Environmental Services: Waste Management

August 5, 2014

China: Environmental Services: Waste Management

Equity Research Turning trash into cash; initiate sector – 3 Buys, Dongjiang (H) on CL

On-grid tariffs, insufficient land resources bode well for WtE... Although China’s waste-to-energy (WtE) market has developed rapidly in COVERAGE SUMMARY recent years, we still see ample room for growth, driven by on-grid tariffs Company Ticker Rating 12M TP Price 1-Aug pot. up/down and scarce land resources for sanitary landfills. We forecast 2015E/2020E Dongjiang(H) 0895.HK Buy* 35.97 29.05 24% Dongjiang(A) 002672.SZ Neutral 28.85 30.08 -4% operational revenue of Rmb19.7bn/Rmb33.2bn (2010-2020E CAGR of 20%), Everbright 0257.HK Buy 13.19 10.42 27% Grandblue 600323.SS Buy 14.68 12.08 22% and expect leading firms to benefit due to the public’s rising environmental Sound Envt 000826.SZ Neutral 24.13 21.84 10% awareness and the industry’s move towards EU emission standards. Origin Water 300070.SZ Buy 34.19 27.00 27% WBD 300055.SZ Neutral 32.10 28.07 14% BEWG 0371.HK Neutral 5.35 5.05 6% Tianjin MOTIMO 300334.SZ Neutral 21.32 19.31 10% …while strict regulatory supervision may spur HWT development… TCEPC (H) 1065.HK Neutral 5.57 5.31 5% TCEPC (A) 600874.SS Sell 6.67 8.05 -17% According to judicial interpretations released in June 2013, illegal dumping *denotes stock is on our regional Conviction List. Target of over three tons of hazardous waste is a criminal act. As China continues price is in local currency. to tighten its supervision of hazardous waste treatment (HWT), we expect Source: FactSet, Gao Hua Securities Research. this market segment to experience rapid growth, and attain 2015E/2020E WTE – A POTENTIAL RMB33.2BN MARKET BY 2020E operational revenue of Rmb12.5bn/Rmb26.1bn (2012-2020E CAGR of 22%). Total Operational Revenue (RMB mn) 33,210 35,000

…benefiting quality industry participants; top pick – Dongjiang (H) 30,000 CAGR:20% Accordingly, we initiate coverage on the waste management sector and 25,000 19,717 use PEG as our primary valuation methodology. We have Buy ratings on: 20,000 15,000

Dongjiang H (on CL; 24% upside): Likely beneficiary of tighter regulations 10,000 5,560 in the HWT industry given its leadership status. We expect its treatment 5,000 0 capacity to surge to 1.67mn tons from 415,000 tons over the next three years. 2010 2015E 2020E

Everbright Int’l (27% upside): WtE leader with strong operational track Source: China Statistical Yearbook on the Environment record and low financing costs; actively exploring opportunities in the HWT 2011, Gao Hua Securities Research. and water businesses. We estimate net profit CAGR of 33% in 2014E-2016E. RELATED RESEARCH GrandBlue (22% upside): Proposed C&G China acquisition could enable it China: Environmental Services: Water Treatment: to expand nationwide; solid waste facilities may become industry model. Watershed moment amid structural change; Buy OriginWater, WBD, December 12, 2013 We are Neutral on Dongjiang A and Sound Environmental. For our broader environmental services coverage, we update: 1) EPS estimates/TP for KEY INDUSTRY RISKS

OriginWater given its 1H14 earnings preannouncement; and 2) TP for Upside: Potential government investment in urban Tianjin Capital as we switch valuation method to P/B-ROE from EV/EBITDA. environmental management. Downside: WtE projects face protests from surrounding residents and are delayed or cancelled. Global comparison suggests China still in rapid growth stage

China’s solid waste volume is growing at a much faster pace than that in developed countries (2000-2012 CAGR of 3.1% vs. 0.2% in the US). While waste collection and transport generally account for over 60% of the waste management market across regions, the dominant treatment method varies; for example incineration is widely adopted in Japan (74% of total waste volume) and Germany (35%), while landfill is a key channel in the US (54%). Yong Han, CFA +86(21)2401-8948 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with Jefferson Zhang companies covered in its research reports. As a result, +86(21)2401-8945 [email protected] Beijing Gao Hua Securities Company Limited 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.

The Goldman Sachs Group, Inc. Global Investment Research August 5, 2014 China: Environmental Services: Waste Management

Table of contents

Our view of China’s solid waste sector in six charts 3 Overview: Initiate waste mgmt sector on promising growth outlook 4 Waste mgmt: Public pressure drives positive industry development 6 Strict regulatory supervision bodes well for hazardous waste sector 17 Global comparison: China’s solid waste market in rapid growth phase 22 Sector risks: NIMBY-ism and local government spending power 30 Buy quality names: Dongjiang H (on CL), Everbright, GrandBlue 31 Dongjiang (H): Policies/capacity to drive rapid growth; initiate CL-Buy 36 China Everbright Int’l: Leading/competitive WtE player; initiate Buy 43 GrandBlue Environment: Nationwide expansion via M&A; initiate Buy 50 Sound Environmental: Market leader, full value chain; initiate Neutral 57 Disclosure Appendix 64

Prices in this report are based on the close of August 1, 2014, unless otherwise stated.

Exhibit 1: Global valuation comparison

GS/GH Up/Down 1-Aug-14 Market cap EPS EPS CAGR P/E (X)EV/EBITDA(X) ROE Ticker Rating Price Ccy 12M TP Potential USD mn 2014E 2015E (2014E-2016E) 2014E 2015E 2014E 2015E 2014E 2015E China-A share Grandblue 600323.SS Buy 12.08 CNY 14.68 22% 1,132 0.45 0.59 25.2% 26.9 20.5 14.2 13.5 10% 12%

Sound Environmental 000826.SZ Neutral 21.84 CNY 24.13 10% 2,981 0.87 1.10 27.6% 25.0 19.8 19.1 15.6 16% 17%

Dongjiang-A 002672.SZ Neutral 30.08 CNY 28.85 -4% 1,691 0.72 1.07 40.1% 41.8 28.0 28.2 19.6 11% 15%

Origin Water 300070.SZ Buy 27.00 CNY 34.19 27% 4,673 1.08 1.42 31.8% 25.1 19.1 23.2 17.6 21% 23% WBD 300055.SZ Neutral 28.07 CNY 32.10 14% 1,039 0.76 1.05 38.1% 37.0 26.8 27.4 19.2 9% 12%

Tianjin MOTIMO 300334.SZ Neutral 19.31 CNY 21.32 10% 816 0.46 0.68 46.8% 42.4 28.4 33.1 22.3 14% 18%

TCEPC (A) 600874.SS Sell 8.05 CNY 6.67 -17% 1,859 0.18 0.18 6.7% 46.0 45.5 15.5 14.7 6% 6%

Median-Ashare companies 34.9% 39.7 27.6 25.3 18.4 12% 15%

HK-H share DongJiang-H 0895.HK Buy* 29.05 HKD 35.97 24% 1,302 0.72 1.07 40.1% 32.2 21.6 21.6 15.2 11% 15%

Everbright 0257.HK Buy 10.42 HKD 13.19 27% 6,028 0.40 0.56 33.3% 26.3 18.5 17.4 13.2 13% 16%

BEWG 0371.HK Neutral 5.05 HKD 5.35 6% 5,497 0.20 0.26 27.4% 25.9 19.6 22.5 17.6 12% 14%

TCEPC (H) 1065.HK Neutral 5.31 HKD 5.57 5% 978 0.18 0.18 6.7% 24.2 23.9 8.7 8.0 6% 6%

Median-H share companies 17.1% 25.0 21.8 15.6 12.8 9% 10%

US Waste Management WM Neutral 44.41 USD 45.00 1% 20,784 2.33 2.52 9.0% 19.0 17.6 8.8 8.4 18% 21%

Waste Connections WCN Neutral 47.11 USD 49.00 4% 5,839 2.04 2.37 16.9% 23.1 19.9 11.1 10.0 12% 14%

Republic Services RSG Neutral 37.78 USD 38.00 1% 13,688 1.98 2.17 11.4% 19.1 17.4 8.2 7.7 9% 10%

Stericycle SRCL Buy 116.81 USD 129.00 10% 10,044 4.27 5.05 16.4% 27.3 23.1 16.2 13.6 20% 21%

Median-US share companies 13.9% 21.1 18.8 10.0 9.2 15% 17%

Europe Veolia Environnement VIE.PA Neutral 12.8 EUR 15.3 20% 8,681 0.41 0.78 50.7% 31.2 16.4 6.0 4.8 3% 5%

Suez Environnement SA SEVI.PA Neutral 13.5 EUR 16.8 25% 9,230 0.69 0.89 19.3% 19.6 15.1 6.8 6.3 7% 9% Median-Europe companies 35.0% 25.4 15.7 6.4 5.5 5% 7% *denotes stock is on our regional Conviction List. All target prices mentioned above are on a 12-m basis except for Stericycle, which is on a 6-m basis.

Source: Datastream, Gao Hua Securities Research, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 2 August 5, 2014 China: Environmental Services: Waste Management

Our view of China’s solid waste sector in six charts

Exhibit 2: We believe public pressure may drive positive Exhibit 3: China’s waste-to-energy (WtE) operating development of the environmental industry capacity is growing rapidly

China WtE Capacity (t/d) Public protests against 140,000 low‐quality Local Government： 122,649 environmental service Decision Maker 120,000 providers may induce the government to select 100,000 Select Service high‐quality 80,000 CAGR: 25% Provider environmental service providers 60,000

40,000 Provide Service 25,460 Environmental Public： 20,000 ： Company Active Consumer Service Provider 0 2005 2012

Source: Gao Hua Securities Research. Source: China Statistical Yearbook on the Environment, 2013.

Exhibit 4: We forecast 2010-2020E WtE operational Exhibit 5: China’s hazardous waste treatment (HWT) revenue CAGR of about 20% volume is also growing rapidly

40 140% Total Operational Revenue (RMB mn) Industrial Hazardous Waste (mt) - LHS 34.31 34.65 33,210 35 120% 35,000 yoy growth - RHS 100% 30 30,000 80% CAGR:20% 25 25,000 60% 20 19,717 15.87 40% 20,000 14.30 15 13.57 11.70 11.62 10.84 10.79 20% 9.52 10.01 9.95 15,000 10 0% 10,000 5 5,560 -20% 5,000 0 -40% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 2010 2015E 2020E

Source: China Statistical Yearbook on the Environment, 2011, Gao Hua Source: China Statistical Yearbook on the Environment, 2013. Securities Research.

Exhibit 6: We forecast 2012-2020E HWT operational Exhibit 7: China’s municipal solid waste (MSW) revenue CAGR of about 22% production growth is far higher than that in the US

Hazardous Centralized Centralization Unit operation Total Operation Waste Treatment Rate fee Fee MSW CAGR(2000‐2012) (mn ton) (mn ton) % RMB/ton (mn US$) 3.5% 2005 11.62 0.74 6.3% 971 715 3.1% 2010 15.87 3.31 20.9% 1,174 3,890 2012 34.65 7.16 20.7% 753 5,394 3.0% 2015E 50.00 12.50 25.0% 1,000 12,500 2020E 66.91 20.07 30.0% 1,300 26,095 2.5%

2012‐2020E CAGR 21.8% 2.0%

1.5%

1.0%

0.5% 0.2%

0.0% US China

Source: China Statistical Yearbook on the Environment, 2013, Gao Hua Source: Ministry of Environmental Protection, EPA. Securities Research.

Goldman Sachs Global Investment Research 3 August 5, 2014 China: Environmental Services: Waste Management

Overview: Initiate waste mgmt sector on promising growth outlook

Public pressure may drive environmental protection market expansion In the past, when the public were the final consumers of the environmental protection industry and lacked influence in selecting environmental products, the environmental firms often gained market share through connections with local governments, or through price wars, causing bad money to drive out good money. As a series of environmental problems have recently driven public protests, we believe the local governments may have to take public satisfaction into account when deciding policies, making them more likely to select environmental protection firms which are capable of providing top-quality services. This in turn could put the environmental protection industry on a positive development path.

WtE market still has significant room for growth Although the contract bidding peak for waste-to-energy (WtE) projects is nearly over, the construction peak should continue until 2016 or 2017, with the operational development cycle even longer. In addition, the WtE market is becoming more concentrated, but remains relatively dispersed, with the top 12 firms accounting for 74% of the total China market share in 2013 – the largest US WtE operator, Covanta, has a US market share of over 50%. We estimate that once new WtE capacity reaches a level of relative saturation, industry participants will increasingly expand into new markets through M&A, similar to the current situation in the wastewater treatment market. We estimate operational revenue in 2015E and 2020E of Rmb19.7bn and Rmb33.2bn, respectively, for a 2010-2020E CAGR of 20%.

HWT market begins healthy expansion In June 2013, China’s Supreme People’s Court and Supreme People’s Procuratorate jointly released Interpretations on Certain Issues Concerning the Application of Law in the Handling of Criminal Cases of Environmental Pollution. The first article regulated illegal emission, dumping or treatment of hazardous waste over three tons, and determined that serious environmental pollution would face criminal penalties; article seven states that knowingly providing a party with or entrusting a party to collect, store, utilize or treat hazardous waste with no operating license or outside the scope of their license, is an act of serious environmental pollution, and the perpetrator may be charged jointly under the environmental pollution law. Since these Interpretations were promulgated, each region has dealt with and announced a series of cases of illegal treatment and dumping of hazardous waste. We believe tightening regulations would strongly promote the growth of the hazardous waste treatment (HWT) industry. We estimate the HWT market would attain operational revenue of Rmb12.5bn and Rmb26.1bn in 2015E and 2020E, respectively, for a 2012-2020E CAGR of 22%.

China’s solid waste market has high growth potential vs. overseas peers According to MEP and EPA, 2000-2012 municipal solid waste (MSW) production CAGR in China and the US were 3.1% and 0.2%, and 2001-2011 hazardous waste production CAGR for the two countries were 13.8% and -1.7%, respectively. China’s environmental protection industry is still relatively concentrated on project construction and equipment manufacture, while environmental services accounted for 54% of the US market in 2012. In addition, China’s solid waste management is concentrated on end-level treatment, while solid waste collection and transport made up over 60% of the US market in 2012. At the same time, China’s environmental protection industry has relatively low concentration, leaving more potential for consolidation, in our view. On the financial side, China’s waste companies have relatively high ROEs and low debt ratios as China’s waste market is expanding swiftly and provides more business opportunities, while US and European companies’ utilities businesses are relatively stable and usually have higher leverages, in our view.

Goldman Sachs Global Investment Research 4 August 5, 2014 China: Environmental Services: Waste Management

Initiate Buy on Dongjiang H (add to CL), Everbright Int’l and GrandBlue Dongjiang Environmental H (12-m PEG-based TP of HK$35.97; 24% upside): Dongjiang is the leading listed domestic HWT company in terms of capacity. We expect its treatment capacity to surge to 1.67mn tons from 415,000 tons over the next three years as its Yuebei and Jiangmeng facilities come online. According to the company, it will continue to expand its treatment capabilities through M&A. Dongjiang’s H-share is trading at a 26% discount to its A-share, and will likely benefit from the Shanghai-Hong Kong Stock Connect scheme.

China Everbright Int’l (12-m PEG-based TP of HK$13.19; 27% upside): With backing from its parent company (China Everbright Group), strong operational track record and low funding costs, we believe the company would sustain its leadership position in the WtE industry. At the same time, the firm is expanding into HWT, along with water treatment, with its proposed HanKore Environment acquisition as its platform. We estimate the firm’s 2014E-2016E net profit CAGR could reach 33% as new WtE plants come online.

GrandBlue Environment (12-m PEG-based TP of Rmb14.68; 22% upside): We believe GrandBlue’s proposed purchase of C&G China’s 11,350 tons/day MSW generation business in January 2014 could allow the firm to expand its environmental business nationwide from Foshan. GrandBlue has also proposed to raise its equity stake in Nanhai Gas to 70% from 40%; phase I of Nanhai Green Power redevelopment is scheduled for completion in mid 2015, potentially increasing its WtE capacity to 3,000 tons/day from 1,500 currently.

We also initiate Dongjiang A and Sound Environmental at Neutral. For our broader environmental services coverage, we update: 1) EPS estimates/target price for Beijing OriginWater given its earnings preannouncement; and 2) target price for Tianjin Capital (A/H) as we switch our primary valuation methodology to P/B-ROE from EV/EBITDA.

Exhibit 8: We use PEG to value our China environmental services coverage (except for TCEPC, which we value using P/B-ROE); Dongjiang-H is our top pick with 24% upside

2014E EPS CAGR Premium/ Target Target Target Potential Stock Price Rating P/E (2014E-2016E) Discount PEG P/E Price Upside DongJiang-H HKD 29.05 32.1x 40.0% 0% 1.00x 40.0x HKD 35.97 24% Buy* Dongjiang-A CNY 30.08 41.8x 40.1% 0% 1.00x 40.1x CNY 28.85 -4% Neutral Everbright HKD 10.42 26.3x 33.3% 0% 1.00x 33.3x HKD 13.19 27% Buy Grandblue CNY 12.08 26.9x 25.2% 29% 1.29x 32.6x CNY 14.68 22% Buy Sound Environment CNY 21.84 25.0x 27.6% 0% 1.00x 27.6x CNY 24.13 10% Neutral

OriginWater CNY 27.00 25.1x 31.8% 0% 1.00x 31.8x CNY 34.19 27% Buy WBD CNY 28.07 37.0x 38.1% 11% 1.11x 42.4x CNY 32.10 14% Neutral BEWG HKD 5.05 25.9x 27.4% 0% 1.00x 27.4x HKD 5.35 6% Neutral Tianjin MOTIMO CNY 19.31 42.4x 46.8% 0% 1.00x 46.8x CNY 21.32 10% Neutral

2014E ROE Target Target 2014E Target Potential Stock Price Rating P/E (2014E-2016E) PB/ROE PB BPS Price Upside TCEPC (H) HKD 5.31 24.1x 6.2% 24.4x 1.5x 3.65 HKD 5.57 5% Neutral TCEPC (A) CNY 8.05 46.0x 6.2% 37.1x 2.3x 2.88 CNY 6.67 -17% Sell *denotes stock is on our Conviction List. All target prices are on a 12-month basis. Prices as of August 1, 2014 close.

Source: FactSet, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 5 August 5, 2014 China: Environmental Services: Waste Management

Waste mgmt: Public pressure drives positive industry development

Rise in public pressure could drive industry towards positive devt In the past, the environmental industry had a fundamental problem: the beneficiaries and policy-makers were not the same. The main issue facing the environmental industry then, including the municipal solid waste (MSW) management industry, was: the beneficiaries of environmental management were the public at large, while the ones setting policies for environmental management were the local governments. In the past, this has meant that when a local government selected a builder or operator for an environmental project, the decision was often made, not based on technical and management capabilities, but on personal connections or low cost. The result of this role dislocation was that environmental companies engaged in price wars, leaving them incapable of, and uninterested in, improving technology and management. At the same time, firms were often only able to develop business in regions where they had close connections, meaning very few were able to transform into large-scale national firms. Significant rise in public pressure may push governments and businesses to interact effectively with the public, promoting a positive direction for environmental industry development. As economic development progresses and interactive internet tools like Weibo and WeChat become more widespread, the public’s focus on environment and health has reached unprecedented levels, and it has become far more convenient to obtain updated environmental information. Environmental problems have become one of the most important drivers of public protests in China, including protests against a planned waste incineration generator in Hangzhou in May 2014. This type of public protests occur frequently, forcing local governments to ensure the public is satisfied when implementing environmental projects, and requiring them to take into account the actual effectiveness of environmental management. This has united the decision makers and beneficiaries of environmental protection. In fact, environmental improvement in developed countries went through a similar process: in the early stages of environmental problems, polluting industries avoid responsibility and governments work together with businesses, ignoring the benefit of the public. Only when public environmental consciousness is awakened, and pressure put on governments and businesses, do they earnestly focus on environmental problems, driving positive development of the environmental protection industry.

