 20% in cities with water shortage and more than 30% in Beijing- Tianjin-Hebei region. 3 Conservation And Protection Of Water Resources 4 Scientific And Technological Support 5 Market Mechanisms a) Accelerating water tariff reform. All cities above county level should implement progressive water tariff by 2015, and nation wide all non-residential water consumption over planned voulme should be charged with progressive water tariff by 2020.

b) Improve the pricing policy. Revise the collection and management method of urban sewage treatment fee, sewage charge fee, and water resources fee. Raise the fee to a reasonable level which is not lower than treatment and disposal costs. Groundwater water fee collection standards should be higher than surface water, water resources fee in groundwater overdraft area should be higher than the non-exploitation areas. c) Tax policy support. Remove import tariff of the key components and raw materials used to manufacture large-scale environmental protection equipment; Accelerate the legislative work of environmental taxes, tax reform resource taxes. Impose consumption tax on products made with high energy consumption and high pollution.

6 Environmental Regulation And Enforcement a) Ensure law enforcement. All companies must be compliant with the sewage discharge standards. If a company is not compliant, it will receive a "yellow card" warning, and its production will be restricted or halted for remdiation; If it still can not meet the requirements of the regulation, it will receive a "red card" notice and it will be shut down. From 2016, MOEP will regularly publish the namelist of "yellow card", "red card" companies.

7 Environmental Management 8 Protection Of The Aquatic Ecological Environment 9 Differentiated Responsibilities of related parties 10 Public Participation And Social Supervision

Source: State Council, www.natlawreview.com.

Upcoming new initiatives We expect China to continue rolling out new initiatives: 1) China’s environmental improvement blueprint in the 13th Five-Year Plan; 2) discourage pollution through the introduction of Environmental Taxation and the further implementation of Carbon Trading and Pollution Rights Trading; 3) expected roll out the Soil Ten later this year; and 4) further open up the industry to the private sector through the introduction of PPP and TPT to secure more funding.

China has already announced a doubling of the pollution discharge unit free, effective January 2016. We expect China to further increase its taxation on pollution to: 1) fund pollution reduction efforts; and 2) discourage pollution.

Goldman Sachs Global Investment Research 54 July 13, 2015 China: Environmental Services

Exhibit 92: Environmental taxation – global experiences and China’s status quo

Country Year Taxes charged US 1970s CO2 tax, carbon tax, resources tax, gasoline tax and exploration tax Sweden 1991 CO2 tax, electricity tax, nuclear energy tax, and pollution tax Denmark 1992 CO2 tax, gasoline tax, diesel tax, coal tax, waste water tax, and solid waste tax Japan 2007 CO2 tax, and global warming solution tax on fossil fuels

2003 Start the collection of pollution discharge fee State Council states it's considering raising the resources tax rate and setting China 2007 favorable tax rate for energy conservation and emission reduction projects 2014 China announced to double the pollution discharge unit fee, effective Jan 2016

Source: Shanghai IE Expo conference materials.

Meanwhile, we expect China to further promote carbon trading in the coming 13th Five- Year Plan in order to incentivize emitters to further reduce emissions. Compared to developed countries, China has just taken a baby step in this aspect. The EU’s carbon trading market grew 18 times in 2005-2011 to US$148 bn while China’s total transaction value was only US$200 mn as of March 2015.

Exhibit 93: Carbon trading – global experiences and China’s status quo

Global China

• Kyoto Protocol: • Launched 7 pilot • Clean development cities/provinces in 2 011 mechanism (CDM) • Beijing, Shanghai, • Joint implementation Tianjin, Chongqing, • Int'l emission trading Guangdong, Hubei and Shenzhen • Transaction value • Initiated carbon trading • US$148bn in 2011 (peak) (2013) • Activity > 4.8% • Transaction value: • ETS (emission trading Rmb500mn till Nov 2014 system) in EU • Activity peak 0.87% in • RGGI in US Beijing

Source: Shanghai IE Expo conference materials.

Goldman Sachs Global Investment Research 55 July 13, 2015 China: Environmental Services

Lessons from developed economies

Starting in the 1940s, environmental pollution in the US, the UK and Japan became increasingly acute and a number of highly influential pollution incidents occurred, including smog in Los Angeles in 1943 and London in 1952, Japan’s Minamata disease outbreaks in 1953-1965, and the “itai-itai” disease related to a cadmium poisoning incident in Japan’s Toyama prefecture (1955-1972). This series of incidents underlined that pollution had become an alarming social problem for developed nations by the middle of the 20th Century.

Exhibit 94: Developed countries began seeing major pollution incidents in the 1940s

Time Event Cause Effect Los Angeles Smog caused by vehicle emission absorbed Smog caused eye pain, headaches, breathing difficulties, 1943 Photochemical sunlight, leading to chemical reaction and even death in severe cases. It also caused livestock illness, Smog Event produced photochemical smog. hindered plant growth, and building and material erosion.

Sulfur dioxide and other harmful substances US Donora The incident caused 20 deaths, 6,000 people sick (c.43% of 1948 discharged by factories caused severe air Smog Event total residents in town). pollution when abnormal weather occurred. Waste gas discharged during industrial The smog resulted in chest distress and suffocation. It led to London Smog production and residential coal-fired heating 1952 over 5,000 deaths in 5 days and over 8,000 deaths in 2 Event accumulated over the city and could not be months after the smog dispersed. dissipated. Nitrogen producers discharged industrial wastewater with mercury, which was High toxic substances infringed the brain and other body 1953- Japan Minamata converted to highly toxic substance and parts, damaged nerve cells. The disease caused over 1,000 1965 disease event entered into human bodies through food deaths. Number of sick people up to 10,000. chain after eaten by aquatic life. Wastewater discharged by zinc smelters with Cadmium causes a huge loss of calcium in the bones, leading 1955- Japan Toyama large amounts of cadmium caused rice and to bone atrophy, joint pain and even minor activities can 1972 Itai-itai disease fish contamination. The substance went into cause fractures. The disease caused more than 200 deaths. human bodies through the food chain. Waste gas and water discharged by oil Many people had headaches, vomit and other symptoms. Japan Yokkaichi 1961 companies caused smoggy skies all year Asthma patients surged. The event caused up to 6,000 people asthma event round. Aquatic products were not edible. sick and some of them died.

Source: Goldman Sachs Global Investment Research, consolidated press reports.

In the 1960s and 1970s, developed countries became more aware of the hazards of environmental pollution, and they worked to combat them when their per-capita GDP was about US$5,000-US$6,000. Developed countries began to adopt 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 the 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 1960s and 1970s, developed countries began systematic environmental pollution mitigation by greatly increasing investment.

Goldman Sachs Global Investment Research 56 July 13, 2015 China: Environmental Services

Exhibit 95: Pollution incidents have prompted 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 1876 Rivers (Prevention of Pollutions) Act Water Pollution 1960 Federal River Purification Law Water Pollution UK Germany 1956 Clean Air Act Air Pollution 1965 Air Purification Law Air Pollution 1960 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 1968 Air Pollution Control Law 1955 Assistance Relating to Air Pollution Control Air Pollution Air Pollution US 1969 Nation Environmental Policy Act Comprehensive Japan 1970 Water Pollution Control Law Water Pollution Pollution-related Health Damage 1972 Clean Water Act Water Pollution 1973 Comprehensive Compensation Law 1976 Solid Waste Disposal Act Solid waste

Source: Media reports compiled by Goldman Sachs Global Investment Research.

Following a number of highly influential pollution incidents, Japan embarked on large- scale investment in environmental cleanup during the 1970s. Private and public investment in pollution control in Japan grew from 1.0% of GDP in 1970 to 2.0% of GDP in 1975. Total investment in pollution prevention increased from ¥109 bn in 1969 to ¥1,049 bn (a CAGR of 46%) and 80% was aimed at 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 1975.