Exhibit 9: In the past, when the public lacked standing, Exhibit 10: Public pressure could drive environmental bad money chased out the good industry towards positive development

Environmental services were Public protests against passively accepted by the low‐quality ： Local Government： Local Government public while consumers and environmental service Decision Maker Decision Maker policy makers did not have providers may induce the common interests, leading government to select Select Service to "bad money chasing out Select Service high‐quality environmental service Provider good money" Provider providers

Provide Service Provide Service Environmental Environmental Public： Public：： Company： Company Passive Consumer Active Consumer Service Provider Service Provider

Source: Gao Hua Securities Research. Source: Gao Hua Securities Research.

Goldman Sachs Global Investment Research 6 August 5, 2014 China: Environmental Services: Waste Management

Based on the EKC, China is about to enter a phase of large-scale environmental management. According to the Environmental Kuznets Curve (EKC), in the early stages of development, environmental quality worsens as per capita income increases; however, when per capita income passes a certain level, environmental quality begins to improve in line with income. Of course, this environmental improvement is not an automatic result of higher incomes, but requires effort on every front. In 2013, China’s per capita income was Rmb41,805, or approximately US$6,798, according to the National Bureau of Statistics. As the government focuses more heavily on environmental protection, and the environmental consciousness of the public is awakened, we estimate China would begin to expand the scale of its investment in environmental management, gradually entering the phase of improving environmental quality.

Exhibit 11: The Environmental Kuznets Curve Exhibit 12: We estimate China is nearing the turning point for some pollutants

Pollutants Turning point(US$) Environmental COD 7853 Degradation BOD 7623

SO2 8691-18039

NOX 12041-14810

Arsenic 4900

Turning point Per Capita income

Source: The Environmental Kuznets Curve: a Survey of the Literature by Source: The Environmental Curve by James Van Alstine and Eric Neumayer. Simone Borghesi.

Development of China’s waste management industry: rapid increase in innocuous treatment, WtE continues to grow Domestic garbage management methods. Domestic garbage management methods basically include landfills, composting and incineration. Landfills refer to prepared locations in which garbage is buried, taking necessary measures to prevent groundwater and air pollution—this is the most widely used waste disposal method in China. Composting involves using fermentation to decompose the organic components of collected waste, creating harmless compost; as the market for compost in China is fundamentally weak, composting is not widely practiced. Incineration involves burning waste in a high-temperature oven, creating thermal energy which is used for heating and power generation—this field has developed rapidly in recent years (Exhibits 15-16).

Goldman Sachs Global Investment Research 7 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 13: Comparison of key waste management methods

Hygiene Landfilled Compost Incinerated Cost Low cost Relatively low cost Highest cost, Rmb400k-500k/day Dioxin is the biggest threat, while Able to control if Stink pollution it can be controlled with current operated standardly Pollution technology Small, reduced by 80%-90% after Large Relatively small Area incineration Cannot be used for grain according to Revenue from electric No MOA, need to sell compost products power; recycle of metal Product sales

Source: Gao Hua Securities Research.

Evolution of China’s MSW production volume and management methods. China’s urban waste management volume (excluding those of county-level cities) rose from 108mn tons in 1996 to 173mn tons in 2013, representing a CAGR of 2.8%. The harmless treatment ratio increased from 51% in 2003 to 89% in 2013.

Exhibit 14: China’s urban garbage disposal volume has steadily increased, with harmless treatment rates increasing rapidly

Municipal Waste Disposal Capacity (mt) Innocuous Treatment Rate(%)

200 100% 171 173 180 164 89% 90% 155 156 152 154 157 158 85% 160 149 148 80% 80% 135 137 78% 140 71% 70% 113 114 118 67% 120 108 110 62% 60% 100 51%52%52%52% 50% 80 40% 60 30% 40 20% 20 10% 0 0%

Source: CEIC, Ministry of Housing and Urban Development, Ministry of Environmental Protection.

Waste incineration power generation is growing in absolute scale and as a percentage of waste management. From 2005-2012, China’s urban WtE capacity grew from 25,460 tons/day to 122,649 tons/day, representing a CAGR of 25%. During the same period, WtE rose from 9.8% of harmless waste management to 24.7%.

Goldman Sachs Global Investment Research 8 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 15: China’s WtE is growing rapidly Exhibit 16: WtE is growing steadily as a percentage of waste management

China Municipal WtE Capacity (t/d) Sanitary Landfill Incineration Others

140,000 100% 122,649 90% 9.8% 14.5% 15.2% 15.2% 18.0% 120,000 18.8% 19.9% 24.7% 80% 100,000 70% 80,000 CAGR: 25% 60% 50% 60,000 40% 85.2% 81.4% 80.9% 81.7% 79.2% 77.9% 76.9% 72.6% 40,000 30% 25,460 20% 20,000 10% 0 0% 2005 2012 2005 2006 2007 2008 2009 2010 2011 2012

Source: China Statistical Yearbook on the Environment, 2013. Source: China Statistical Yearbook on the Environment, 2013.

Investment in domestic waste management is expected to reach Rmb263.6bn during the 12th Five-year Plan. In the State Council’s Infrastructure Construction Plan for Treatment, Recycling and Reuse of Urban Waste During the 12th Five-year Plan, the planned investment in infrastructure construction for urban waste treatment is Rmb263.6bn. According to data from www.solidwaste.com.cn, there were at least 201 new domestic waste treatment projects built in 2012, with a total domestic waste treatment market investment of c.Rmb42.6bn; waste incineration projects accounted for 84% of the total investment.

Exhibit 17: Planned waste management investment in China during the 12th Five-year Plan

Investment Scale (bn RMB)

Kitchen Waste, 10.9, Supervising System, 4% 2.5, 1% Waste Classification, 21, 8%

Existing Waste Treatment, 21.1, 8%

Innocuous Treatment Facility, 173, Waste Collection & 66% Transfer, 35.1, 13%

Source: Infrastructure Construction Plan for Treatment, Recycling and Reuse of Urban Waste During the 12th Five-year Plan.

Goldman Sachs Global Investment Research 9 August 5, 2014 China: Environmental Services: Waste Management

New WtE contracts are near their peak, but operations have significant room to develop—we estimate 2010-2020E CAGR of 20%. According to the 12th Five-year Plan, WtE plants in operation (including county cities) would reach 307,155 tons/day by end 2015, up from 89,265 tons/day in 2010. However, according to www.solidwaste.com.cn data, total WtE capacity by end May 2014 was just 166,000 tons/day, making the aforesaid 2015 target difficult to reach; we estimate a total of 240,000 tons/day by end 2015E. We believe WtE plant investment could reach Rmb67.7bn during the 12th Five-year Plan, with total operational revenue reaching Rmb19.7bn in 2015E. During the 13th Five-year Plan, we estimate WtE investment could reach Rmb77.7bn, with total operational revenue growing to Rmb33.2bn in 2020E, implying a 2010-2020E CAGR of 20%.

Exhibit 18: Our WtE investment estimates Exhibit 19: Our WtE operating revenue estimates

Construction Investment 11th Five Year 12th Five Year 13th Five Year Operational Forecast 2010 2015E 2020E New Capacity (ton/day) 63,550 150,375 155,354 Annual Treatment volume (mn ton) 23.17 75.83 118.61 Unit Investment (mn RMB/ton) 0.4 0.45 0.5 Revenue Per Ton (RMB/ton) 240 260 280 Total Investment (RMB mn) 25,420 67,669 77,677 Total Operational Revenue (RMB mn) 5,560 19,717 33,210 Total Investment (USD mn) $3,838 $11,003 $12,630 Total Operational Revenue (USD mn) $840 $3,206 $5,400 CAGR(2010‐2020) 20%

Source: China Statistical Yearbook on the Environment, 2012, Gao Hua Source: China Statistical Yearbook on the Environment, 2012, Gao Hua Securities Research. Securities Research.

China’s WtE market has begun to consolidate, but it is still relatively dispersed compared to other countries. Domestic waste management has become a national market, with the main areas of competition being capital strength, operational experience, and connections with local governments. So far, the 12 largest WtE firms in China have signed contracts on projects with a total scale of 232,960 tons/day, amassing a combined market share of 74%.

Exhibit 20: Current contract capacity of major Chinese Exhibit 21: Market share by company (as of 1H14) WtE operators

Latest Contract Capacity (t/d) Market Share 50,000 43,000 45,000 40,000 32,100 Hangzhou 35,000 Jinjiang , 27,500 30,000 13.7% 25,000 21,050 19,700 others, 26.3% 20,000 17,85017,200 12,250 Everbright, 10.2% 15,000 11,70011,35010,210 8,300 10,000 Jiangsu Tianying, 2.6% CECEP, 8.7% 5,000 0 Weiming Group, 3.2% C&G China, 3.6% Shanghai Sound Environment, 6.7% Environmental, 3.7% Dynagreen, 6.3% Shenzhen Chongqing Shengyun, 5.7% Energy, Sanfeng, 5.5% 3.9%

Source: Various company websites. Source: Various company websites, www.solidwaste.com.cn.

Goldman Sachs Global Investment Research 10 August 5, 2014 China: Environmental Services: Waste Management

Examination of WtE market issues Why has WtE developed so rapidly in recent years? It is related to on-grid tariffs. In March 2012, the NDRC released an Announcement on Improving Waste Incineration Power Pricing Policies, setting a national on-grid tariff of Rmb0.65/kWh. To prevent companies from adding other materials like coal to profit from government subsidies, a standard rate per ton of waste incinerated was set at 280kWh. On-grid tariffs are higher than the local desulfurized coal-fired plants, and the subsidies will be undertaken by two parties: the local provincial grid is responsible for Rmb0.1/kWh, payable monthly; the rest comes from a nationwide renewable energy fee, paid quarterly by the Ministry of Finance (MoF). Looking at the eastern province of Shandong, for example, the local standard thermal energy tariff is Rmb0.45/kWh, equivalent to Rmb56/t of waste incinerated paid by the province and the MoF. This has become a key driver of WtE development in China. Furthermore, looking at major developed countries around the world, MSW power generation as a percentage of waste treatment appears closely correlated with local on-grid tariffs.

Exhibit 22: Waste incineration as a percentage of total treatment is closely correlated with on-grid tariffs (2013) Tariff and WtE ratio

Tariff for the power from MSW（$/KWH) $/kwh WtE ratio in the MSW treatment（RH） 0.25 80% 0.22 0.20 74.0% 70% 0.20 60%

0.15 50% 0.11 40% 0.10 32.3% 30% 0.06 20% 0.05 24.7% 13.6% 10% 0.00 0% US China Germany Japan

Source: Ministry of Environmental Protection, EU Parliament.

Why should China develop MSW power generation? Land resources are insufficient for landfills. As shown in Exhibit 23, waste incineration in major countries and regions is closely correlated with population density. China’s eastern provinces have very dense populations, and lack the required space for sanitary landfills; therefore, waste incineration power generation seems to be an inevitable choice.

Goldman Sachs Global Investment Research 11 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 23: Waste incineration as a percentage of waste treatment is closely correlated to population density in a country (or region)

person / % Municipal Waste Incinerated (%) - LHS sq km 80 Population Density - RHS 700

70 600 60 500 50 400 40 300 30 200 20

10 100

0 0 Taiwan Japan UK Germany France US

Source: China Statistical Yearbook on the Environment, 2013.

WtE plants are on the path to meeting EU standards: On May 30, 2014, China’s Ministry of Environmental Protection released Pollution Control Standards for Domestic Waste Incineration (GB18485-2014), which were set to go into effect on July 1, 2014, replacing the prior standards issued in 2001. These standards greatly tightened limits on key pollutants, gradually approaching the EU 2000 standards—in particular, dioxin, a major pollutant from incineration, is limited at the same level as the EU 2000 standards: 0.1ng TEQ/m3. In 2012, the Ministry of Housing and Urban-Rural Development conducted a one-time survey of waste incineration plants in China, and found that of 123 lines, 90.5% had dioxin levels below 0.1ng TEQ/m3.

Exhibit 24: New WtE emission standards are approaching EU levels

Daily Avg or Determination of Avg China 2001 Standard China 2014 Standard Euro 2000 Standard Note Particles (mg/m3) 80 (Determination of Avg)2010 NOx(mg/m3) 400 (hourly Avg) 250 200 SO2(mg/m3) 260 (hourly Avg) 80 50 HCl(mg/m3) 75 (hourly Avg) 50 10 Hg(mg/m3) 0.2 0.05 0.05 Determination of Avg Ce+Tl(mg/m3)1 0.1 0.1 0.05 Determination of Avg Sb+As+Pb+Cr+CO+Cu+Mn+Ni(mg/m3) 1.6 1 0.5 Determination of Avg Dioxin (ng TEQ/m3） 1 0.1 0.1 Determination of Avg CO(mg/m3) 150 (hourly average) 80 50

Note 1: 2001 Standard only includes Ce Note 2: 2001 Standard only includes Pb

Source: Ministry of Environmental Protection, EU Parliament.

Goldman Sachs Global Investment Research 12 August 5, 2014 China: Environmental Services: Waste Management

What impact have public protests had on WtE plants? They have benefited industry leaders. On May 10, 2014, Xinhua reported that the planned WtE plant in Hangzhou had sparked protests among the local population; on December 17, 2013, CCTV reported that illegal waste incineration plants in Wuhan have had a significant negative impact on the surrounding environment. China’s WtE projects have sparked protests in some areas because of both overly lax pollution control standards for incinerators and past poor management of these power plants, causing a lack of public trust that these facilities can meet pollution standards. We believe the solution to this problem is multifactorial: 1) tightening emission standards for WtE plants—new, stricter standards have already been announced; 2) improve transparency of environmental information, including seeking public comment during the construction policy-making stage. In addition, when the project is in operation, pollution emission information should be available online and through other channels to ease public concerns; 3) implement ecological subsidies, providing affected people with appropriate compensation, or building facilities to benefit the surrounding communities; and 4) select WtE operators with a strong operational track record and reputation, rather than just seeking the lowest price.

Kitchen waste management Evolution of the kitchen waste management market. According to Goootech.com, kitchen waste in China has grown to more than 30mn tonnes in 2012, but insufficient facilities and production policies, as well as unclear business models have caused kitchen waste management rates to remain low, in our view, driving issues like that of the “gutter oil”. In 2010, the NDRC began recycling and safe disposal pilot projects in cities, with 66 pilot cities covered in the first three batches. On April 28, 2014, the NDRC released Recommendations Regarding the Fourth Group of Kitchen Waste Recycling and Safe Disposal Pilot Cities, promoting further development of the national kitchen waste management market. According to statistics from www.cenews.com.cn, as of March 2014, China had 46 kitchen waste treatment facilities in operation, with a total capacity of 6,378 tons/day and an average capacity of 138.65 tons/day. Of these, 40 have capacity under 200 tons/day.

Exhibit 25: Kitchen waste treatment policies over the past years

Time Policy NDRC, MOHURD and MOC held Nationwide City Kitchen Waste Recycling Conference in Ningbo; kitchen waste Dec 2008 processing is on the agenda National standard‐Kitchen Waste Recycling Technology Requirement‐ is ready for application; industry standard‐Kitchen 2007‐2009 Waste Processing Technic Standard‐ is ready for review; national standard‐Kitchen Waste Oil Recycling and Processing Technic Standard‐ is launched and drafted Jul 2010 State Council published Notes on Improving Regulation on Gutter Oil and Kitchen Waste State Council approved 16 ministries' Note on Improving City Living Waste Processing , and targets to raise the sorting Apr 2011 rate of kitchen waste to 50% by 2015

May 2010‐Jul 2011 NDRC and MOHURD published 4 documents to launch kitchen waste recycling and innocuous treatment trial in 33 cities

Nov 2012 MOF and NDRC announced the second group of 16 cities to join the trial

12th Five‐year Plan on Nationwide City/county Living Waste Innocuous Treatment Construction is published; targets to Apr 2012 increase the number of kitchen waste processing plants to 242 in 2015, reaching daily capacity of 30k tons

MOF and NDRC published Recycling Economics Development Fund Managing Plan (draft); plans to use special account Jul 2012 from central government to support 7 types of projects, in which waste recycling and processing is listed

Jul 2013 NDRC announced the thrid group of 17 cities to join the trial

May 2014 NDRC announced the fourth group of 17 cities to join the trial

Source: NDRC, MOHURD.

Goldman Sachs Global Investment Research 13 August 5, 2014 China: Environmental Services: Waste Management

Kitchen waste treatment technology is still in exploratory phase. China’s current kitchen waste treatment technology can be divided into three types: feed processing, composting and anaerobic digestion to produce methane. Feed processing of kitchen waste should have a high degree of recycling, but homogeneity problems mean that the state has not promoted this method. In terms of composting, the high oil and fat content of China’s food waste can create anaerobic environments, leading to less than ideal composting results, while the high salt content can damage the soil. Anaerobic digestion producing methane is a mature technology in Europe, but the complex make-up, high oil and fat content, high salt content and high nutrient content of Chinese food waste mean that hydrolysis during pure anaerobic digestion leads to high acid content, which is not an ideal environment for methanogens; in addition, the carbon-nitrogen ratio is not balanced, with nitrogen levels too high. Therefore, some locales use integrated anaerobic digestion technology to solve these problems. According to www.solidwaste.com.cn, since late 2013, 53 of the 77 food waste processing facilities have used anaerobic treatment methods.

Estimates of food waste market scale. According to Infrastructure Construction Plan for Treatment, Recycling and Reuse of Urban Waste During the 12th Five-year Plan, by 2015, food waste collection and treatment would have begun in 50% of cities. During the 12th Five-year Plan, investment in dedicated kitchen waste projects would total Rmb10.9bn, and treatment capacity is planned to reach 30,000 tons/day by the end of 2015. According to Goootech’s 2014 report on food waste in China, food waste production in China would reach 33.67mn tons in 2015, translating into a planned treatment rate 32%.

Competitive structure of the food waste market. Both the technology behind kitchen waste treatment and the market are in their early stages, with potential for rapid growth; however, in the short term, we believe market potential is relatively limited. Kitchen waste treatment facilities are mainly government-operated, and the construction model depends mainly on government investment, engineering contracts, and franchising. According to China Environmental News, of the current 46 operating facilities, 15 use a franchising business model.

Exhibit 26: Total current treatment capacity of food Exhibit 27: Total investment costs of food waste facilities waste facilities from 2010 to date

Investment cost/unit for kitchen waste processing plant Rmb10k/ton 80 70.46 70 10-100t, 1-10t, 17.39% 60 30.43% 53.58 >300t, 6.52% 50

40 35.50 200-300t, 29.08 6.52% 30 26.00

20 100-200t, 39.13% 10 0 1-10t 10-100t 100-200t 200-300t >300t

Source: China Environmental News. Source: China Environmental News.

Goldman Sachs Global Investment Research 14 August 5, 2014 China: Environmental Services: Waste Management

Soil remediation market: Ideally rich, but thin in reality Results of China’s soil survey suggest soil pollution is severe in the country. According to the national soil pollution survey (conducted in 2005-2013) results jointly issued by the Ministry of Environmental Protection and the Ministry of Land and Resources in April 2014, 16.1% of China’s soil was polluted above acceptable standards, including 19.4% of arable land.

Exhibit 28: Degree of soil pollution in China for various types of land

Light Mild Medium Heavy Total Overall 11.2% 2.3% 1.5% 1.1% 16.1% Farmland 13.7% 2.8% 1.8% 1.1% 19.4% Forest 5.9% 1.6% 1.2% 1.3% 10.0% Grassland 7.6% 1.2% 0.9% 0.7% 10.4% Unused Land 8.4% 1.1% 0.9% 1.0% 11.4%

Source: MEP/MLR Report on the National Soil Pollution Survey, 2005-2013.

According to the representative block land survey, over 30% of land used by heavily polluting industries, industrial waste sites and mining areas was polluted.

Exhibit 29: Representative blocks and surrounding soil pollution rates

Investigated Investigated % over‐limit lands Points points Main pollutant Heavy polluted used for 690 5,846 36.3% enterprises Zinc, mercury, lead, chromium, arsenic and Industrial wasteland 81 775 34.9% PAHs Metallurgical plant: cadmium, lead, copper, Industrial area 146 2,523 29.4% arsenic and zinc; chemical plant: PAHs Mainly inorganic pollution; organic pollution is Solid waste processing area 188 1,351 21.3% severe near incineration plant and landfilling plant Oil‐producing region 13 494 23.6% Petroleum hydrocarbon and PAHs Mainly cadmium, lead, arsenic and PAHs; Mining region 70 1,672 33.4% nonferrous metal plant: cadmium, lead, arsenic Wastewater irrigated region 55 1,378 26.4% Cadmium, arsenic and PAHs Near artery 267 1,578 20.3% lead, zinc, arsenic and PAHs

Source: MEP/MLR Report on the National Soil Pollution Survey, 2005-2013.

Groundwater pollution is widespread in China. According to the Ministry of Land and Resources’ 2013 report, around 60% of groundwater surveyed in China exceeded pollutant standards, with soil contamination a main cause of groundwater pollution.

Goldman Sachs Global Investment Research 15 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 30: Almost 60% of groundwater surveyed was polluted in 2013

2013 Underground Water Quality

Worse Excellent 16% 10%

Good 27%

Bad 44% Fair 3%

Source: MLR 2013 China Land Resource Report.

Ministry of Environmental Protection has issued soil remediation policies. In February 2014, the Ministry of Environmental Protection released five sets of standards for polluted sites: Technological Guidance for Site Soil Remediation, Technical Guidance for Environmental Site Surveys, Technical Guidance for Environmental Site Supervision, Technical Guidance for Polluted Site Risk Evaluation and Polluted Site Terminology, which went into effect on July 1, 2014. In 2014, the Ministry also released Guidelines on Technology Application in Contaminated Sites Remediation (Draft for Comment), which is scheduled to go into effect before the end of the year. Soil remediation market still lacks mature business models, particularly arable soil mitigation. Although the companies involved generally have high hopes for the soil remediation market, most are currently directed toward the more mature urban property developer business model: once polluted sites are reclaimed, they become government land reserves and are then sold to property developers for residential or commercial development. However, there continue to be limited feasible business models for contaminated farmland.

Goldman Sachs Global Investment Research 16 August 5, 2014 China: Environmental Services: Waste Management

Strict regulatory supervision bodes well for hazardous waste sector

Industrial waste production is growing rapidly Industrial waste production is growing yearly. In 2012, China’s industrial solid waste volume was c.3.3bn tons, representing a 2001-2012 CAGR of 12.7%, according to the China Statistical Yearbook on the Environment, 2013. Steel, power generation, non-ferrous metals, coal and chemicals are the major producers of industrial solid waste. In 2012, these five industries produced c.2.9bn tons of industrial solid waste, or 92% of the national total.

Exhibit 31: China’s industrial solid waste production is Exhibit 32: Industrial solid waste production by sector in growing year by year 2012

National Industrial Solid Waste - LHS mn tons Top 10 industries in producing solid waste (mn ton) yoy growth - RHS 1,200 3,500 40.0% 1,000 35.0% 3,000 800 30.0% 2,500 600 25.0% 2,000 400 20.0% 1,500 200 15.0% 0 1,000 10.0% 500 5.0% 0 0.0%

Source: China Statistical Yearbook on the Environment, 2013. Source: China Statistical Yearbook on the Environment, 2013.

Hazardous waste market analysis Industrial hazardous waste production is also growing yearly. China’s hazardous waste production grew from 9.52mn tons in 2001 to 34.65mn tons in 2012 (12.5% CAGR).

Exhibit 33: Industrial hazardous waste production Exhibit 34: Hazardous waste generation by province (2012)

40 140% HW Utilized HW Disposed Stock of HW Industrial Hazardous Waste (mt) ‐ LHS 34.31 34.65 mt 35 120% 9 yoy growth ‐ RHS 100% 8 30 7 80% 25 6 60% 5 20 15.87 40% 4 14.30 15 13.57 3 11.70 11.62 10.84 10.79 20% 9.52 10.01 9.95 2 10 0% 1 0 5 ‐20% Jilin Tibet Hebei Hubei Anhui Fujian Henan 0 ‐40% Gansu Hunan Tianjin Shanxi Beijing Hainan Jiangxi Yunnan Ningxia Qinghai Jiangsu Sichuan Shaanxi Xinjiang Guizhou Guangxi Zhejiang Liaoning

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Shanghai Shandong Chongqing Guangdong Heilongjiang Inner Mongolia Inner

Source: China Statistical Yearbook on the Environment, 2013. Source: China Statistical Yearbook on the Environment, 2013.

Goldman Sachs Global Investment Research 17 August 5, 2014 China: Environmental Services: Waste Management

Hazardous waste production in China by province. In 2012, the provinces of Shandong, Xinjiang, Hunan, Jiangsu, Yunnan, Guangdong, Sichuan and Zhejiang produced the greatest amount of hazardous waste. Of these, the hazardous waste in Shandong, Jiangsu, Guangdong and Zhejiang mainly came from industrial production, while the hazardous waste in Xinjiang, Hunan, Yunnan and Sichuan mainly came from mining and processing.

China’s hazardous waste industry. In 2012, the top ten hazardous waste producing industries contributed a total volume of 31.87mn tons, 92% of the national total—34.65mn tons. Hazardous waste produced by the chemical processing, computer and electronics equipment manufacturing, non-ferrous metal refining, and petrochemical processing industries was relatively high in volume and difficult to treat.

Exhibit 35: China’s top ten hazardous waste-producing industries by volume

2012 Hazardous Waste by industry (mn ton) 8 7.15 7.12 7 6.62

5 4.54

2 1.61 1.47 1.39 0.73 0.73 1 0.51

Source: China Statistical Yearbook on the Environment, 2013.

China has relatively low hazardous waste central treatment rates, and illegal disposal is commonplace. Comprehensive utilization remains the main waste management technique for hazardous waste in China, accounting for 57.8% in 2012. Treatment concentrated at central treatment facilities was 7.16mn tons in 2012 (20.7%). However, oversight of hazardous waste used to be fairly lax, and illegal treatment and disposal were not uncommon. For instance, according to data from the MEP’s 2007 Statistical Yearbook on the Environment, hazardous waste production in 2007 was 10.79mn tons; however, in 2010, the Ministry announced that its 2007 environmental survey showed actual hazardous waste production that year of 45.74mn tons. In 2011, the Ministry revised its survey and statistical indicator methods, leading to a jump in official hazardous waste production from 15.87mn tons in 2010 to 34.31mn tons in 2011. According to the central government’s plans to combat hazardous waste during the 12th Five-year Plan, a key goal is to determine the actual hazardous waste volume by 2015.

Goldman Sachs Global Investment Research 18 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 36: Industrial hazardous waste utilization and Exhibit 37: Concentrated treatment of hazardous waste treatment

40 mn tons Incinerated Landfilled Utilized Processed % processed Hazardous Waste Storage (mt) 35 2001 0.10 0.04 0.07 0.21 2.2% Hazardous Waste Disposal (mt) 8.47 2002 0.15 0.05 0.18 0.37 3.7% 30 8.24 Hazardous Waste Integrated Utilization (mt) 2003 0.33 0.09 0.22 0.64 5.5% 25 2004 0.27 0.14 0.18 0.59 6.0% 6.98 9.17 2005 0.32 0.20 0.21 0.74 6.3% 20 2006 0.51 0.35 0.34 1.22 11.3% 15 1.66 2007 0.78 0.29 0.91 2.05 19.0% 2.19 1.96 5.13 2008 0.98 0.17 1.23 2.53 18.6% 10 4.23 3.37 2.67 1.54 3.89 4.28 20.05 3.07 3.83 3.43 3.46 17.73 2009 1.56 0.34 1.55 3.53 24.7% 3.75 3.39 2.89 5 2.29 2.42 2.75 9.77 2010 1.34 0.42 1.50 3.31 20.9% 6.50 8.19 8.31 4.42 3.92 4.27 4.03 4.96 5.66 2011 1.34 1.22 3.33 5.93 17.3% 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012 1.29 1.11 3.75 7.16 20.7%

Source: China Statistical Yearbook on the Environment, 2013. Source: China Statistical Yearbook on the Environment, 2013.

China’s hazardous waste oversight Hazardous waste qualifications can be divided into two types: comprehensive licenses and hazardous waste collection licenses.

Exhibit 38: Two types of hazardous waste license

Certifications Business Operate in all kinds of waste collecting, storing and Comprehensive operating certification processing business Can only operate in collecting waste oil from autorepair Collection operating certification and waste cadmium-nickel batteries

Source: Eurostat.

Hazardous waste licenses are generally granted by the provincial Ministry of Environmental Protection. According to the newest regulations, with the exception of hazardous medical waste (which is administered at the city level) and hazardous waste collection (which is administered at the county level), other hazardous waste operation qualifications are administered by the provincial Ministry of Environmental Protection.

Exhibit 39: Oversight of hazardous waste in China by level

Regulator Regulated Items Note Qualification for incineration of more than 10,000 ton of According to "State Council's hazardous waste per year, or operation license for decision to abolish and release disposal of contents that seriously threat human health project approval rights", in Dec 10, Ministry of Environmental Protection such as PCBs and mercury, or license of integrated 2013, Ministry of Environmental operation for centralized treatment facilities listed in Protection released approval rights national hazardous waste utility construction plan to provincial level Municipal Environmental Bureau Qualification for medical hazardous waste disposal County Environmental Bureau Operation license for hazardous waste collection Provincial Environmental Department Other operation license related to hazardous waste

Source: State Council, Ministry of Environmental Protection.

Goldman Sachs Global Investment Research 19 August 5, 2014 China: Environmental Services: Waste Management

Judicial interpretations by China’s “two supremes” promote expansion of the hazardous waste industry. As an industry heavily dependent on government oversight, hazardous waste laws and regulatory policies are important catalysts for the hazardous waste management industry. In June 2013, China’s Supreme People’s Court and Supreme People’s Procuratorate jointly released Interpretations on Certain Issues Concerning the Application of Law in the Handling of Criminal Cases of Environmental Pollution. The first article regulated illegal emission, dumping or treatment of hazardous waste over three tons, and determined that serious environmental pollution would face criminal penalties; article seven states that knowingly providing a party with or entrusting a party to collect, store, utilize or treat hazardous waste with no operating license or outside the scope of their license, is an act of serious environmental pollution, and the perpetrator may be charged jointly under the environmental pollution law.

Hazardous waste treatment price guide. Looking at the standard hazardous waste fees in Suzhou and Hainan, incineration generally costs more than landfill. In the past, hazardous waste treatment firms have collected lower fees than the government guided rates.

Exhibit 40: Hainan hazardous waste fee standards Exhibit 41: Suzhou hazardous waste fee standards

Hazardous waste processing Fee Hazardous waste processing Fee Medical waste Rmb2.5/day-bed Medical waste Per bed (Rmb/day‐bed) 2 Industrial hazardous waste Rmb/kg In weight (Rmb/kg) 3.6 Incinerated 4 Solidification and landfilling 3.2 Industrial hazardous waste Rmb/kg Materialization and landfilling 3.9 Solidification and landfilling 2 direct landfilling 2 Toxic 70 Toxic 500 Incinerated 2.8 Easy-made poisonous chemicals 80 Materialization 1.3 Special hazardous waste 8

Source: Hainan price bureau. Source: Suzhou price bureau.

Characteristics of the hazardous waste industry 1. Heavily dependent on government regulation. Without strict government oversight, firms that produce hazardous waste have limited incentive to use high- cost, high-effectiveness waste treatment methods.

2. Compared with waste incineration, FAI is not high. In general, a 1,000 tons/day WtE plant requires investment of Rmb400-500mn; a hazardous waste treatment facility generally requires investment of just Rmb100-200mn.

3. Obtaining qualifications is very difficult. If hazardous waste is not treated sufficiently, it can pose a serious danger to the environment and public health— therefore, the government keeps strict control over industry licensing.

4. New project construction cycle is quite long. During site selection for hazardous waste treatment projects, factors such as the surrounding environment, geology and groundwater, must be taken into account; the entire process typically requires approximately two years. Furthermore, obtaining construction permits generally takes approximately one year, as does construction; then, after a pilot operation period, and an application to the Ministry of Environmental Protection, the project can finally receive its full qualifications. All these mean that a complete project requires at least four years.

Goldman Sachs Global Investment Research 20 August 5, 2014 China: Environmental Services: Waste Management

Hazardous waste market estimates Operating costs for China’s hazardous material centralized treatment plants were Rmb5.39bn in 2012. According to the China Statistical Yearbook on the Environment, 2013, there were 722 centralized hazardous waste treatment plants in China in 2012, 78 more than 2011; there were also 236 centralized medical waste treatment facilities, 24 more than 2011. Total hazardous waste treatment capacity was 59,805 tons/day; operating costs were Rmb5.39bn, Rmb580mn more than 2011. Total recycled hazardous waste was 3.752mn tons. Total hazardous waste disposal volume was 3.407mn tons, of which hazardous waste in landfills totaled 1.105mn tons, and 1.291mn tons were incinerated.

Hazardous waste market estimates: Rmb26.1bn by 2020E. We see the market developing rapidly as China significantly tightens hazardous waste treatment oversight, reaching Rmb12.5bn in 2015E and Rmb26.1bn by 2020E, for a 2012-2020E CAGR of 22%.

Exhibit 42: We expect China’s hazardous waste treatment market to see rapid growth

Hazardous Centralized Centralization Unit operation Total Operation Waste Treatment Rate fee Fee (mn ton) (mn ton) % RMB/ton (mn US$) 2005 11.62 0.74 6.3% 971 715 2010 15.87 3.31 20.9% 1,174 3,890 2012 34.65 7.16 20.7% 753 5,394 2015E 50.00 12.50 25.0% 1,000 12,500 2020E 66.91 20.07 30.0% 1,300 26,095

2012-2020E CAGR 8.6% 13.8% 0.0% 21.8%

Source: China Statistical Yearbook on the Environment, 2013, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 21 August 5, 2014 China: Environmental Services: Waste Management

Global comparison: China’s solid waste market in rapid growth phase

China’s solid waste volume remains in stage of rapid growth. As shown in Exhibits 43- 44, MSW and hazardous waste in China are both growing much faster than those in the US.

Exhibit 43: MSW growth comparison, China vs. the US Exhibit 44: Hazardous waste growth comparison, China vs. the US

MSW CAGR(2000‐2012) HW CAGR(2001‐2011) 3.5% 16.0% 3.1% 13.8% 14.0% 3.0% 12.0% 2.5% 10.0% 2.0% 8.0%

1.5% 6.0% 4.0% 1.0% 2.0% 0.5% 0.2% 0.0% US China 0.0% ‐2.0% ‐1.7% US China ‐4.0%

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

China EP market structure as shown in the 2011 industry survey China’s environmental services market remains underdeveloped. According to the 2011 Report on the National Environmental Protection Industry, total industry revenue in 2011 was Rmb3,075.3bn, with environmental services revenue of Rmb170.68bn, merely 5.6% of the total. Even by looking solely at environmental protection in a narrow sense (excluding production of environmental friendly products), that is just 15.9% of the industry total. However, the environmental protection services industry commanded profit margins of 10.8%, the highest of all related sub-sectors.

Exhibit 45: China’s EP market structure Exhibit 46: Profitability of China EP subsectors (2011)

2011 Revenue of China Environmental Sub Sector Profit Margin Environment （） al Protection Market bn RMB Product, 199.7, 6% Environment Environmental Protection Service 10.8% al Protection Service, 170.7, 6% Environmental Protection Product 10.7%

Environmental Friendly Product 9.5% Resource Recycling Environment Product, al Friendly 700.2, 23% Resource Recycling Product 6.8% Product, 2,004.7, 65% 0% 2% 4% 6% 8% 10% 12%

Source: 2011 China environment protection related industry report. Source: 2011 China environment protection related industry report.

Goldman Sachs Global Investment Research 22 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 47: EP products revenue by subsector (2011) Exhibit 48: EP services revenue by subsector (2011)

Revenue of Environmental Protection Products Revenue of Environmental Service (Bn RMB) (bn RMB) Environmental Noise & Eco- Monitor Vibration Restoration & Instrument, Control Eco-Protection 6.2, 3% Product, 4.5, Service, 6.3, 2% Environmental 4% Resource consultancy Recycling Service, 25.7, Equipment, 16% 10.3, 5% Environmental Protection Solid Waste Air Pollution Facility Treatment, Treatment, Operation 18.2, 9% Water 89.4, 45% Environmental Service, 72.2, Pollution Engineer 46% Treatment, Construction 70.7, 36% Service, 53.8, 34%

Source: 2011 China environment protection related industry report. Source: 2011 China environment protection related industry report.

US EP market structure EP services have the biggest share in the US EP market. According to the Department of Commerce, the US EP services market was US$144.5bn in size in 2008, or 54% of the total US EP market.

Exhibit 49: EP services account for over 50% of the US EP Exhibit 50: Water treatment accounts for the biggest market (2008) share in the US EP equipment market (2008)

Environmental Market size(US$ bn) Equipment market(US$ bn) Process & Instruments & Prevention info. Systems, Tech., 1.9, 3% 5.9, 9% Resources, Equipment, 59.2, 22% Waste Mgmt Water 65.7, 24% Equipment, Equipment 11.4, 17% & Chemicals, Services, Air Pollution 28.5, 43% 144.5, 54% Control, 18, 28%

Source: Department of Commerce. Source: Department of Commerce.

Solid waste is the biggest component of the EP services sector in the US. General solid waste and hazardous waste management accounted for 37% and 6% of the EP services sector, respectively, in 2012.

Goldman Sachs Global Investment Research 23 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 51: Solid waste accounts for the biggest share in Exhibit 52: Water utilities account for the biggest share in EP services (2012) resource recycling (2012)

Services Market(US$ bn) Resources(US$ bn) Remediation, Analytical 12.5, 9% Services, 1.9, 1%

Clean Consulting& Water Engineering, Energy, 27.1, 19% Solid Waste 21.5, 24% Utilities, Management, 39.2, 44% 53.1, 37% Resources Water Recovery, Treatment 28.5, 32% Works, 40.7, 28% Hazardous Waste Mgmt, 9.2, 6%

Source: Department of Commerce. Source: Department of Commerce.

Overseas MSW treatment markets: waste collection and transport are dominant; great disparity in final disposal methods Landfills cost less, incineration costs more. The World Energy Council has compared the costs of different treatment methods including sanitary landfills, composting and waste-to- energy (WtE) across country groups. Generally speaking, landfill incurs lower costs while WtE incurs higher costs.

Exhibit 53: Waste treatment method comparison across country groups

low income countries lower Mid Inc countries Upper Mid Inc countries High Income countries Income(GNI/capita) <$876 $876‐3465 $3466‐10725 >$10725 Waste generation(ton/capita/yr) 0.22 0.29 0.42 0.78 Collection efficiency(percentage collected) 43% 68% 85% 98% cost of collection and disposal($/t) Collection 20‐50 30‐75 40‐90 85‐250 Sanitarty landfill 10‐30 15‐40 25‐65 40‐100 Open dumping 2‐83‐10 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.

MSW recycling rates in the US still rising. The MSW treatment sector in the US is mostly market oriented. Professional environmental protection services companies are engaged in waste treatment. The public pays waste treatment fees to the relevant municipal agencies on a monthly basis. According to the Environmental Protection Agency, the country produced 251mn tons of MSW in 2012, and 34.5% of it was recycled.