Exhibit 96: Japan’s environmental investment as a Exhibit 97: Spending on environmental protection rose percentage of GDP rose rapidly in the 1970s significantly for all of Japan’s industries in 1969-75 Pollution control investment as % of GDP

1,200 16% 1.2% Pollution control investment of private firms Environmental protection investment from all industries (JPY bn) 14% Pollution control investment of government 1,000 Environmental protection investment / 1.0% industrial investment (%, RHS) 12% 800 10% 0.8% 600 8% 0.6% 6% 400 0.4% 4% 200 2% 0.2% 0 0% 1969 1970 1971 1972 1973 1974 1975 0.0% 1970 1971 1972 1973 1974 1975

Source: Development Bank of Japan. Source: Development Bank of Japan.

Goldman Sachs Global Investment Research 57 July 13, 2015 China: Environmental Services

History shows that China’s pollution is curable The history of pollution in developed economies such as the US, Japan and the UK suggests China’s pollution is severe in terms of its scale and how quickly it has developed, but this is not unexpected given China’s rapid industrialization and urbanization. Moreover, the experience in developed economies also shows that severe pollution is curable.

Exhibit 98: China is on track to follow approaches taken by the developed countries

Models from developed China's approach countries

Water/air/soil pollution Tackle the pollution sources solid waste

Awareness of both government Lessons from developed Public protest and government and the public economies promotion

Measures Measures

Establishment of Introduction New Environment Law Introduction Enforcement of R&D in Establishment Who pollutes authorities in of private Water Ten of advanced environment law technologies of MEP in 2008 who must pay charge capital Air Ten technologies

Source: Media reports compiled by Goldman Sachs Global Investment Research.

Exhibit 99: Historical air pollution trend 1,000 metric tons of carbon emissions per million dollars of GDP, 10-year moving average

0.80 UK: Smoke Abatement Act, 1926 UK: Public Health Act, 1875 US: Air Pollution Control Act, 1955 0.70 China: Environmental Protection Law, 1979 0.60 UK: Clean Air Act, 1956

0.50 US: Clean Air Act, 1970

0.40

0.30 Japan: Air Pollution Control Act, 1967

0.20

0.10

0.00 1830 1835 1840 1845 1850 1855 1860 1865 1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

UK US China Japan Note: GDP is PPP and commodity price adjusted, constant 1990 dollars.

Source: World Bank, CDIAC (Tom Boden, Bob Andres, Gregg Marland), Angus Maddison, Wikipedia.

Goldman Sachs Global Investment Research 58 July 13, 2015 China: Environmental Services

China under-invested, but catching up

Prior to 2013, China had significantly underspent on environmental protection. In 2013, China’s anti-pollution investment amounted to just 1.7% of GDP, and industrial enterprises’ anti-pollution investment was only 5.1% of total FAI, even lower than the 2000 level of 6.4%. This suggests environmental protection has been a very low priority for both the government and industrial corporates.

Exhibit 100: China’s anti-pollution investment remains Exhibit 101: Industrial investment in pollution mitigation low as a percentage of GDP is declining as a percentage of total investment 2000-2013 2003-2013

Rmb bn China's total investment in pollution control (LHS) Rmb bn 1,000 2.0% 1,000 9.0% % of GDP (RHS) Industrial investment in pollution mitigation 900 % of total industrial FAI 8.0% 800 1.8% 800 7.0% 700 6.0% 600 1.6% 600 5.0% 500 4.0% 400 1.4% 400 300 3.0% 200 1.2% 200 2.0% 100 1.0% 0 1.0% 2001 2010 011 2 2012 2013 2000 2002 2003 2004 2005 2006 2007 2008 2009 0 0.0% 2010 011 2 2012 2013 2003 2004 2005 2006 2007 2008 2009

Source: China Statistical Yearbook on the Environment, Wind. Source: Wind.