Goldman Sachs Global Investment Research 24 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 54: Per capita MSW volume in the US declined in Exhibit 55: …while MSW recycling rate continued rising recent years… year by year

mt Total living waste Living waste per capita/day lbs mt Total volume of living waste recycling ratio 300 10 90 50% 80 250 8 70 40% 200 60 6 30% 50 150 40 4 20% 100 30 20 10% 50 2 10 0 0 0 0% 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Source: Environmental Protection Agency. Source: Environmental Protection Agency.

Landfill, recycling and WtE are the major treatment methods. Landfill has been declining in percentage year by year, though it remains the key waste disposal channel. WtE has remained largely stable with some declines in recent years, mainly because of the plentiful land resources in the US and the higher costs of incineration versus other methods. Waste recycling has grown more rapidly. In 2012, the country reused 65mn tons of waste, composted 21mn tons and incinerated 29mn tons (12% of total household waste volume). Its landfill rate also dropped from 89% in 1980 to 54% in 2012.

Exhibit 56: Lower share of landfill and rising share of Exhibit 57: Household waste treatment volume by recycling over time method in the US (2012)

Recovery for recycling Recovery for composting Combustion with energy recovery Discards to landfill, other disposal mt 3,000 Combustion, 2,500 12% Discarded, 2,000 54% 1,500 Recovery, 1,000 35%

500

0 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Source: Environmental Protection Agency. Source: Environmental Protection Agency.

Incineration is the major household waste treatment method in Japan. Unlike the situation in the US, the government plays a leading role in waste treatment in Japan. Japan has implemented a strict and well-developed waste sorting system. Waste materials are first reduced in volume during pre-treatment, and then further processed. WtE technology, which originated in Europe and the US, has a high penetration rate and has become the major waste treatment method in Japan, due to the country’s limited land area and high population density.

Goldman Sachs Global Investment Research 25 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 58: Over 70% of the solid waste in Japan is incinerated (2012)

Japan waste processing methods Landfilling, 3.4% Others, 5.8%

Compost, 16.9%

Incinerated, 74.0%

Source: China Statistical Yearbook on the Environment, 2013.

In Germany, MSW is mostly recycled, incinerated or composted. There is arguably no landfill. Similar to that in the US, the German waste treatment sector is market oriented. Germany has implemented the most sophisticated and thorough waste sorting system in the world. Strict garbage classification makes waste treatment easier. The prioritized treatment of household waste is recycling, then incineration and lastly landfill. Since June 2005, the government has prohibited dumping of waste materials to landfill without hazardous-free treatment, making incineration the major method of disposing the remaining waste after recycling treatment over time. According to Eurostat, among the household waste produced in Germany in 2009, 47% was recycled, 18% was composted, 35% was incinerated, and nearly 0% was dumped to landfill.

Exhibit 59: Germany has arguably no landfill of domestic garbage (2009)

Incinerated, 35% Recycled, 47%

Landfilled, Composted, 0% 18%

Source: Eurostat.

Goldman Sachs Global Investment Research 26 August 5, 2014 China: Environmental Services: Waste Management

Snapshots of overseas EP companies

European EP companies: Mostly integrated players covering both water treatment and solid waste service Veolia: Water treatment was the biggest segment in terms of revenue, contributing 46% of the company’s revenue in 2013. Solid waste environmental services contributed c.EUR8.1bn and took a share of 36%. Waste collection accounted for 58% of its revenue from the solid waste business.

Exhibit 60: Solid waste service was Veolia’s second Exhibit 61: Waste collection and transport accounted for largest revenue contributor over 50% of its total revenue

2013 Revenue (€mn) 2013 Environmental sevice breakdown Landfilling of Energy Services, Other, 261, 1% non‐hazardous & 3,756, 17% Waste‐to‐energy inert waste, 8% from non‐ hazardous waste, Urban cleaning & 9% collection, 18%

Hazardous waste Water, 10,222, treatment, 10% Environmental 46% Services, 8,076, Sorting & Non‐hazardous 36% recycling, industrial waste 15% collection, 22%

Hazardous industrial waste collection, 18%

Source: Veolia annual report. Source: Veolia annual report.

Suez: Revenue from its solid waste business in Europe reached c.EUR6.6bn in 2013, higher than the c.EUR4.5bn from its water treatment business.

Exhibit 62: Suez’s solid waste business contributed more revenue than its water business

2013 revenue breakdown(€mn)

Other , 89, 1%

International, Water Europe, 3,682, 25% 4,475, 30%

Waste Europe, 6,587, 44%

Source: Suez annual report.

German solid waste treatment companies Remondis was originally a German family business founded in 1934. It has become the biggest recycling, waste service and water treatment firm in Germany after continuous development and M&As. Remondis has 30,500 employees globally and raked in revenue of about EUR6.8bn in 2013. Covering 34 countries around the world, Remondis has an annual treatment and recycling volume of 30mn tons, including 7.52mn tons of scrap metal, 3mn tons of construction waste and 1mn tons of hazardous waste. The firm operates approximately 500 treatment facilities, including 102 sewage treatment plants, 73 HWT plants, 38 waste landfill sites and many other waste recycling plants.

Goldman Sachs Global Investment Research 27 August 5, 2014 China: Environmental Services: Waste Management

US solid waste companies Waste Management is the largest solid waste treatment company both in the US and worldwide (in revenue terms). Its total revenue reached c.US$14.0bn in 2013. Its business coverage includes waste collection, transport, transfer, recycling and landfill for commercial, residential and industrial customers, as well as WtE.

Exhibit 63: Waste collection and transport account for Exhibit 64: …with labor being the biggest cost around 60% of WM’s revenue… component historically

Revenue Costs (US$ mn) 2011 2012 2013 US$ mn 2011 2012 2013 Labor and related benefits 2,336 2,407 2,506 Collection Transfer and disposal costs 937 964 973 commercial 3,499 3,417 3,423 maintenance and repairs 1,090 1,157 1,181 Residential 2,609 2,584 2,608 Subcontractor costs 948 1,190 1,182 Industrial 2,052 2,129 2,209 Cost of goods sold 1,071 919 1,000 Other 246 275 273 Fuel 628 649 603 Total collection 8,406 8,405 8,513 Disposal and franchise fees and taxes 602 630 653 Transfer 1,280 1,296 1,329 landfill operating costs 255 224 232 Landfill 2,611 2,685 2,790 Risk management 222 230 244 Wheelabrator(WtE) 877 846 845 Other 452 509 538 Recycling 1,580 1,360 1,447 Total 8,541 8,879 9,112 Other 655 1,416 1,583 Intercompany (2,031) (2,359) (2,524) Total 13,378 13,649 13,983

Source: Waste Management annual report. Source: Waste Management annual report.

US hazardous waste and medical waste treatment companies Clean Harbor: Established in 1980, Clean Harbor has extended its business to the US, Canada, and Mexico. The firm is engaged in waste/hazardous waste collection, transport and treatment. It also provides services for industrial companies and oil/gas fields. In 2013, the firm’s revenue expanded to US$3.51bn from US$711mn in 2005, growing at a CAGR of 22%. Its EBITDA during the same period grew at a CAGR of 24%.

Stericycle: Established in 1989, it is the largest medical waste treatment company in the US. In 1988, the enforcement of The Medical Waste Tracking Act of 1988 marked the emergence of the US medical waste treatment industry. The Act specifies that medical waste must be tracked and separated from general waste. Stericycle uses high temperature steaming and boiling, incineration and the firm’s specialized ETO technology to treat medical waste. Its revenue/net profit rose to US$2.14bn/US$311mn in 2013 from US$1.18bn/US$176mn in 2009, growing at a CAGR of 16%/15%. In addition, the firm has carried out 353 M&A deals since 1993, facilitating its expansion.

US WtE company Covanta: As the largest US WtE player in terms of capacity, Covanta has 46 WtE facilities with a total annual capacity of c.20mn tons. In 2013, the firm processed 18.5mn tons of waste in the North America region, with revenue per ton reaching US$50.07; sold 5.4 bn kWh of electricity with revenue of US$338mn (6.26 US cents per KWH); and recycled 331,000 tons of metals. Covanta accounted for 65% of total WtE power generation in the US in 2013, with its total revenue reaching US$1.63bn in the same period.

Goldman Sachs Global Investment Research 28 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 65: Waste treatment segment is the biggest Exhibit 66: The firm’s average EBITDA margin is c.30% in revenue contributor for Covanta 2011-2013

2013 Revenue Breakdown(US$ mn) EBITDA Margin

other, 118, 7% 35% 32.0% Recycled 30.1% 30.2% Metals, 73, 5% 30%

25%

20% Waste and Energy, 431, 15% 26% service, 1008, 62% 10%

0% 2013 2012 2011

Source: Covanta annual report. Source: Covanta annual report.

Earnings, financial data, valuation of key EP names Profitability of US firms is higher than that of European firms, but Chinese firms are doing even better. For instance, the ten-year (2005-2014E) average ROE of the world’s largest solid waste management company, Waste Management, was 15.6%, while that for Stericycle, a medical hazardous waste firm, was even higher at 20.2%, vs. 6.8% for Veolia and 10.5% for Suez. Chinese solid waste firms’ average ROE for the same period was 14.3%, higher than the 12.9% average of overseas firms.

Exhibit 67: Profitability comparison of global solid waste companies

ROE 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2005-2014E Global Waste Management 19.6% 18.6% 19.4% 18.6% 16.3% 15.2% 15.6% 13.2% 1.6% 18.2% 15.6% Waste Connections 11.8% 10.6% 13.1% 10.4% 8.4% 9.9% 11.9% 9.7% 10.0% 11.8% 10.8% Republic Services 14.6% 18.5% 21.3% 1.7% 6.7% 6.6% 7.6% 7.4% 7.5% 8.6% 10.1% Stericycle 13.2% 18.4% 18.0% 22.0% 24.0% 23.3% 22.1% 21.0% 19.9% 20.2% 20.2% Clean Harbor 42.3% 32.5% 23.6% 18.2% 7.0% 18.7% 15.1% 11.1% 6.6% 7.5% 18.3% Covanta* 16.2% 15.8% 14.8% 11.6% 7.9% 4.9% 19.8% 10.7% -0.7% 6.9% 10.8% Veolia Environment 16.9% 18.4% 15.5% 5.5% 8.1% 7.5% -9.5% 5.5% -2.4% 2.7% 6.8% Suez Environment 16.9% 13.7% 14.9% 11.2% 13.2% 6.1% 4.6% 6.7% 7.0% 10.5% average 19.2% 18.7% 17.4% 12.9% 11.2% 12.4% 11.1% 10.4% 6.2% 10.4% 12.9%

China EverBright 10.1% 12.4% 11.1% 8.6% 12.2% 12.6% 11.2% Dongjiang 24.1% 17.5% 9.6% 10.7% 15.5% Sound 17.6% 21.1% 15.8% 14.2% 15.6% 16.9% GrandBlue 9.5% 10.4% 10.8% 10.5% 10.6% 44.1% 9.5% 9.8% 9.9% 10.2% 13.5% average 9.5% 10.4% 10.8% 10.5% 10.3% 24.7% 16.5% 12.9% 11.5% 12.3% 14.3% *Not Covered; estimates from Bloomberg.

Source: Company data, Bloomberg, Goldman Sachs Global Investment Research, Gao Hua Securities Research.

Debt ratio comparison of overseas solid waste firms. As shown in Exhibit 68, the debt ratios of overseas peers are far higher than those of Chinese firms.

Exhibit 68: Debt ratio comparison of global solid waste companies

Gearing ratio 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2005-2014E Global Waste Management 142% 134% 144% 141% 141% 142% 161% 156% 179% 188% 153% Waste Connections 83% 87% 95% 67% 65% 68% 85% 119% 101% 100% 87% Republic Services 92% 109% 120% 106% 92% 86% 90% 92% 89% 90% 97% Stericycle 69% 75% 89% 118% 117% 105% 116% 88% 82% 90% 95% Clean Harbor 140% 78% 64% 14% 49% 36% 60% 98% 95% n/a 70% Covanta* 192% 345% 216% 166% 167% 204% 199% 221% 255% n/a 218% Veolia Environment 430% 398% 239% 296% 283% 265% 298% 238% 154% 139% 274% Suez Environment 179% 167% 194% 219% 274% 202% 204% 204% 201% 198% 204% average 166% 174% 145% 141% 149% 139% 152% 152% 145% 134% 150%

China EverBright 93% 68% 74% 85% 72% 52% 47% 70% Dongjiang 90% 55% 15% 20% 18% 40% Sound 93% 77% 85% 39% 44% 38% 63% GrandBlue 27% 32% 40% 66% 82% 68% 104% 72% 78% 84% 65% average 27% 32% 40% 79% 81% 77% 83% 50% 48% 47% 59% *Not Covered; estimates from Bloomberg.

Source: Company data, Bloomberg, Goldman Sachs Global Investment Research, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 29 August 5, 2014 China: Environmental Services: Waste Management

Sector risks: NIMBY-ism and local government spending power

NIMBY-ism. NIMBY (not in my back yard) refers to residents’ general pushback against the government for building certain facilities near their own communities, even though these facilities are essential to the whole society. There have been public protests against proposed WtE projects near residences in recent years, leading to project delay or cancelation, as people generally have limited understanding of WtE and some poorly managed plants have had negative impacts on the daily life of the people living nearby. For example, the WtE project in the Huadu District of Guangzhou was initially proposed in 2009, but had to select a new site in 2014 due to public opposition.

Exhibit 69: Residents’ protests against WtE plants in recent years

Time Location Project investor Incident

More than 5,000 residents protest against Jiufeng May 2014 Hangzhou Hangzhou Chengtou waste power station (planning); project is on hold. Continued protests by Huadu residents led to the 2009‐2013 Guangzhou, Huadu Guangri Group project's relocation in 2014.

Local residents blocked the completion of Xidong Apr 2011 Wuxi Enfi waste power station. It has yet to start operation. Relocation due to protest. Passed environmental 2009 Guangzhou, Fanyu Guangri Group evaluation in 2013.

Source: Sina.com, Bloomberg.

Local government affordability. WtE plants typically have two revenue sources: MSW power generation (70%) and local government subsidies (30%; at Rmb60-100/t). According to the Circular on Improving Pricing Policy for Municipal Solid Waste Power Generation issued by the National Development and Reform Commission in March 2012, two parties will pay for the amount in surplus of the nationwide Rmb0.65 electricity tariff for waste incineration power generation over the local benchmark on-grid tariff for desulfurized coal- fired power plants. Specifically, the province-level grid network will pay Rmb0.1 on a monthly basis, while the Ministry of Finance will pay the rest on a quarterly basis using the money from the national subsidy for electricity generated from renewable energy. Government subsidies are much needed, given the current underdeveloped garbage charge. Any delay in government payment could negatively impact the profitability of WtE projects.

Goldman Sachs Global Investment Research 30 August 5, 2014 China: Environmental Services: Waste Management

Buy quality names: Dongjiang H (on CL), Everbright, GrandBlue

Valuation methodology PEG is our primary valuation method based on back-test results. Our historical back- testing of A and H shares in our Environmental Services coverage (including water treatment and waste management stocks) indicates that the PEG method generates the highest long alpha. Therefore, we adopt PEG as our primary valuation method—except for Tianjin Capital (TCEPC), for which we use the P/B-ROE valuation method as we expect its EPS to experience negative growth in 2014E.

Exhibit 70: PEG generates the highest long alpha

P/E Annual Alpha on Long Stocks : Average (2010 - 2014ytd) 2010 2011 2012 2013 2014 2% -9% 5% 4% -7% 18% Alpha on Short Portfolio : Average (2010 - 2014ytd) 30% 53% 33% 2% 63% -3% Alpha on Portfolio (Long + Short) : Average (2010 - 2014ytd) 28% 39% 36% -3% 51% 15%

PEG Annual Alpha on Long Stocks : Average (2010 - 2014ytd) 2010 2011 2012 2013 2014 24% 74% 40% 12% 11% -19% Alpha on Short Portfolio : Average (2010 - 2014ytd) 32% 10% 15% 22% 109% 4% Alpha on Portfolio (Long + Short) : Average (2010 - 2014ytd) 59% 87% 56% 40% 129% -17%

PB/ROE Annual Alpha on Long Stocks : Average (2010-2014ytd) 2010 2011 2012 2013 2014 2% -8% 18% -3% -7% 11% Alpha on Short Portfolio : Average (2010-2014ytd) 28% -21% 62% 32% 72% -3% Alpha on Portfolio (Long + Short) : Average (2010-2014ytd) 29% -32% 88% 22% 60% 8%

EV/EBITDA Annual Alpha on Long Stocks : Average (2010-2004ytd) 2010 2011 2012 2013 2014 -1% -12% 5% -8% -7% 17% Alpha on Short Portfolio : Average (2010-2004ytd) 21% 21% 37% 10% 26% 10% Alpha on Portfolio (Long + Short) : Average (2010-2004ytd) 16% 5% 40% -7% 15% 26%

DC Annual Alpha on Long Stocks : Average (2010-2014ytd) 2010 2011 2012 2013 2014 1% -6% 3% -21% 27% 1% Alpha on Short Portfolio : Average (2010-2014ytd) 25% 38% 29% 24% 22% 10% Alpha on Portfolio (Long + Short) : Average (2010-2014ytd) 24% 29% 30% -4% 54% 10%

Source: Gao Hua Securities Research.

Goldman Sachs Global Investment Research 31 August 5, 2014 China: Environmental Services: Waste Management

We initiate Buy on Dongjiang Environmental H (add to Conviction List), Everbright International and GrandBlue; as well as Neutral on Dongjiang Environmental A and Sound Environmental.

Exhibit 71: Valuation summary of our Environmental Services coverage

Source: FactSet, Bloomberg, Gao Hua Securities Research.

We apply valuation premium on GrandBlue/WBD. We continue to apply an 11% premium on Beijing Water Business Doctor (WBD) reflecting business potential from its proposed acquisition of Haotian Energy. However, our earnings estimates do not factor in this transaction, as it has yet to complete. We also assign a 29% premium on GrandBlue reflecting business potential from its proposed acquisition of C&G China. Likewise, our earnings estimates do not factor in this transaction, as it has yet to complete.

Exhibit 72: Potential impact of proposed Haotian Exhibit 73: Potential impact of proposed C&G acquisition acquisition

Current Pro-forma estimates Current estimates Pro-forma estimates (Before acquisition) (assuming consolidation in 2014) (Before acquisition) (assuming consolidation in 2014) PEG 1.00 1.00 PEG 1.00 1.00 2014EPS, Rmb 0.76 0.90 2014EPS(Rmb) 0.45 0.46 2014-2016 CAGR 38.09% 35.85% 2014-2016 CAGR 25.24% 31.91%

Source: Gao Hua Securities Research. Source: Gao Hua Securities Research.

We cut OriginWater’s TP, but maintain Buy rating. OriginWater preannounced that its 1H14 net profit will rise 25%-35% yoy, which is below our expectations (we expect 2014 earnings growth of 43%). Factoring in lower revenue growth of its membrane EPC business, we reduce our 2014/15/16 revenue estimates by 4.6%/8.1%/8.2%, and EPS estimates by 4.5%/8.3%/8.4% to Rmb1.08/1.42/1.87. Consequently, we cut our 12-month PEG-based (unchanged target multiple of 1x) target price by 12% to Rmb34.19.

Key downside risks: As we expect its membrane EPC business to slow, Origin Water’s revenue growth could face headwinds if the company is unable to expand its BOT and other operating businesses.

Goldman Sachs Global Investment Research 32 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 74: EPS estimate revisions of OriginWater (Rmb)

2014E 2015E 2016E EPS(old) 1.13 1.54 2.04 EPS(new) 1.08 1.42 1.87 change% -4.5% -8.3% -8.4%

Source: Gao Hua Securities Research.

Exhibit 75: We adopt PEG as our primary valuation methodology

P/E (2014E) y = 87.83x + 1.11 R² = 0.77 45 Dongjiang-A Tianjin MOTIMO

40 WBD

35 DongJiang-H 30 Everbright BEWG 25 Grandblue OriginWater Sound 20

10 20% 25% 30% 35% 40% 45% 50%

Growth (2014-2016E) Buy Neutral Sell

Note: Dongjiang H is also on our regional Conviction List.

Source: Bloomberg, Gao Hua Securities Research.

We now use P/B-ROE to value TCEPC. As we expect Tianjin Capital (TCEPC) to witness negative earnings growth in 2014E driven by lower wastewater treatment prices in Tianjin, and subsequently slow growth in 2015E/2016E, we are not able to value it using the PEG method. In our Water Treatment sector initiation report China: Environmental Services: Water Treatment: Watershed moment amid structural change; Buy OriginWater, WBD, December 12, 2013, we valued TCEPC using EV/EBITDA as it was the second-best method in terms of alpha generation (long+short) then. Our updated back-test results (which include both water treatment and waste management sectors) show that P/B-ROE is now the second-best method. Hence, we switch our primary valuation method to P/B-ROE from EV/EBITDA for TCEPC.

Goldman Sachs Global Investment Research 33 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 76: Dongjiang A/H premium Exhibit 77: TCEPC A/H premium

Dongjiang A /H premium TCEPC A /H premium 160% 500% Historical:92% 140% 450% Current:30% Historical:232% 120% 400% Current:90% 100% 350% 80% 300% 60% 250% 200% 40% 150% 20% 100% 0% 50% 0% Oct-12 Oct-13 Apr-12 Feb-13 Apr-13 Feb-14 Apr-14 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14

Aug-12 Aug-13 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Source: Bloomberg. Source: Bloomberg.

We maintain TCEPC A at Sell and TCEPC H at Neutral. We derive our target price for TCEPC A based on its historical average P/B-ROE multiple of 37.1x. For TCEPC H, we assume its discount to A-share to shrink by 50% after launch of the Shanghai-Hong Kong Stock Connect scheme, and assign a 24.4x (11.8+0.5*(37.1-11.8)) P/B-ROE multiple.

Based on the P/B-ROE methodology, our new 12-month target prices for TCEPC H/A are HK$5.57/Rmb6.67, vs. prior HK$3.72/Rmb7.91 (based on EV/EBITDA).

Upside risk: the company may restart its expansion outside of Tianjin. Downside risk: the company’s margin may decline if its cost control initiatives are not effective.

Exhibit 78: Historical (since 2009) P/B-ROE of TCEPC Exhibit 79: P/B-ROE based 12-m target price of TCEPC

PB/ ROE TCEPC (H) TCEPC (A) TCEPC (H) TCEPC (A) Historical Max 27.0X 55.6X Avg ROE (14-16) 6.2% 6.2% Historical Min 7.0X 21.4X 2014E BPS, Rmb 3.6 2.9 Historical average 11.8X 37.1X Target PB/ROE 24.4X 37.1X Historical median 11.6X 36.5X Target Price, Rmb 5.57 6.67 Historical Stdev 3.7X 7.4X Current Price, Rmb 5.31 8.05 Current (2014.8.1) 24.5X 46.5X % upside/ downside 5% -17% Prices as of August 1, 2014 close.

Source: Wind. Source: FactSet, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 34 August 5, 2014 China: Environmental Services: Waste Management

Valuation comparison among EP names Valuation vs. history. China EP companies are trading at 28.4x one-year forward P/E, 3% lower than their historical (since 2010 to date) median of 29.2x, and 14% lower than their historical average of 33.0x.

Exhibit 80: Chinese EP firms are trading close to their historical average (since 2010) P/E

Forw ard P/ E OriginWater WBD BEWG Tianjin MOTIMO TCEPC (H) TCEPC (A) Historical Max 109.5 227.7 41.3 54.6 26.4 82.0 Historical Min 17.9 25.1 12.2 27.2 3.0 20.8 Historical average 34.0 82.0 24.8 42.9 11.4 38.4 Historical median 30.1 50.8 24.3 42.7 10.9 36.2 Historical Stdev 13.7 54.8 7.2 5.4 4.0 10.7 Current (2014.8.1) 21.2 31.8 23.2 35.8 24.0 45.8 Forw ard P/ E EverBright Dongjiang H Dongjiang A Sound GrandBlue Average Historical Max 56.5 27.7 51.7 59.7 42.3 70.9 Historical Min 5.6 8.1 25.8 20.6 6.0 15.7 Historical average 23.0 15.9 36.8 32.7 21.6 33.0 Historical median 22.0 15.7 37.1 31.8 20.0 29.2 Historical Stdev 7.5 4.0 5.4 7.2 8.1 11.6 Current (2014.8.1) 22.8 25.0 36.0 22.8 24.2 28.4

Source: Bloomberg, Gao Hua Securities Research.

Valuation of overseas peers. We find that overseas companies are trading at 23.2x one- year forward P/E, 8% higher than their historical (since 2004 to date) median of 21.4x.

Exhibit 81: Historical (since 2004) P/E of overseas EP companies

Forw ard P/ E WM WCN RCG SRCL CVA Veolia Suez Average Historical Max 21.5 26.2 22.4 36.7 n/m n/m 28.6 27.1 Historical Min 11.0 13.6 10.4 19.6 n/m n/m 11.2 13.2 Historical average 17.0 19.9 16.9 26.8 7.2 n/m 18.0 17.6 Historical median 17.0 20.2 16.9 26.8 26.0 25.7 17.1 21.4 Historical Stdev 1.8 2.0 1.7 3.1 n/m n/m 4.1 2.5 Current (2014.8.1) 18.2 21.2 18.1 24.7 42.8 20.5 16.7 23.2

Source: Bloomberg, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 35 August 5, 2014 China: Environmental Services: Waste Management

Dongjiang (H): Policies/capacity to drive rapid growth; initiate CL-Buy

Source of opportunity Investment Profile We initiate coverage on Dongjiang Environmental H at Conviction Low High List Buy with a 12-month target price of HK$35.97, implying 24% Growth Growth Returns * Returns * upside. Dongjiang is an industry leading hazardous waste treatment Multiple Multiple

(HWT) company in China, and we expect its treatment capacity to rise Volatility Volatility from 415,000 tons to 1.668 mn tons over the next three years. Also, we Percentile 20th 40th 60th 80th 100th believe Dongjiang would greatly benefit from the likely improvement in Dongjiang Environmental Company Limited (0895.HK) the pricing power of HWT firms and tighter government regulations to Asia Pacific Industrials Peer Group Average * Returns = Return on Capital For a complete description of the investment crack down on the illegal disposal of hazardous waste. Separately, we profile measures please refer to the disclosure section of this document. initiate Neutral on Dongjiang A, which is trading at a c.30% premium over its H-share, with 4% downside potential. Key data Current Price (HK$) 29.05 12 month price target (HK$) 35.97 Catalyst Market cap (HK$ mn / US$ mn) 10,090.4 / 1,302.0 Substantial increase in capacity. We forecast Dongjiang’s treatment Foreign ownership (%) -- capacity would increase from 415,000 tons in 2013 to c.1.67mn tons in 12/13 12/14E 12/15E 12/16E 2016E, given its north Guangdong base (500,000 tons) and Jiangmen EPS (Rmb) 0.600.721.071.41 EPS growth (%) (21.9) 19.9 49.2 31.6 facility (198,500 tons) are scheduled to come online over the next three EPS (diluted) (Rmb) 0.60 0.72 1.07 1.41 years as well as the planned capacity expansion of its Shajing base from EPS (basic pre-ex) (Rmb) 0.60 0.72 1.07 1.41 P/E (X) 22.6 32.2 21.6 16.4 92,100 tons in 2013 to 200,000 tons in 2014E. P/B (X) 2.1 3.3 3.0 2.6 EV/EBITDA (X) 14.8 21.6 15.2 11.8 Dividend yield (%) 1.5 1.0 1.5 2.0 Significantly tighter regulations to drive disciplined development of ROE (%) 9.6 10.7 14.5 16.9 HWT industry. In June 2013, the government released judicial CROCI (%) 15.0 14.9 16.7 17.1 clarifications on criminal environmental pollution, imposing criminal liabilities on enterprises that dispose of more than three tons of hazardous waste illegally. Since 2H2013, several criminal acts have been Price performance chart brought to trial or disclosed across the country. We expect this to boost 30 25,500 28 25,000 the disciplined development of the HWT industry. 26 24,500 24 24,000 Higher pricing power of HWT companies in sight. HWT companies 22 23,500 20 23,000 had limited pricing power in the past due to loose regulations, in our 18 22,500 view. While unqualified industry participants have exited the market, 16 22,000 14 21,500 new facilities would need to go through a prolonged procedure from site 12 21,000 selection to approval and construction. As such, we expect existing Aug-13 Nov-13 Feb-14 May-14 Dongjiang Environmental Company Limited (L) Hang Seng Index (R) qualified firms to enjoy stronger pricing power.

Potential increase in capacity through more M&As. Dongjiang completed the acquisition of Yanhai Solid Waste Treatment and Xiamen Share price performance (%) 3 month 6 month 12 month Absolute 56.2 78.6 54.8 Oasis in 1H2014. As a leading company in the sector, Dongjiang could Rel. to Hang Seng Index 40.9 60.4 39.4 leverage its advantage in the capital market to engage in further M&A Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/01/2014 close. activities.

Valuation We estimate 2014/15/16 EPS of Rmb0.72/1.07/1.41. The stock is trading at 0.80x 2014E PEG (vs. sector median of 0.93x). Based on 1x target PEG, we derive 12-month target prices of HK$35.97/Rmb28.85 for Dongjiang H/A. Key risks

Lower-than-expected earnings if copper prices drop sharply again. Delay in construction of new HWT facilities.

Goldman Sachs Global Investment Research 36 August 5, 2014 China: Environmental Services: Waste Management

Dongjiang Environmental Company Limited: Summary financial

Profit model (Rmb mn) 12/13 12/14E 12/15E 12/16E Balance sheet (Rmb mn) 12/13 12/14E 12/15E 12/16E

Total revenue 1,582.9 1,942.6 2,854.2 3,688.8 Cash & equivalents 948.9 837.4 581.3 653.9 Cost of goods sold (1,100.4) (1,350.0) (1,963.1) (2,513.5) Accounts receivable 389.7 478.2 702.6 908.0 SG&A (259.7) (318.7) (468.3) (605.2) Inventory 244.5 299.9 436.1 558.4 R&D (80.7) (99.1) (145.6) (188.1) Other current assets 43.7 43.7 43.7 43.7 Other operating profit/(expense) (18.4) (19.5) (25.3) (30.9) Total current assets 1,626.7 1,659.2 1,763.7 2,164.0 EBITDA 297.8 366.0 541.3 699.7 Net PP&E 876.2 1,183.0 1,640.5 1,877.2 Depreciation & amortization (93.3) (111.6) (143.8) (160.5) Net intangibles 538.6 510.3 482.1 453.9 EBIT 204.4 254.4 397.5 539.2 Total investments 260.7 260.7 260.7 260.7 Interest income 17.6 16.2 14.3 9.9 Other long-term assets (34.8) (34.8) (34.8) (34.8) Interest expense (19.0) (22.5) (22.5) (22.5) Total assets 3,267.5 3,578.5 4,112.3 4,721.0 Income/(loss) from uncons. subs. 35.9 44.7 69.8 94.6 Others 32.6 32.6 32.6 32.6 Accounts payable 276.3 339.0 492.9 631.1 Pretax profits 271.5 325.4 491.6 653.9 Short-term debt 323.3 323.3 323.3 323.3 Income tax (27.8) (33.2) (54.8) (78.3) Other current liabilities 6.1 6.1 6.1 6.1 Minorities (35.4) (42.4) (64.0) (85.2) Total current liabilities 605.7 668.4 822.3 960.5 Long-term debt 124.7 124.7 124.7 124.7 Net income pre-preferred dividends 208.3 249.8 372.8 490.4 Other long-term liabilities 87.1 112.7 139.1 158.4 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 211.8 237.4 263.8 283.1 Net income (pre-exceptionals) 208.3 249.8 372.8 490.4 Total liabilities 817.5 905.8 1,086.1 1,243.7 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 208.3 249.8 372.8 490.4 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 2,241.8 2,422.1 2,711.5 3,077.6 EPS (basic, pre-except) (Rmb) 0.60 0.72 1.07 1.41 Minority interest 208.2 250.6 314.6 399.8 EPS (basic, post-except) (Rmb) 0.60 0.72 1.07 1.41 EPS (diluted, post-except) (Rmb) 0.60 0.72 1.07 1.41 Total liabilities & equity 3,267.5 3,578.5 4,112.3 4,721.0 DPS (Rmb) 0.20 0.24 0.36 0.47 Dividend payout ratio (%) 33.4 33.4 33.4 33.4 BVPS (Rmb) 6.45 6.97 7.81 8.86 Free cash flow yield (%) 0.5 (1.0) (2.9) 1.2

Growth & margins (%) 12/13 12/14E 12/15E 12/16E Ratios 12/13 12/14E 12/15E 12/16E Sales growth 4.0 22.7 46.9 29.2 CROCI (%) 15.0 14.9 16.7 17.1 EBITDA growth (22.1) 22.9 47.9 29.3 ROE (%) 9.6 10.7 14.5 16.9 EBIT growth (33.5) 24.5 56.2 35.7 ROA (%) 6.5 7.3 9.7 11.1 Net income growth (21.9) 19.9 49.2 31.6 ROACE (%) 14.1 14.2 17.3 19.1 EPS growth (21.9) 19.9 49.2 31.6 Inventory days 83.4 73.6 68.4 72.2 Gross margin 30.5 30.5 31.2 31.9 Receivables days 96.6 81.5 75.5 79.7 EBITDA margin 18.8 18.8 19.0 19.0 Payable days 115.7 83.2 77.3 81.6 EBIT margin 12.9 13.1 13.9 14.6 Net debt/equity (%) (20.4) (14.6) (4.4) (5.9) Interest cover - EBIT (X) 139.2 40.0 48.1 42.7

Cash flow statement (Rmb mn) 12/13 12/14E 12/15E 12/16E Valuation 12/13 12/14E 12/15E 12/16E Net income pre-preferred dividends 208.3 249.8 372.8 490.4 D&A add-back 93.3 111.6 143.8 160.5 P/E (analyst) (X) 22.6 32.2 21.6 16.4 Minorities interests add-back 35.4 42.4 64.0 85.2 P/B (X) 2.1 3.3 3.0 2.6 Net (inc)/dec working capital 17.8 (81.3) (206.6) (189.5) EV/EBITDA (X) 14.8 21.6 15.2 11.8 Other operating cash flow (10.8) (19.0) (43.4) (75.3) EV/GCI (X) 1.8 2.7 2.2 2.0 Cash flow from operations 344.0 303.4 330.6 471.2 Dividend yield (%) 1.5 1.0 1.5 2.0

Capital expenditures (317.9) (390.1) (573.1) (368.9) Acquisitions (94.7) 0.0 0.0 0.0 Divestitures 0.0 0.0 0.0 0.0 Others (142.0) 44.7 69.8 94.6 Cash flow from investments (554.5) (345.4) (503.4) (274.3)

Dividends paid (common & pref) (60.2) (69.5) (83.3) (124.3) Inc/(dec) in debt 138.4 0.0 0.0 0.0 Common stock issuance (repurchase) 0.0 0.0 0.0 0.0 Other financing cash flows (44.4) 0.0 0.0 0.0 Cash flow from financing 33.8 (69.5) (83.3) (124.3) Total cash flow (176.7) (111.5) (256.1) 72.6 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 37 August 5, 2014 China: Environmental Services: Waste Management

Key drivers and catalysts Capacity likely to increase sharply. We forecast Dongjiang’s treatment capacity would increase from 415,000 tons in 2013 to c.1.67mn tons in 2016E, given its north Guangdong base (500,000 tons) and Jiangmen facility (198,500 tons) are scheduled to come online over the next three years as well as the planned capacity expansion of its Shajing base from 92,100 tons in 2013 to 200,000 tons in 2014E.

Exhibit 82: We expect Dongjiang’s treatment capacity to Exhibit 83: ...and its treatment volume to also grow increase substantially… rapidly

Recycling (mt) Detoxification (mt) Recycling (mt) Detoxification (mt) Recycling growth(%) Detoxification Growth (%) Recycling growth(%) Detoxification Growth (%) 1.40 160% 0.90 140% 0.80 1.20 140% 0.83 120% 120% 0.70 1.00 1.11 100% 0.60 0.98 100% 0.80 0.50 0.58 80% 80% 0.60 0.67 0.40 60% 60% 0.40 0.30 0.35 40% 40% 0.20 0.26 0.60 0.29 0.52 0.56 0.21 0.20 0.23 20% 20% 0.32 0.10 0.39 0.12 0.13 0.11 0.14 0.18 0.00 0% 0.00 0% 2012 2013 2014E 2015E 2016E 2012 2013 2014E 2015E 2016E

Source: Government of Beijing Municipality, Gao Hua Securities Research. Source: Government of Beijing Municipality, Gao Hua Securities Research.

Judicial interpretations on policies regarding high-pollution/high energy-consuming enterprises and implementation of the new environmental protection law may help boost the disciplined development of the HWT industry. In June 2013, the Supreme People’s Court and the Supreme People’s Procuratorate jointly released their judicial interpretations of criminal environmental pollution, imposing criminal liabilities on enterprises that dispose off more than three tons of hazardous waste illegally; enterprises knowingly discharging hazardous waste to unqualified treatment facilities are also subject to criminal liabilities. Since 2H2013, several criminal cases have been brought to trial or disclosed across the country. We expect this to greatly boost the disciplined development of the HWT industry.

Exhibit 84: Cases of illegal hazardous waste disposal since the release of the government’s judicial interpretations

Time Case 5 waste incineration companies including Hubei Wuhan Borui Environmental Energy Development Co. generated c. 560 tons of ash, and did not solidify the ash before they Oct 2010 transfer it to construction material companies which have no hazardous waste processing certification.

Zhejiang Tonglu Jinfanda and Jiande Xinanhua shipped 50k tons of Glyphosate liquor through transportation companies including Jiande Hongan and Quzhou Xinhe; leakages Since May 2012 into Grand Canal and Qu River resulted in serious pollution and economic loss of Rmb300mn. Zhejiang police has arrested 48 people related to the incident.

Xinrong Chemical in Nanjing transferred 1,000 tons of wastewater to parties without Aug 2013 processing certification for illegal dumping.

Source: Various news reports (such as Zhejiang Daily, Sina.com).

Goldman Sachs Global Investment Research 38 August 5, 2014 China: Environmental Services: Waste Management

HWT fees likely to rise. HWT companies had limited pricing power in the past due to loose regulations, in our view. While unqualified industry participants have exited the market, new facilities would need to go through a prolonged procedure from site selection to approval and construction. We expect existing qualified firms to enjoy stronger pricing power, in turn leading to possible hikes in HWT fees.

Exhibit 85: Shenzhen government’s guidance on HWT fees

Hazardous waste processing Fee Medical waste Rmb2.5/day-bed

Industrial hazardous waste Rmb/kg Incinerated 3.5-4.0 Solidification and landfilling 1.8-2.0 Toxic pesticide 80

Source: Price Management Administration of Shenzhen.

Main businesses and development trends Recycling and hazard-free treatment of industrial hazardous waste. Dongjiang’s HWT treatment capacity was about 415,000 tons/year in 2013, and we expect this to substantially rise with the build-up of new facilities and the expansion of established facilities.