Based on the EKC (Environmental Kuznets Curve by economist Simon Kuznets), in the early stages of economic development, environment quality worsens as per-capita income increases; however, when per-capita income passes a certain level, environment quality begins to improve in line with income. Such environment improvement is not a natural result of higher income; instead, it requires effort on every front.

Exhibit 102: The Environmental Kuznets Curve

Environmental Degradation

Turning point Per Capita income

Source: The Environmental Kuznets Curve: a Survey of the Literature by Simone Borghesi.

Goldman Sachs Global Investment Research 59 July 13, 2015 China: Environmental Services

Major developed countries enacted a series of environmental laws and regulations when their per-capita GDP reached US$5,000-10,000. Per-capita GDP in the US was US$10,225 in 1978 when the Clean Air Act, Resource Conservation and Recovery Act and the Clean Water Act were passed or significantly amended in 1970, 1976 and 1977, respectively. When Japan’s per-capita GDP reached US$10,212 in 1981 and Germany’s reached US$10,916 in 1979, both countries also passed a series of key environmental laws and regulations.

Exhibit 103: The US passed a number of key Exhibit 104: Japan passed a number of key environmental laws and regulations in 1969-1977 environmental laws and regulations in 1967-1973

USD US GDP per capita USD Japan GDP per capita 30,000 35,000

30,000 25,000

25,000 20,000 1977, the Clean 1976, Resource Conservation Water Act and Recovery Act 20,000

15,000 1973, Pollution- 1972, Federal 1970, The Related Health Damage 1970, the 15,000 1968, The Water Pollution Water Pollution Clean Air Act Air Pollution Compensation Law Control Act Control Law 10,000 Control Law 1969, National 10,000 Environmental 1967 , The Basic Policy Act 5,000 Environment Law 5,000

0 0

Source: Wind. Source: Wind.

Compared to the major developed countries, China’s current environmental investment – a GDP ratio of 1.5% – is even lower than for those countries during their respective pollution clean-up phases around 40 years ago. Considering the magnitude of Chinese pollution is far more acute than in those countries, we believe China would have to invest significantly more in environmental protection over the next 5-10 years.

Exhibit 105: China has underinvested in environmental Exhibit 106: China’s gross net income is approaching the protection turning point for some pollutants Investment/GDP ratio during pollution control period Turning point for various pollutants (GNI per capita, US$)

2.2% 20,000 18,039 2.00% 18,000 2.0% 1.95% 1.85% 16,000 14,810 2013 China GNI = 11,850 1.8% 14,000 1.67% 12,000

1.6% 10,000 7,853 7,623 8,000 1.4% 6,000 4,000 1.2% 2,000 - 1.0% US 1970-1980 Germany 1971-1975 Japan 1972-1975 China 2013 COD BOD SO2 NOX Note: COD is Chemical oxygen demand; BOD is Biological oxygen demand.

Source: www.chanyezixun.com, Wind. Source: The environmental curve by James Van Alstine and Eric Neumayer, Cole and Neumayer (2005: 310), Grossman and Krueger (1995), Cole (2003), Stern and Common (2001), Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 60 July 13, 2015 China: Environmental Services

In 2013, China’s per-capita income was Rmb41,805, or approximately US$6,798, according to the National Bureau of Statistics (NBS). Based on the experiences of the major developed countries including the US, Japan, the UK and Germany, we believe China has already entered a phase where it can and must increase its investment in environmental protection.

Exhibit 107: China’s per-capita GDP is high enough to take the country into a new era of environmental protection

USD China's GDP per capita China passed the new 8,000 Environmental Protection Law in Apr 2014, effective Jan 2015

7,000

6,000

5,000

4,000

1987, Air 1995, Solid 3,000 1984, Water Pollution (& Hazardous) Pollution Prevention and Waste Law 1979, Prevention and Control Law 2,000 Environmental Control Law Protection Law 1,000

0 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2013 011 2 2001 2003 2005 2007 2009

Source: Wind, World Bank.