Exhibit 86: Dongjiang’s HWT projects (2013)

Final capacity Subsidiaries % stake Note (10k tons/year) Headquater(Shajing) 100% 12 Overlimit by 20% in 2013, applying for another 100% Copper wastewater 25k tons; nickel waster mud 15k tons; inorganic Huizhou Dongjiang 100% 4 wastewater 1k tons Receive certification; copper wasterwater 48k tons, solder stripper 5k tons, Kunshan Qiandeng Co. Ltd. 51% 5.5 waste acid 10k tons, waste alkali 5k tons Kunshan Kunpeng Co. Ltd. 51% 1.2 Qingyuan Xinlu Environmental Co. Ltd. 62.50% 6 Processing copper wastewater and solder stripper from PCB Zhuhai Qingxin Industrial Environment Co. 75% Processing copper and zinc waste 10k tons Waste Home appliance and cellphone disassemble, got 30k tons certification in Feb Qingyuan Dongjiang 100% 8 recycling 2014, will be 80k in the end Copper wasterwater processing. Expand to 60k tons, finish in end of 2014, Jiaxing Deda Resources Recycling Co. Ltd. 51% 6 operating in 2015 Dongguan Hengjian 100% 10 Acquired in Aug 13, 50k tons copper wastewater Yuebei(Shaoguan Luran) 100% 43.46 Construction finishes in 2016, total 504k tons Jiangmen 100% 12.85 130k tons per year Xiamen Luzhou Environmental Co. Ltd. 60% 5.7 Total 114.71

Headquater(Shajing)100%8Overlimit by 20% in 2013, applying for another 100% Longgang Dongjiang Co. Ltd. 54% 10 Materialization 6k tons, stablization 13.5k tons; 24.5k tons now Huizhou Dongjiang 100% 5 Kunshan Kunpeng Co. Ltd. 51% 1.3 Innocuous treatment of 70k tons: incineration 9.5k tons and materialization 26k Yuebei(Shaoguan Luran) 100% 6.94 tons will be finished before end of 2014, 34k tons of landfilling will be Hazardous constructed starting 2015 waste Finished in the end of 2014, will get certification for operating in 1H15, 70k Jiangmen 100% 7 innocuous tons treatment Yancheng Coastal Solid-Waste Management Co. 60% 3.35 Acquired in Mar 14, expand from 6k to 9k tons, ready for operating 2H14 Ltd. Xiamen Luzhou Environmental Co. Ltd. 60% 2.53 Huizhou Dongjiang Veolia Environmental Received certification: 40k tons of landfilling, 10k tons of incineration, 33k tons 51% 14 services Limited of materialization; count as investment gain instead of consolidation Total 58.12

Source: Company data.

Goldman Sachs Global Investment Research 39 August 5, 2014 China: Environmental Services: Waste Management

Municipal waste treatment. Dongjiang’s municipal waste treatment business includes waste landfill sites/municipal sewage sludge projects, landfill gas (LFG)-to-electricity projects and kitchen waste treatment projects (under construction).

Exhibit 87: Dongjiang’s municipal waste treatment projects (2013)

Municipal waste treatment projects Operating Waste processing projects Scale (10k tons/year) Investment, Rmb mn Shenzhen Xiaping, living waste processing project 150 Entrusted operating Hunan Shaoyang, living waste processing project 23 125 Fuyong minicipal, waste mud processing project 2nd stage 40 80 Total 213 213

Landfilling electric power Scale (MW) Investment, Rmb mn Xiaping, landfilling electric power project 8 95 Laohukeng, landfilling electric power project 3 36 Qingdao, landfilling electric power project 3 40 Nanchang, Xinguan renewable energy project 5 55 Hefei, Xinguan renewable energy project 3 40 Total 22 266

In construction Project Scale (10k tons/year) Investment, Rmb mn Shenzhen Luohu, kitchen waste processing project 11 91

Source: Company data.

Competitive advantages Rich operational experience and leading HWT capacity. Founded in 1999, Dongjiang Environmental has been operating for 15 years, with the highest HWT capacity in China.

Exhibit 88: Dongjiang has the highest HWT capacity in China (2013)

Hazardous Waste Treatment Capacity（ton/year） 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0

Source: Various company websites.

Goldman Sachs Global Investment Research 40 August 5, 2014 China: Environmental Services: Waste Management

M&As and expansion by leveraging capital markets. Dongjiang Environmental went public on the Growth Enterprise Market (GEM) of the Hong Kong Stock Exchange in 2003. It transferred to the Mainboard of the Hong Kong Stock Exchange in 2010, and secured its listing on the Shenzhen Stock Exchange in 2012. By leveraging capital markets, Dongjiang has successfully expanded its footprint from Guangdong to other regions, including the Pearl River Delta, Yangtze River Delta and mid-west China. Specifically, Dongjiang carried out M&A deals in each of the past three years, and has already won two deals ytd (Xiamen Oasis and Yanhai Solid Waste Treatment). We believe the company may continue to leverage its capital market listing status to obtain more HWT facilities through M&A opportunities, and may increase the treatment capacity at acquired sites through project expansion and upgrading.

Exhibit 89: Dongjiang’s past M&A deals

Time of Acquisition Target Purchasing % of Target Asset acquisition Price (mn RMB) Stake Xiamen Luzhou 6,900t Incineration + 8,400t medical waste + 6/19/2014 375 60% Environmental Co. Ltd. 45,735t electronic product recycling Yancheng Coastal Solid- 3/26/2014 51.2 60% 6,000t hazardous waste incineration Waste Management Co. Ltd. Hengjian Energy 50,000t copper containing waste liquid 8/17/2013 77 100% Environmental Co. Ltd. treatment capacity Shaoguan Green Recycling Yuebei Hazardous Waste Treatment Center 11/22/2012 95 40% Development Co. Ltd. Project (500,000t planned)

Source: Company data.

Key risks Sharp decline in copper prices could weigh on Dongjiang’s earnings. Dongjiang’s industrial waste recycling segment, which is highly sensitive to copper prices (copper is an important product from the recycling of hazardous waste), accounted for 63% of the firm’s entire business in 2013. Therefore, a sharp drop in metal (such as copper) prices could result in lower-than-expected earnings.

Delay in construction of new HWT facilities. We expect the company’s new HWT facilities to be key growth drivers over the next three years. As such, any delay in the construction of these new facilities could result in lower-than-expected earnings.

Goldman Sachs Global Investment Research 41 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 90: Dongjiang’s net income growth vs. copper price movement

Net Income Growth Copper Price Growth 100% 80% 60% 40% 20% 0% -20% -40%

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

Source: Company data, Bloomberg.

History and company profile Leader in industrial HWT. Founded in 1999, Dongjiang has been mainly engaged in the recycling and hazard-free treatment of industrial hazardous waste. Industrial hazardous waste recycling remains Dongjiang’s key revenue source, contributing 63% of the firm’s revenue in 2013. However, the company’s gross profit margin dropped during the same period primarily due to falling prices of recycled metals (such as copper).

Exhibit 91: Recycling of hazardous waste remains Exhibit 92: ...but its gross profit margin trended down Dongjiang’s key revenue contributor in 2013… (Rmb mn)

Renewable energy and CDM Company GP Margin Recycling of HW trade revenue, Trade and 65, 4% others, 39, 3% Innocuous Disposal of HW

Environmental 80% engineering and service, 96, 6% 70% 60% Municipal waste 50% processing, 135, 9% 40% Industrial waste recycling, 1,004, 30% Industrial waste 63% innoctuous 20% treatment, 244, 15% 10% 0% 2009 2010 2011 2012 2013

Source: Company data. Source: Company data.

Goldman Sachs Global Investment Research 42 August 5, 2014 China: Environmental Services: Waste Management

China Everbright Int’l: Leading/competitive WtE player; initiate Buy

Source of opportunity Investment Profile We initiate China Everbright International at Buy with a 12-month Low High target price of HK$13.19 (27% upside). We believe Everbright enjoys Growth Growth Returns * Returns * strong competitive advantages compared to its peers, largely owing to Multiple Multiple the backing from its parent company Everbright Group, its robust Volatility Volatility operational track record and low funding costs. Since 2007, the firm has Percentile 20th 40th 60th 80th 100th expanded into the hazardous waste treatment (HWT) segment apart China Everbright International Limited (0257.HK) from its waste-to-energy (WtE) business. It is also developing its water Asia Pacific Industrials Peer Group Average * Returns = Return on Capital For a complete description of the investment treatment business with its proposed HanKore Environment acquisition profile measures please refer to the disclosure section of this document. as the platform. We estimate 2014E-16E net income CAGR of 33%.

Key data Current Catalyst Price (HK$) 10.42 12 month price target (HK$) 13.19 WtE business still in stage of rapid growth. As of June 2014, Market cap (HK$ mn / US$ mn) 46,720.3 / 6,028.4 Everbright had 13,250 tons/day in operation and 13,600 tons/day under Foreign ownership (%) -- construction/in the pipeline. Its phase II contract capacity was 5,250 12/13 12/14E 12/15E 12/16E tons/day, leading to a total contract capacity of 32,100 tons/day. We EPS (HK$) 0.300.400.560.70 EPS growth (%) 112.6 34.1 42.1 25.0 believe the firm’s superior operational track record puts it in a good EPS (diluted) (HK$) 0.30 0.40 0.56 0.70 stead to win new WtE projects over the next three years. EPS (basic pre-ex) (HK$) 0.30 0.40 0.56 0.70 P/E (X) 21.8 26.3 18.5 14.8 P/B (X) 2.2 3.2 2.8 2.4 Expansion into HWT sector. Its current three HWT projects have a total EV/EBITDA (X) 13.7 17.4 13.2 11.2 Dividend yield (%) 1.3 1.1 1.6 1.9 treatment capacity of 60,000 tons/year. Separately, it has three projects ROE (%) 12.2 12.6 16.0 17.5 under construction and another three in the pipeline, which are all CROCI (%) 65.9 54.7 71.0 79.8 scheduled for commissioning in 2015; this could potentially boost its capacity to 240,000 tons/year. Price performance chart Developing water treatment business with HanKore as the platform. 12 27,000

Everbright now runs 17 sewage treatment plants and four water 11 26,000 reclamation plants, with a total treatment capacity of 1.89mt/d. The 10 25,000 company recently announced a proposed injection of its entire water 9 24,000 treatment assets into HanKore Environment in exchange for a 79.21% 8 23,000 stake in the latter; this could see its water treatment assets under control 7 22,000 expand to 3.46mt/d. Everbright has also stated its plans to improve its 6 21,000 profitability by increasing the utilization rate at its water treatment Aug-13 Nov-13 Feb-14 May-14 China Everbright International Limited (L) Hang Seng Index (R) plants, hiking water treatment fees and cutting financial costs, as well as expand its water treatment assets through exploring more M&A opportunities, once its proposed acquisition of HanKore is completed. Share price performance (%) 3 month 6 month 12 month Absolute 7.2 1.8 46.1 Valuation Rel. to Hang Seng Index (3.3) (8.6) 31.6 Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/01/2014 close. We estimate 2014/15/16 EPS of HK$0.40/0.56/0.70. The stock is trading at 0.79x 2014E PEG (vs. sector median of 0.93x). Based on 1x target PEG, we derive a 12-month target price of HK$13.19.

Key risks Potential pushback from the residents around the WtE sites, leading to project delay or cancelation.

Goldman Sachs Global Investment Research 43 August 5, 2014 China: Environmental Services: Waste Management

China Everbright International Limited: Summary financials

Profit model (HK$ mn) 12/13 12/14E 12/15E 12/16E Balance sheet (HK$ mn) 12/13 12/14E 12/15E 12/16E

Total revenue 5,319.9 7,400.4 9,766.0 11,652.8 Cash & equivalents 5,771.1 3,975.7 3,872.0 3,240.4 Cost of goods sold (2,944.5) (4,302.3) (5,548.1) (6,466.9) Accounts receivable 1,376.7 1,824.8 2,140.5 2,554.0 SG&A (392.2) (518.0) (634.8) (699.2) Inventory 75.5 110.4 142.3 165.9 R&D (54.7) (72.2) (88.5) (97.5) Other current assets 1,020.6 1,372.9 1,822.6 2,337.5 Other operating profit/(expense) 144.1 187.9 255.8 314.5 Total current assets 8,244.0 7,283.6 7,977.4 8,297.8 EBITDA 2,217.9 2,877.5 3,954.1 4,923.5 Net PP&E 1,409.9 1,487.1 1,605.9 1,755.4 Depreciation & amortization (90.7) (109.5) (115.2) (122.3) Net intangibles 1,117.2 1,078.6 1,039.9 1,001.2 EBIT 2,127.2 2,767.9 3,838.9 4,801.3 Total investments 431.8 431.8 431.8 431.8 Interest income 0.0 0.0 0.0 0.0 Other long-term assets 12,268.1 15,438.2 19,486.1 24,120.3 Interest expense (315.6) (338.0) (386.8) (484.5) Total assets 23,471.0 25,719.3 30,541.1 35,606.5 Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 Accounts payable 1,733.8 2,533.3 3,266.8 3,807.8 Pretax profits 1,811.7 2,430.0 3,452.1 4,316.8 Short-term debt 1,779.9 1,779.9 1,779.9 1,779.9 Income tax (447.5) (600.2) (852.6) (1,066.2) Other current liabilities 58.4 58.4 58.4 58.4 Minorities (39.5) (53.0) (75.3) (94.2) Total current liabilities 3,572.0 4,371.6 5,105.1 5,646.1 Long-term debt 5,141.3 5,141.3 7,141.3 9,141.3 Net income pre-preferred dividends 1,324.7 1,776.8 2,524.2 3,156.4 Other long-term liabilities 978.6 978.6 978.6 978.6 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 6,119.9 6,119.9 8,119.9 10,119.9 Net income (pre-exceptionals) 1,324.7 1,776.8 2,524.2 3,156.4 Total liabilities 9,691.9 10,491.5 13,225.0 15,766.0 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 1,324.7 1,776.8 2,524.2 3,156.4 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 13,374.3 14,769.9 16,782.9 19,213.1 EPS (basic, pre-except) (HK$) 0.30 0.40 0.56 0.70 Minority interest 404.9 457.9 533.2 627.4 EPS (basic, post-except) (HK$) 0.30 0.40 0.56 0.70 EPS (diluted, post-except) (HK$) 0.30 0.40 0.56 0.70 Total liabilities & equity 23,471.0 25,719.3 30,541.1 35,606.5 DPS (HK$) 0.09 0.11 0.16 0.20 Dividend payout ratio (%) 28.8 28.8 28.8 28.8 BVPS (HK$) 2.98 3.29 3.74 4.29 Free cash flow yield (%) (1.4) (3.0) (3.4) (4.0)

Growth & margins (%) 12/13 12/14E 12/15E 12/16E Ratios 12/13 12/14E 12/15E 12/16E Sales growth 56.0 39.1 32.0 19.3 CROCI (%) 65.9 54.7 71.0 79.8 EBITDA growth 41.7 29.7 37.4 24.5 ROE (%) 12.2 12.6 16.0 17.5 EBIT growth 43.4 30.1 38.7 25.1 ROA (%) 6.6 7.2 9.0 9.5 Net income growth 112.6 34.1 42.1 25.0 ROACE (%) 11.9 12.6 14.3 14.5 EPS growth 112.6 34.1 42.1 25.0 Inventory days 8.7 7.9 8.3 8.7 Gross margin 44.7 41.9 43.2 44.5 Receivables days 88.6 79.0 74.1 73.5 EBITDA margin 41.7 38.9 40.5 42.3 Payable days 181.3 181.0 190.8 199.7 EBIT margin 40.0 37.4 39.3 41.2 Net debt/equity (%) 8.3 19.3 29.2 38.7 Interest cover - EBIT (X) 6.7 8.2 9.9 9.9

Cash flow statement (HK$ mn) 12/13 12/14E 12/15E 12/16E Valuation 12/13 12/14E 12/15E 12/16E Net income pre-preferred dividends 1,324.7 1,776.8 2,524.2 3,156.4 D&A add-back 90.7 109.5 115.2 122.3 P/E (analyst) (X) 21.8 26.3 18.5 14.8 Minorities interests add-back 39.5 53.0 75.3 94.2 P/B (X) 2.2 3.2 2.8 2.4 Net (inc)/dec working capital (2,423.3) (3,205.6) (4,111.8) (5,045.3) EV/EBITDA (X) 13.7 17.4 13.2 11.2 Other operating cash flow 604.5 0.0 0.0 0.0 EV/GCI (X) 7.8 12.2 12.0 11.0 Cash flow from operations (363.9) (1,266.3) (1,397.2) (1,672.4) Dividend yield (%) 1.3 1.1 1.6 1.9

Capital expenditures (56.4) (148.0) (195.3) (233.1) Acquisitions 0.0 0.0 0.0 0.0 Divestitures 0.2 0.0 0.0 0.0 Others (894.2) 0.0 0.0 0.0 Cash flow from investments (950.4) (148.0) (195.3) (233.1)

Dividends paid (common & pref) (263.5) (381.1) (511.2) (726.2) Inc/(dec) in debt 806.6 0.0 2,000.0 2,000.0 Common stock issuance (repurchase) 3,627.6 0.0 0.0 0.0 Other financing cash flows (277.2) 0.0 0.0 0.0 Cash flow from financing 3,893.6 (381.1) 1,488.8 1,273.8 Total cash flow 2,579.2 (1,795.5) (103.7) (631.6) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 44 August 5, 2014 China: Environmental Services: Waste Management

Key drivers and catalysts Rapid growth of its WtE business. As of June 2014, Everbright had a total contract capacity of 32,100 tons/day, including 13,250 tons/day in operation, 2,000 tons/day under construction and 11,600 tons/day in the pipeline. Its phase II contract capacity was 5,250 tons/day. If its current projects move forward as scheduled, we estimate Everbright would have an operational capacity of 26,850 tons/day by end 2016. This number would amount to 30,000 tons/day if we take into account the newly commissioned projects ytd.

Exhibit 93: Everbright’s total contract capacity (July, Exhibit 94: Everbright’s WtE operating capacity growth 2014)

WtE Projects(t/d) operating capacity(t/d) 14,000 13,250 30,000 26,850 11,600 12,000 24,150 25,000 10,000 8,000 20,000 6,000 5,250 14,550 15,000 4,000 2,000 9,650 2,000 10,000 8,150 8,150

0 5,000 operating capacity under capacity under contracted capacity construction planning projects 0 expansion 2011 2012 2013 2014E 2015E 2016E

Source: Company data. Source: Company data, Gao Hua Securities Research.

HWT business to become new growth driver. Everbright has three hazardous waste landfill sites with a total treatment capacity of 60,000 tons/year, three projects under construction with a total treatment capacity of 140,000 tons/year, and three projects in the pipeline with a total treatment capacity of 40,150 tons/year. Assuming all projects are completed, we estimate HWT’s capacity would rise from 60,000 to 240,000 tons/year.

Goldman Sachs Global Investment Research 45 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 95: Everbright is proactively developing its HWT business

Operating projects Total investment Date of commercial Type of investment (Rmb mn) operation Annual Capacity(t/y) Suzhou, industrial solid waste lanfilling project, stage 1 BOT for 30 years 78.1 July, 2007 Suzhou, industrial solid waste lanfilling project, stage 2 BOT for 30 years 40 November, 2011 40,000 Suqian, hazardous waste lanfilling project, stage 1 BOT for 25 years 99.09 January, 2013 20,000 Total 217 60,000

In construction Total investment Date of commercial Type of investment (Rmb mn) operation Binhai EDZ, industrial park hazardous solid waste lanfilling project BOT for 20 years 186 2H 2014 30,000 Lianyungang Guanyun county, hazardous solid waste landfilling project, stage 1 BOT for 25 years 109.15 2014 20,000 incineration 40 000: Physical-chemical Zibo, Qihu chemical industry park, hazardous waste processing project BOO 400 1H2015 processing 50 000 Total 295 140,000

In plan Total investment Date of commercial Type of investment (Rmb mn) operation Annual Capacity(t/y) Shouguang, hazardous waste processing project BOO 157 1H2015 20000 Lianyungang, hazardous waste processing project (Lianyungang Suzuki waste Incineration of HW 9 000t processing co., ltd) 80.24 2H2014 Medical Waste 1 650t Xinyi, hazardous waste processing project BOT for years 100 2H2015 HW Incineration: 9500t/y Total 110,150 40,150

Total 110,662 240,150

Source: Company data.

To consolidate and develop water treatment business with HanKore as platform. Everbright operates 17 sewage treatment projects and four water reclamation projects in Jiangsu and Shandong. It has a wastewater treatment capacity of 1.83mt/d and reclaimed water production capacity of 61,600t/d. The company posted an EBITDA of HK$290.4mn in 2013. On June 2, 2014, Everbright announced an agreement with HanKore Environment (U9E.SI; Not Covered) to inject all of its water treatment assets into the latter in exchange for a 79.21% equity stake. Listed on the Singapore Exchange, HanKore operates 11 water supply/sewage treatment projects in Jiangsu, Shandong, Beijing, Shaanxi and Henan with a total contract capacity of 1.57mt/d in 2013. HanKore reported an NPAT of Rmb99.4mn in 2013. Upon completion, we estimate Everbright’s total contract capacity would reach 3.46mt/d. Meanwhile, Everbright has stated its plans to improve its profitability by increasing the utilization rate at its water treatment plants, hiking water treatment fees and cutting financial costs, as well as expand its water treatment assets through exploring more M&A opportunities, once its proposed acquisition of HanKore is completed.

Goldman Sachs Global Investment Research 46 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 96: Impact of proposed HanKore acquisition on Everbright’s water treatment business

Water Business EBITDA(HKD Mn) - LHS

Water Plant Capacity (mt/d) - RHS 450 416 4

400 3.46 3.5 350 3 290 300 2.5 250 2 200 1.89 1.5 150 100 1 50 0.5 0 0 Everbright current water business Post acquisition

Source: Company data.

Competitive advantages Strong operational track record. In 2013, Everbright’s Suzhou WtE plant was rated as one of the five AAA-level WtE projects in China by the Ministry of Housing and Urban-Rural Development. All of Everbright’s WtE plants conform to EU2000 emission standards. Everbright’s WtE plants generally operated at full capacity in the second year after commissioning. Notably, gas emission at its Suzhou plant has been better than China and EU 2000 standards.

Exhibit 97: Superior track record at Everbright’s Suzhou MSW power generation plant

2013 Company Site Name of Indicator China National Standard Euro 2000 Standard Measurement Ash（mg/N3） 80 10 4.44 HCL（mg/N3） 75 10 4.16 SO2（mg/N3） 260 50 23.45 Nox（mg/N3） 400 200 115.13 Dioxin（ngTEQ/m3） 1 0.1 0.019

Source: Company data.

Everbright has lower funding costs. Predominantly due to its strong balance sheet/access to the HK capital market and SOE background, Everbright has much lower financing costs than its peers.

Goldman Sachs Global Investment Research 47 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 98: Everbright has much lower funding costs than its peers

2011-2013 Average Funding Cost 8.5% 7.9% 8.0% 7.5% 7.0% 6.8% 6.3% 6.5% 6.1% 6.0% 5.5% 5.3% 5.0% 4.5% 4.0% Everbright Dongjiang Grandblue Sound Shengyun Environmental

Source: Company data.

Backing from parent company could help facilitate nationwide expansion. Everbright Group, Everbright International’s biggest shareholder, is a mega conglomerate directly under the administration of the central government. It also controls other companies like Everbright Bank and Everbright Securities. The total asset under its control reached Rmb2.6tn in 2013. Everbright Group has signed strategic cooperation agreements with many local governments across the nation with environmental protection as one of the key focus areas, which we believe would facilitate Everbright International’s nationwide expansion.

Exhibit 99: Everbright Group’s total asset and total net Exhibit 100: Some of the agreements between Everbright income Group/Everbright International and local governments

Everbright Group/ Everbright International signed partial Time Everbright Group 2013 Operational strategy cooperation agreements with local governments Indicator（Rmb bn） Everbright Group/ Everbright International signed security strategy cooperation agreements with Beijing government 3000 Oct-13 2600 to cooperate in aspects such as infrustructure 2500 construction, environmental industry development, etc Everbright Group signed strategic cooperation agreement 2000 with Shenzhen government on aspects such as finance, 1500 Oct-12 investment, municipal infrastructure construction, environmental protection, new energy, low carbon 1000 economy development etc

500 Mar-12 Everbright Group/ Everbright International signed security 37 strategy cooperation agreements with Fujian government 0 Everbright Group and Shandong province signed Total Asset Total Profit May-10 strategic cooperation agreements

Source: Company data. Source: Company data.

Goldman Sachs Global Investment Research 48 August 5, 2014 China: Environmental Services: Waste Management

Everbright possesses incineration equipment manufacturing capability, which could reduce manufacturing costs. Everbright has built an EP equipment manufacturing center in Changzhou, which produces grate furnaces and flue-gas purification systems for the company to build WtE plants. Currently, its Changzhou plant has the capability of producing 250t-750t grate furnaces at 30% lower prices than those of imported equipment. Everbright has installed its self-produced grate furnaces at its Suzhou project phase III with satisfactory operational performance. Its Changzhou base produced eight grate furnaces last year and the company guided an output of 15 for 2014.

Key risks Waste incineration power generation could potentially face pushback from nearby residents. Despite the company’s positive track record, some projects could be delayed or cancelled under the pressure from nearby residents, primarily due to concerns about the potential pollution issues from the waste-to-energy plants.

History and company profile WtE leader in China. Everbright’s first WtE plant, Suzhou phase I with capacity of 1,050t/d, officially came online in 2006, marking the start of the company’s expansion in MSW power generation. Everbright reported total revenue of HK$5.3 bn in 2013, including HK$3.6bn from its environmental energy business (68% of total revenue).

Exhibit 101: EP energy is Everbright’s biggest revenue Exhibit 102: …and has maintained high EBITDA margin source in 2013… (HKD mn)

Revenue by Sector Company EBITDA Margin Environmental Energy Alternative Environmental Water Alternative Energy Energy, 416 , 8% 70%

60%

50% Environmental 40% Water, 1,284 , 24% 30% Environmental Energy , 3,616 20% , 68% 10%

0% 2008 2009 2010 2011 2012 2013

Source: Company data. Source: Company data.

Goldman Sachs Global Investment Research 49 August 5, 2014 China: Environmental Services: Waste Management

GrandBlue Environment: Nationwide expansion via M&A; initiate Buy

Investment Profile Source of opportunity Low High We initiate GrandBlue at Buy with a 12-month target price of Growth Growth Rmb14.68 (22% upside). The firm has announced its plan to acquire the Returns * Returns * 11,350 tons/day WtE business from C&G China, thus expanding its Multiple Multiple Volatility Volatility environmental protection business nationwide from Foshan; it has also Percentile 20th 40th 60th 80th 100th proposed to raise its equity holding in Nanhai Gas from 40% to 70%. In GrandBlue Environment Co Ltd (600323.SS) addition, the redevelopment of Green Power Phase I project is Asia Pacific Industrials Peer Group Average * Returns = Return on Capital For a complete description of the investment scheduled for completion in mid 2015, which would raise the firm’s WtE profile measures please refer to the capacity in Nanhai from 1,500 tons/day to 3,000 tons/day. disclosure section of this document.

Catalyst Key data Current Price (Rmb) 12.08 If the C&G acquisition is successful, GrandBlue could increase its 12 month price target (Rmb) 14.68 Market cap (Rmb mn / US$ mn) 6,997.3 / 1,132.3 WtE capacity substantially and expand its footprint nationwide. On Foreign ownership (%) -- January 30, 2014, GrandBlue announced a proposal to purchase C&G China’s WtE assets at a price of Rmb1.85bn (Rmb1.1bn in cash). If 12/13 12/14E 12/15E 12/16E EPS (Rmb) 0.400.450.590.71 completed, the transaction would increase the operating capacity of EPS growth (%) 22.9 11.4 30.9 19.8 EPS (diluted) (Rmb) 0.40 0.45 0.59 0.71 GrandBlue’s WtE plants from 1,500 tons/day to 7,000 tons/day, and its EPS (basic pre-ex) (Rmb) 0.40 0.45 0.59 0.71 P/E (X) 19.6 26.9 20.5 17.1 total contracted capacity would rise to 14,350 tons/day from 3,000 P/B (X) 1.9 2.6 2.4 2.2 tons/day. EV/EBITDA (X) 10.9 14.2 13.5 11.9 Dividend yield (%) 1.3 0.9 1.2 1.4 ROE (%) 9.9 10.2 12.3 13.3 Redevelopment of Green Power Phase I project is scheduled for CROCI (%) 12.3 11.2 10.5 10.4 completion in mid-2015. The 400 tons/day WtE plant of Green Power Phase I project was closed for redevelopment in late 2012. Upon completion, the project would have a capacity of 1,500 tons/day, with a Price performance chart total investment of c.Rmb650mn. Management expects production to 15 2,950 14 2,850 resume in mid 2015, which would increase GrandBlue’s WtE capacity in 13 2,750 the Nanhai district to 3,000 tons/day from 1,500 tons/day. 12 2,650 11 2,550 Acquisition of additional equity in Nanhai Gas could improve 10 2,450 9 2,350 investment gain. GrandBlue currently holds a 40% stake in Nanhai Gas. 8 2,250 In 2011/12/13, Nanhai Gas realized net profit of Rmb78.23/101.37/ 7 2,150 6 2,050 132.47mn. GrandBlue has announced a proposed acquisition of another Aug-13 Nov-13 Feb-14 May-14 30% stake for Rmb383.45mn to increase its shareholding to 70% and GrandBlue Environment Co Ltd (L) Shanghai - Shenzhen 300 (R) consolidate Nanhai Gas into its financial statements.

Share price performance (%) 3 month 6 month 12 month Valuation Absolute 14.6 (13.2) 69.4 Our 2014E-16E EPS are Rmb0.45/0.59/0.71, implying 1.06x 2014E PEG, Rel. to Shanghai - Shenzhen 300 6.2 (17.9) 63.3 Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/01/2014 close. higher than the sector medium of 0.93x. Our PEG-based 12-month target price is Rmb14.68 (1.29x target multiple; we apply 29% premium reflecting business potential from proposed C&G China acquisition).

Key risks Management execution risks during its expansion upon completion of the proposed acquisition of C&G China, as the firm’s existing business is mainly in Nanhai, Guangdong province.

Goldman Sachs Global Investment Research 50 August 5, 2014 China: Environmental Services: Waste Management

GrandBlue Environment Co Ltd: Summary financials

Profit model (Rmb mn) 12/13 12/14E 12/15E 12/16E Balance sheet (Rmb mn) 12/13 12/14E 12/15E 12/16E

Total revenue 1,001.4 1,061.1 1,127.4 1,281.5 Cash & equivalents 392.1 343.0 328.0 526.4 Cost of goods sold (615.9) (646.3) (676.0) (756.3) Accounts receivable 366.3 388.1 412.4 468.7 SG&A (72.3) (74.3) (78.9) (89.7) Inventory 52.0 54.6 57.1 63.9 R&D ------Other current assets 22.2 22.2 22.2 22.2 Other operating profit/(expense) (8.9) (9.4) (10.0) (11.2) Total current assets 832.6 807.9 819.7 1,081.2 EBITDA 563.3 628.9 683.7 759.3 Net PP&E 1,911.2 2,540.8 3,192.0 3,576.1 Depreciation & amortization (259.0) (297.8) (321.2) (335.0) Net intangibles 1,777.2 1,570.6 1,364.1 1,157.6 EBIT 304.3 331.1 362.5 424.3 Total investments 508.0 508.0 508.0 508.0 Interest income 17.1 9.0 7.9 7.5 Other long-term assets 399.4 389.6 379.7 369.9 Interest expense (103.5) (108.9) (125.9) (137.0) Total assets 5,428.4 5,816.9 6,263.5 6,692.9 Income/(loss) from uncons. subs. 47.7 63.6 133.5 160.2 Others 10.9 10.9 10.9 10.9 Accounts payable 1,006.1 885.4 740.8 828.8 Pretax profits 276.5 305.7 388.9 466.0 Short-term debt 203.3 203.3 203.3 203.3 Income tax (41.7) (44.1) (46.5) (55.7) Other current liabilities 0.0 0.0 0.0 0.0 Minorities (1.0) (1.1) (1.4) (1.6) Total current liabilities 1,209.3 1,088.6 944.1 1,032.1 Long-term debt 1,707.3 2,007.3 2,307.3 2,307.3 Net income pre-preferred dividends 233.9 260.6 341.0 408.7 Other long-term liabilities 28.1 33.5 46.9 62.4 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 1,735.3 2,040.8 2,354.2 2,369.6 Net income (pre-exceptionals) 233.9 260.6 341.0 408.7 Total liabilities 2,944.7 3,129.4 3,298.2 3,401.7 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 233.9 260.6 341.0 408.7 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 2,442.6 2,645.2 2,921.7 3,246.0 EPS (basic, pre-except) (Rmb) 0.40 0.45 0.59 0.71 Minority interest 41.2 42.2 43.6 45.2 EPS (basic, post-except) (Rmb) 0.40 0.45 0.59 0.71 EPS (diluted, post-except) (Rmb) 0.40 0.45 0.59 0.71 Total liabilities & equity 5,428.4 5,816.9 6,263.5 6,692.9 DPS (Rmb) 0.10 0.11 0.15 0.17 Dividend payout ratio (%) 24.8 24.8 24.8 24.8 BVPS (Rmb) 4.22 4.57 5.04 5.60 Free cash flow yield (%) (4.0) (5.2) (5.6) 1.6

Growth & margins (%) 12/13 12/14E 12/15E 12/16E Ratios 12/13 12/14E 12/15E 12/16E Sales growth 13.1 6.0 6.2 13.7 CROCI (%) 12.3 11.2 10.5 10.4 EBITDA growth 5.5 11.6 8.7 11.1 ROE (%) 9.9 10.2 12.3 13.3 EBIT growth 1.5 8.8 9.5 17.0 ROA (%) 4.6 4.6 5.6 6.3 Net income growth 22.9 11.4 30.9 19.8 ROACE (%) 8.5 8.0 9.0 9.9 EPS growth 22.9 11.4 30.9 19.8 Inventory days 22.7 30.1 30.2 29.2 Gross margin 38.5 39.1 40.0 41.0 Receivables days 82.4 129.8 129.6 125.5 EBITDA margin 56.3 59.3 60.6 59.2 Payable days 497.6 534.1 439.0 378.8 EBIT margin 30.4 31.2 32.2 33.1 Net debt/equity (%) 61.1 69.5 73.6 60.3 Interest cover - EBIT (X) 3.5 3.3 3.1 3.3

Cash flow statement (Rmb mn) 12/13 12/14E 12/15E 12/16E Valuation 12/13 12/14E 12/15E 12/16E Net income pre-preferred dividends 233.9 260.6 341.0 408.7 D&A add-back 259.0 297.8 321.2 335.0 P/E (analyst) (X) 19.6 26.9 20.5 17.1 Minorities interests add-back 1.0 1.1 1.4 1.6 P/B (X) 1.9 2.6 2.4 2.2 Net (inc)/dec working capital 42.8 (145.1) (171.3) 24.8 EV/EBITDA (X) 10.9 14.2 13.5 11.9 Other operating cash flow (40.1) (58.1) (120.1) (144.8) EV/GCI (X) 1.3 1.6 1.4 1.3 Cash flow from operations 496.6 356.3 372.1 625.4 Dividend yield (%) 1.3 0.9 1.2 1.4

Capital expenditures (680.3) (720.8) (765.9) (512.6) Acquisitions 0.0 0.0 0.0 0.0 Divestitures 0.0 0.0 0.0 0.0 Others (528.3) 73.4 143.3 170.0 Cash flow from investments (1,208.6) (647.4) (622.5) (342.6)

Dividends paid (common & pref) (57.9) (57.9) (64.5) (84.5) Inc/(dec) in debt 266.2 300.0 300.0 0.0 Common stock issuance (repurchase) 2.3 0.0 0.0 0.0 Other financing cash flows 146.1 0.0 0.0 0.0 Cash flow from financing 356.6 242.1 235.5 (84.5) Total cash flow (355.4) (49.1) (15.0) 198.4 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 51 August 5, 2014 China: Environmental Services: Waste Management

Key drivers and catalysts If completed, the proposed purchase of C&G China could enable GrandBlue to expand its footprint nationwide. On January 30, 2014, GrandBlue announced its plan to acquire a 100% stake in C&G China for Rmb1.85bn, of which Rmb1.1bn will be paid in cash, and the remaining Rmb750mn will be funded through shares issued to C&G HK at a price of Rmb8.34 per share. Currently, C&G China has an operational capacity of 5,500 tons/day; if we include projects under construction and in the pipeline, its total capacity would reach 11,350 tons/day. GrandBlue expects C&G China’s net profit to rise to Rmb163.8mn in 2016 from c.Rmb9.5mn in 2014. The proposed acquisition consideration implies 17.6X 2015E P/E, higher than the sector average of 10X-15X. However, given the acquisition may help expand GrandBlue’s business nationwide and allow it to become one of the top ten players in China’s EP sector, we believe the transaction could serve as a key growth driver.

Exhibit 103: Growth of operating capacity of C&G China Exhibit 104: GrandBlue’s earnings guidance for C&G China

operating capacity of C&G China(t/d) net profit(Rmb mn)

12,000 11,000 180 163.80 160 10,000 8,600 140

8,000 6,900 6,900 120 105.05 100 6,000 5,500 80 68.44 4,000 60 40 2,000 20 9.46 0 0 2013 2014 2015 2016 2017 2013 2014 2015 2016

Source: Company data. Source: Company data.

Green Power Phase I redevelopment project is likely to resume operation in 2015 and become a key growth driver for the firm. The old 400 tons/day power plant of the Green Power Phase I project was closed in late 2012, and a new 1,500 tons/day plant is under construction with a total investment of c.Rmb650mn. We expect the new plant to come online in mid 2015 and double GrandBlue’s waste incineration capacity to 3,000 tons/day.

Exhibit 105: MSW power plants of Green Power Exhibit 106: Green Power’s profitability has improved greatly

Treatment Total (mn RMB) 2011 2012 2013 Operation Capacity Investment Revenue 106.79 229.63 304.64 Start Date (t/d) (mn RMB) Net Profit 28.48 57.72 70.61 Ludian I expansion 1500 mid 2015 650 Ludian II 1500 2H 2011 650

Source: Company data. Source: Company data.

Goldman Sachs Global Investment Research 52 August 5, 2014 China: Environmental Services: Waste Management

Equity acquisition of Nanhai Gas could further drive earnings growth. GrandBlue acquired a 25% stake in Nanhai Gas in December 2011. Subsequently, the firm raised its equity holding to 40% via a capital injection in 2013. Nanhai Gas is mainly engaged in pipeline gas and bottled LPG businesses. In 2011/12/13, Nanhai Gas raked in net profit of Rmb78.23/101.37/132.47mn. GrandBlue has announced plans to acquire another 30% stake for Rmb383.45mn so as to increase its shareholding to 70% and consolidate Nanhai Gas into its financial statements. Based on 2013 data, the proposed acquisition of an additional 30% stake in Nanhai Gas would add Rmb39.74mn (or 17% more) to GrandBlue’s net profit.

Main businesses and development trends Sewage treatment and water supply businesses in Nanhai District provide stable cash inflow. Previously, GrandBlue’s revenue mainly came from its water supply and sewage treatment divisions. As of 2013, the firm’s sewage treatment capacity was 583,000 tons/day, and water supply capacity was 1.26mn tons/day.