The encouraging development is that, following a number of significant pollution incidents, such as prolonged smog in North China and severe water pollution incidents in several regions, China has stepped up efforts to enact new environmental law (effective January 1, 2015) and committed a large amount of capital on environmental protection. In 2008, China established the MEP and in 2012, at the 18th Communist Party conference, China added environmental protection to the four “platforms”.

According to the MEP, the total industry output of environmental protection is estimated to reach Rmb4.5 trn in 2015, more than double from Rmb2 trn in 2010, representing an 18% CAGR in 2010-2015. Water cleaning and treatment remains the largest sub-sector, accounting for around 40% of total industrial output.

Goldman Sachs Global Investment Research 61 July 13, 2015 China: Environmental Services

Exhibit 108: China environmental industry’s output Exhibit 109: Water and treatment remains the largest growth in 12th Five-Year Plan period sub-sector

Energy conservation and environmental Current market share distribution protection industry output (tn Rmb)

5 4.5 CAGR:18% Others, 20% Water, 40% 4 Solid waste, 10% 3 2 Air pollution, 2 30%

0 2010 2015

Source: 12th Five-year plan for the Energy Saving and Environmental Protection Source: China Association of Environmental Protection Industry, Goldman Industry. Sachs Global Investment Research.

Now that environmental issues are a high priority for both the central and local governments, we expect China to significantly increase its investment in environmental improvement and protection in the coming 13th Five-Year Plan period (2016-20), making up for its chronic underinvestment in the past.

Goldman Sachs Global Investment Research 62 July 13, 2015 China: Environmental Services

Pollution cleanup: Beijing case study

2013 had the most smog days in China since 1961, and Beijing was the most polluting city among the four municipal cities. After China declared “war on pollution” in September 2013, as the capital of the country, Beijing has made tremendous efforts to reduce emissions. The city even set an emission standard for its cement plants and coal-fired power plants higher than the EU standard. However, even with that, Beijing still failed to achieve its annual PM2.5 reduction target in 2014. Beijing targets to lower its PM2.5 level to 60mg/cm in 2017, which means the city needs reduce 25.9mg/cm in 2015-17, compared to the 85.9mg/cm as of end-2014. Considering Beijing only reduced its PM2.5 by 4% in 2014, vs. its target of a 5% reduction, it would be a big challenge for Beijing to achieve its PM2.5 reduction target by 2017 assuming its annual reduction remains at the same level as 2014 in the next three years.

The challenging outlook for Beijing to reduce pollution demonstrates how difficult it would be for China to contain pollution over the next few years. As the nation’s capital city, Beijing should have the best resources to leverage to tackle its pollution issue. However, the complexity of pollution in Beijing suggests that polluting control requires a national campaign and inter-region cooperation and coordination. Taking the source of Beijing pollution for instance, around one-third of the pollution in Beijing is actually from neighboring regions including Shanxi, Hebei, Shandong and Inner Mongolia. Such imported pollution requires “across-region” cooperation, which has been constrained by the uneven economic development and lack of coordination among these regions, making unified pollution control efforts hard to implement.

Exhibit 110: Beijing and its polluting neighbors Exhibit 111: Vehicles are the largest source of local 2014 average PM2.5 concentration pollution Sources of Beijing’s PM2.5 pollution (result released in 2014)

μg/m3 Sources of Beijing's PM2.5 pollution Sources of Beijing's local emission 140.0 122.6 Safety threshold of 120.0 10ug/m3 advised by WHO Others, 14.1%

100.0 91.0 Cross-region 83.2 transmission, 28%-36% Vehicle, 31.1% 80.0 67.7 Dust, 14.3% 60.0 Local 44 emission, 64%-72% Industrial 40.0 production, 18.1% Coal-firing, 20.0 22.4%

0.0 Beijing Shijiazhuang, Jinan, Taiyuan, Hohhot, Inner Hebei Shandong Shanxi Mongolia

Source: Greenpeace, Ministry of Environment Protection. Source: Beijing Environment Protection Bureau, Sanlian Life Weekly.

Furthermore, aside from eliminating the polluting industries in the city, Beijing has been relocating many heavy industries such as steel and power generation to its neighboring regions. For example, in order to improve air quality before the 2008 Beijing Olympics, Beijing moved Beijing Shougang Steel to Caofeidian, Hebei province. Though temporarily helpful for Beijing’s pollution reduction efforts, relocating pollution does not eliminate the problem, and with rising awareness of the importance of environmental sustainability across the country, such an approach will become more and more difficult to implement.

Goldman Sachs Global Investment Research 63 July 13, 2015 China: Environmental Services

Exhibit 112: Beijing’s pollution control efforts require the cooperation of its neighbors China’s top 10 cities by 2014 average PM2.5 concentration vs. distance from Beijing

μg/m3 <300km from BJ 300-500km >500km from BJ 140 Xingtai 453, 131 130 Baoding 184, 127 Shijiazhuang 330, 123 120 Handan Hengshui 473, 114 110 272, 108 Langfang Tangshan 100 55, 99 178, 98 Jinan 435, 91 Cangzhou Tianjin Zhengzhou 90 212, 88 Beijing 146, 88 0, 83 721, 87 80 0 200 400 600 800 Cities in Hebei province Cities in other provinces km

Source: Greenpeace, Ministry of Environment Protection.

Goldman Sachs Global Investment Research 64 July 13, 2015 China: Environmental Services

Disclosure Appendix Reg AC We, Julian Zhu, Yan Yan, Christina He and Claire Wang, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Julian Zhu: Asia Commodities Companies. Yan Yan: Asia Commodities Companies. Claire Wang: Asia Commodities Companies. Asia Commodities Companies: ACC, Aluminum Corp. of China (A), Aluminum Corp. of China (H), Ambuja Cements, Angang Steel (A), Angang Steel (H), Anhui Conch Cement (A), Anhui Conch Cement (H), Banpu Public Co., Baoshan Iron & Steel, BBMG Corp. (A), BBMG Corp. (H), Beijing Enterprises Water Group, Beijing Originwater Technology, Beijing Water Business Doctor, China Coal Energy (A), China Coal Energy (H), China Conch Venture Holdings, China Everbright International Ltd., China Hongqiao Group, China Molybdenum Co., China National Building Material, China Resources Cement Holdings, China Shanshui Cement Group, China Shenhua Energy (A), China Shenhua Energy (H), Coal India Ltd., Dongjiang Environmental Co. (A), Dongjiang Environmental Co. (H), Dongpeng Holdings, GrandBlue Environment Co., Grasim Industries, Hindalco Industries, Jiangxi Copper (A), Jiangxi Copper (H), Korea Zinc, Maanshan Iron & Steel (A), Maanshan Iron & Steel (H), National Aluminium Co., PT Adaro Energy Tbk, PT Indo Tambangraya Megah, PT Tambang Batubara Bukit Asam, Shree Cement Ltd., Sound Environmental Co., Tianjin Capital Environmental (A), Tianjin Capital Environmental (H), Tianjin Motimo Membrane Tech, Ultratech Cement, Vedanta Ltd., Yanzhou Coal Mining (A), Yanzhou Coal Mining (H), Zhaojin Mining Industry, Zijin Mining (A), Zijin Mining (H). Company-specific regulatory disclosures Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe

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Goldman Sachs Global Investment Research 65 July 13, 2015 China: Environmental Services

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Goldman Sachs Global Investment Research 66 July 13, 2015 China: Environmental Services

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Goldman Sachs Global Investment Research 67