Exhibit 107: GrandBlue’s water supply volume Exhibit 108: GrandBlue’s sewage treatment volume

Drinking water supply(mn m3) Wastewater treatment（mn m3） 400 200 360 356 361 350 180 160 300 140 250 120 200 100 150 80 60 100 40 50 20 0 0 2011 2012 2013 2011 2012 2013

Source: Company data. Source: Company data.

WtE has become a growth engine for GrandBlue. Currently, the firm’s WtE capacity is 3,000 tons/day (its operating capacity is 1,500 tons/day). In Exhibit 109, we summarize C&G China’s current and upcoming projects. If successful, GrandBlue’s proposed acquisition of C&G China would increase the former’s total capacity to 14,350 tons/day, thus allowing the firm to become one of the top ten players in the country.

Goldman Sachs Global Investment Research 53 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 109: Summary of C&G China’s MSW generation projects

Project Project Capacity Net Profit（mn RMB） Waste Treatment Operation start Name Name(t/d) 2011 2012 1-3Q13 Fee (RMB/ton) date In Operation C&G Jinjiang Jinjiang I 1200 + II 600 1,800 (0.34) 0.31 31.36 70,sewage 190/ton May 2005+Apr 2010 C&G Huian Huian I 800 800 (5.18) 7.07 18.33 70 March, 2011 C&G Huangshi Huangshi I 800 800 (3.98) (11.89) (0.66) 1st 10 yr 49, then 60 March, 2011 C&G Anxi Anxi I 300+ II 300 600 (2.73) (5.66) 1.08 63May 2011+Nov 2013 C&G Jianyang Nanping BOT 600 (2.00) (5.65) (1.14) 60 Nov-12 C&G Fuqing Fuqing BOT 900 (0.69) (0.80) 1.87 61.5 Jan-12 Total 5,500 (14.92) (16.62) 50.83

Under Construction C&G Langfang Langfang BOT 1,000 (3.69) (14.73) (20.32) 58 2014 C&G Huian Huian II 400 70 2014 C&G Dalian Dalian Jinzhou BOT 1,000 78 2016 C&G Xiaogan Xiaogan BOT 700 (5.15) (0.34) (5.25) 55 2H2016 C&G China Guiyang BOT 2,000 65 2017 Total 5,100

Under planning C&G Huangshi Huangshi II 400 C&G Xiaogan Xiaogan II 350 Total 750

Total 11,350 (43.01) (54.10) 7.74

Source: Company data.

Waste transfer and transport: GrandBlue invested Rmb287mn in building 10 waste transfer stations with a total capacity of 4,000 tons/day in 2013, for which the government pays a fee of Rmb75/ton. On one hand, the waste transfer business has provided material resources for the firm’s WtE business; on the other, the business itself has generated revenue.

Kitchen waste treatment: Located in Nanhai Environmental Protection Industrial Park, GrandBlue’s kitchen waste treatment project adopts the “pre-treatment + anaerobic digestion” technology. Methane gas produced from the anaerobic digestion process can be used to generate power through biogas generation facilities. Besides internal usage, the power generated can also be fed into the power grid through the Industrial Park’s distribution network. Used oil recycled from kitchen waste can be used to produce bio- diesel. Solid substance produced from the treatment process can be sent to the waste incineration power plant in the Industrial Park. Biogas slurry can be recycled as well after treatment via the Industrial Park’s sewage treatment system.

Nanhai Gas: GrandBlue has proposed a 30% stake acquisition in Nanhai Gas. Please refer to Exhibit 110 for the latter’s 2011-2013 revenue and net profit figures.

Goldman Sachs Global Investment Research 54 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 110: Revenue and profit of Nanhai Gas on an uptrend in recent years

Revenue, Rmb mn Net profit, Rmb mn, RHS

1,400 132 140

1,200 1,155 120 1,008 1,000 920 101 100

800 80 78 600 60

400 40

200 20

0 0 2011 2012 2013

Source: Company data.

Competitive advantages Its Nanhai EP Industrial Park has a strong demonstration effect. Located in the University Town of Nanhai District, Foshan City, GrandBlue’s Nanhai EP Industrial Park has created a full value chain covering businesses such as waste transfer, WtE, sludge treatment, fly ash treatment and kitchen waste disposal, and has become a model project in China’s solid waste treatment industry. Its WtE project in the Industrial Park was rated one of the five AAA WtE plants in China in 2013.

Exhibit 111: Nanhai EP Industrial Park has become a model project in the solid waste management industry

Investment Nanhai Project Capacity Unit Fee Note (mn RMB) Waste Transfer 4000 t/d 75 RMB/ton 287

WtE 3000t/d（current1500t/d） 95 RMB/ton 1300 phase I conversion to complete in mid 2015

Start operation in July 2013,use afterheat of Sludge Treatment 450t/d（current 300t/d） 395 RMB/ton 119 waste incineration for sludge drying & incineration

Ash Disposal 90t/d 1100 RMB/ton 5.46

Kitchen Waste 300t/d Est 400-500 RMB/ton 259 Completion by end of 2015

Source: Company data.

Goldman Sachs Global Investment Research 55 August 5, 2014 China: Environmental Services: Waste Management

Timely transformation displays management’s forward-looking capability. When listed in 2000, GrandBlue’s main business was water supply in Nanhai District. Subsequently, the firm expanded into sewage treatment business in 2004. In 2006, GrandBlue tapped into the WtE field. It operated Nanhai EP Power Plant Phase I project and obtained construction and operation rights for Phase II project.

Easy access to funding channels as an SOE. The overall average financing cost for GrandBlue was 6.3% in 2011-2013, second only to Everbright International. For capital intensive companies like WtE plants, cheap financing cost is a key competitive advantage.

Key risks GrandBlue has only one waste-to-energy plant in Naihai, Guangdong at present, while C&G China possesses 11 WtE plants in different provinces (Fujian, Liaoning, Guizhou, Hubei and Hebei). Following the completion of the proposed acquisition of C&G China, we believe there could be management execution risks, given the significant increase in the number of WtE plants.

History and company profile GrandBlue will likely expand its footprint nationwide from Foshan. Formerly known as Nanhai Development, GrandBlue listed on the Shanghai Exchange in 2000, with Foshan Nanhai Public Assets Supervision Commission as its controlling shareholder. In 2013, 48%/30%/19% of GrandBlue’s revenue came from water supply/solid waste treatment/sewage treatment businesses. We believe revenue from water supply and sewage treatment will remain stable, while solid waste disposal will likely become a growth engine for the firm over the next three years.

Exhibit 112: GrandBlue’s 2013 revenue… Exhibit 113: …and gross margin breakdown (Rmb mn)

Revenue by sector Company GP Margin Drinking Water Waste Water Solid Waste treatment Others, 30, 3% 60%

50%

Solid Waste 40% treatment, 303, Drinking Water, 30% 30% 481, 48% 20% Waste Water, 188, 19% 10%

0% 2009 2010 2011 2012 2013

Source: Company data. Source: Company data.

Goldman Sachs Global Investment Research 56 August 5, 2014 China: Environmental Services: Waste Management

Sound Environmental: Market leader, full value chain; initiate Neutral

Investment Profile Investment view Low High We initiate Sound Environmental at Neutral with a 12-month target Growth Growth price of Rmb24.13. As a leader in the domestic solid waste sector, the Returns * Returns * company is developing its WtE, sanitation, recycling and environmental Multiple Multiple Volatility Volatility protection equipment businesses, besides its EPC business, covering the Percentile 20th 40th 60th 80th 100th full value chain. Sound Environmental Co Ltd (000826.SZ)

Asia Pacific Industrials Peer Group Average * Returns = Return on Capital For a complete description of the investment Core drivers of growth profile measures please refer to the Sanitation business and MSW value chain. Sound Environmental’s disclosure section of this document. subsidiary, Beijing Sound Environmental Sanitation, is engaged in the sanitation business (including street cleaning, garbage collection and Key data Current Price (Rmb) 21.84 transport in many cities), which provides waste sources to other 12 month price target (Rmb) 24.13 Market cap (Rmb mn / US$ mn) 18,424.6 / 2,981.4 segments like garbage disposal and helps to build a network for the Foreign ownership (%) -- firm’s recycling business. 12/13 12/14E 12/15E 12/16E WtE projects under construction. As of July 2014, Sound EPS (Rmb) 0.690.871.101.42 EPS growth (%) 36.5 25.8 26.4 28.9 Environmental has signed contracts on 16 WtE projects, with an EPS (diluted) (Rmb) 0.69 0.87 1.10 1.42 EPS (basic pre-ex) (Rmb) 0.69 0.87 1.10 1.42 accumulated design capacity of 13,200 tons/day. We expect these P/E (X) 36.3 25.0 19.8 15.4 P/B (X) 4.8 3.6 3.1 2.6 projects to gradually begin operation in 2014E-2017E. EV/EBITDA (X) 27.4 19.1 15.6 12.6 Dividend yield (%) 0.3 0.4 0.6 0.7 Declining funding costs. Sound Environmental’s overall financing cost ROE (%) 14.2 15.6 17.0 18.6 CROCI (%) 19.7 18.7 18.9 19.1 was 8.4% in 2012. Since then, the firm has reduced its debt ratio through a share placement worth Rmb1.81bn, which also led to an improvement in its financing capability. In 2013, the firm’s bond issuance drove its overall financing cost down significantly to 6.3%. Price performance chart 32 2,650

30 2,550 Risks to the investment case 28 2,450 Upside risks: Sound Environmental’s business encompasses the area of 26 2,350 waste management; hence, if the government were to raise its 24 2,250 investment in this segment, the company’s earnings may come in higher 22 2,150 than expected. 20 2,050 Aug-13 Nov-13 Feb-14 May-14

Downside risks: Sound Environmental has inked a number of WtE BOT Sound Environmental Co Ltd (L) Shanghai SE A Share Index (R) contracts from 2011 to date; any delay in project approval or site selection may in turn delay the launch of these projects. The firm had negative operating cash flow in 2012-2013 with receivables rising Share price performance (%) 3 month 6 month 12 month sharply; this may weaken its balance sheet if not properly resolved. Absolute 4.9 (14.1) (27.7) Rel. to Shanghai SE A Share Index (2.8) (20.1) (32.9)

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/01/2014 close. Valuation Our 2014E-16E EPS are Rmb0.87/1.10/1.42, implying 0.91x 2014E PEG, lower than the sector average of 0.93x. Based on our target PEG multiple of 1x, we derive our 12-month target price of Rmb24.13 (10% upside).

Goldman Sachs Global Investment Research 57 August 5, 2014 China: Environmental Services: Waste Management

Sound Environmental Co Ltd: Summary financials

Profit model (Rmb mn) 12/13 12/14E 12/15E 12/16E Balance sheet (Rmb mn) 12/13 12/14E 12/15E 12/16E

Total revenue 2,683.8 3,326.9 4,104.7 5,191.2 Cash & equivalents 1,791.6 1,669.1 1,810.1 1,818.0 Cost of goods sold (1,739.5) (2,157.2) (2,648.5) (3,337.3) Accounts receivable 2,461.5 3,051.4 3,764.7 4,761.2 SG&A (142.4) (176.5) (217.7) (275.3) Inventory 77.2 95.8 117.6 148.2 R&D (78.2) (96.9) (119.6) (151.3) Other current assets 0.0 0.0 0.0 0.0 Other operating profit/(expense) (63.5) (69.8) (77.9) (89.1) Total current assets 4,330.4 4,816.3 5,692.4 6,727.4 EBITDA 780.3 978.1 1,206.2 1,520.7 Net PP&E 1,386.0 2,015.7 2,787.2 3,758.9 Depreciation & amortization (120.0) (151.6) (165.3) (182.5) Net intangibles 1,589.1 1,473.2 1,357.2 1,241.3 EBIT 660.3 826.5 1,040.9 1,338.3 Total investments 25.9 25.9 25.9 25.9 Interest income 18.9 16.1 15.0 16.3 Other long-term assets 115.9 115.9 115.9 115.9 Interest expense (82.9) (92.6) (99.9) (114.3) Total assets 7,447.3 8,446.9 9,978.6 11,869.4 Income/(loss) from uncons. subs. (4.1) 0.0 0.0 0.0 Others 96.6 115.3 138.0 169.6 Accounts payable 919.5 1,140.2 1,400.0 1,764.0 Pretax profits 688.8 865.3 1,094.1 1,409.8 Short-term debt 1,198.7 1,198.7 1,498.7 1,798.7 Income tax (99.9) (124.8) (157.8) (203.3) Other current liabilities 0.0 0.0 0.0 0.0 Minorities (3.2) (4.0) (5.1) (6.6) Total current liabilities 2,118.2 2,339.0 2,898.7 3,562.7 Long-term debt 720.4 720.4 720.4 720.4 Net income pre-preferred dividends 585.6 736.5 931.2 1,199.9 Other long-term liabilities 208.0 311.3 428.7 552.1 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 928.5 1,031.7 1,149.1 1,272.5 Net income (pre-exceptionals) 585.6 736.5 931.2 1,199.9 Total liabilities 3,046.6 3,370.7 4,047.7 4,835.2 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 585.6 736.5 931.2 1,199.9 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 4,387.7 5,059.3 5,908.8 7,005.6 EPS (basic, pre-except) (Rmb) 0.69 0.87 1.10 1.42 Minority interest 12.9 17.0 22.1 28.6 EPS (basic, post-except) (Rmb) 0.69 0.87 1.10 1.42 EPS (diluted, post-except) (Rmb) 0.69 0.87 1.10 1.42 Total liabilities & equity 7,447.3 8,446.9 9,978.6 11,869.4 DPS (Rmb) 0.08 0.10 0.12 0.16 Dividend payout ratio (%) 11.1 11.1 11.1 11.1 BVPS (Rmb) 5.20 6.00 7.00 8.30 Free cash flow yield (%) (2.0) (0.3) (0.4) (1.0)

Growth & margins (%) 12/13 12/14E 12/15E 12/16E Ratios 12/13 12/14E 12/15E 12/16E Sales growth 27.1 24.0 23.4 26.5 CROCI (%) 19.7 18.7 18.9 19.1 EBITDA growth 19.5 25.4 23.3 26.1 ROE (%) 14.2 15.6 17.0 18.6 EBIT growth 20.8 25.2 25.9 28.6 ROA (%) 8.4 9.3 10.1 11.0 Net income growth 36.5 25.8 26.4 28.9 ROACE (%) 16.3 16.4 17.3 18.3 EPS growth 36.5 25.8 26.4 28.9 Inventory days 11.4 14.6 14.7 14.5 Gross margin 35.2 35.2 35.5 35.7 Receivables days 291.5 302.4 303.1 299.7 EBITDA margin 29.1 29.4 29.4 29.3 Payable days 171.4 174.3 175.0 173.0 EBIT margin 24.6 24.8 25.4 25.8 Net debt/equity (%) 2.9 4.9 6.9 10.0 Interest cover - EBIT (X) 10.3 10.8 12.3 13.6

Cash flow statement (Rmb mn) 12/13 12/14E 12/15E 12/16E Valuation 12/13 12/14E 12/15E 12/16E Net income pre-preferred dividends 585.6 736.5 931.2 1,199.9 D&A add-back 120.0 151.6 165.3 182.5 P/E (analyst) (X) 36.3 25.0 19.8 15.4 Minorities interests add-back 3.2 4.0 5.1 6.6 P/B (X) 4.8 3.6 3.1 2.6 Net (inc)/dec working capital (836.9) (387.6) (475.4) (663.1) EV/EBITDA (X) 27.4 19.1 15.6 12.6 Other operating cash flow 116.3 103.2 117.4 123.4 EV/GCI (X) 4.2 3.0 2.5 2.1 Cash flow from operations (11.7) 607.8 743.5 849.3 Dividend yield (%) 0.3 0.4 0.6 0.7

Capital expenditures (420.8) (665.4) (820.9) (1,038.2) Acquisitions 0.0 0.0 0.0 0.0 Divestitures 0.0 0.0 0.0 0.0 Others (83.6) 0.0 0.0 0.0 Cash flow from investments (504.4) (665.4) (820.9) (1,038.2)

Dividends paid (common & pref) (64.4) (64.9) (81.6) (103.2) Inc/(dec) in debt 376.4 0.0 300.0 300.0 Common stock issuance (repurchase) 50.3 0.0 0.0 0.0 Other financing cash flows (195.5) 0.0 0.0 0.0 Cash flow from financing 166.9 (64.9) 218.4 196.8 Total cash flow (349.3) (122.5) 141.0 7.9 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 58 August 5, 2014 China: Environmental Services: Waste Management

Core growth drivers WtE plants to gradually begin operation. As of end July 2014, Sound Environmental has signed 16 contracts on WtE projects, with an accumulated capacity of 13,200 tons/day. We expect its WtE project in Hunan Jingmai Industrial Park to come online in late 2014, and the construction of projects in Linqu (Shandong province), Dehui (Jilin province) and Kaixian (Chongqing) to complete in late 2015. In 2017E, we estimate the total operational capacity of these WtE plants would reach 7,950 tons/day.

Exhibit 114: Total contracted capacity of Sound Exhibit 115: Total operational capacity of Sound Environmental’s WtE plants Environmental’s WtE plants

Total Contract Capacity (t/d) Total Operation Capacity (t/d) 14000 13200 9000 7950 12000 8000 10100 7000 10000 6000 5050 8000 7100 5000

6000 4000 3000 4000 3500 2000 2000 2000 1000 0 0 2011 2012 2013 2014E 2015E 2016E 2017E

Source: Company data, Gao Hua Securities Research. Source: Company data, Gao Hua Securities Research.

Funding costs have declined markedly. Sound Environmental’s overall funding cost was 8.4% in 2012. The firm financed Rmb1.81bn through a share placement in late 2012. In 2012-2014, the firm conducted five bond issuances with interest rates of 6.0%-7.5%. In 2013, the firm’s overall funding cost fell to 6.3%.

Exhibit 116: Sound Environmental’s refinancing Exhibit 117: Sound Environmental’s funding cost eased in initiatives in recent years 2013

Method Amount, Rmb mn Interest rate Maturity Financing cost of Sound Environment Dec‐12 Equity 1813 Feb‐12 Debt 400 7.50% 1‐year 9.0% 8.4% Sep‐13 Debt 600 6.00% 1‐year 8.0% Nov‐13 Debt 500 7.20% 3‐year 7.0% 6.3% Mar‐14 Debt 400 6.50% 1‐year 6.0% Apr‐14 Debt 500 6.78% 3‐year 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2012 2013

Source: Company data. Source: Company data.

Goldman Sachs Global Investment Research 59 August 5, 2014 China: Environmental Services: Waste Management

Sanitation business expands and may help build a network for the firm’s recycling business. Through its 100% equity acquisition of Zhejiang Yiyi Sanitation Equipment in late 2013, Sound Environmental has further expanded its footprint in the sanitation subsector. The firm clinched the Hebei Ningjin Sanitation concession project with a bid price of Rmb397mn in March 2014. In April, the firm won the Xiling District sanitation outsourcing project in Yichang, Hubei province with a bid price of Rmb19.46mn. On March 25, 2014, Sound Environmental announced that the firm would invest Rmb100mn in establishing a wholly owned subsidiary, Beijing Sound Environmental Sanitation, to tap into the investment and operation of waste collection/transportation. According to the company, Sound Environmental has expanded its business to garbage clearance for two reasons: 1) garbage clearance market itself has great potential—for instance, the garbage collection/transport business accounted for 61% of the entire US waste industry in 2011; and 2) Sound Environmental expects the garbage collection/transport business to help build a network for its recycling business in the near term.

Exhibit 118: Garbage clearance market development

Cleaning area, mn sqm Marketization ratio Fee, Rmb/sqm Cleaning market, Rmb mn 2005 3,108 2010 4,850 2015E 6,639 20% 8 10,622 2020E 7,696 30% 9 20,781

Source: National Bureau of Statistics, Gao Hua Securities Research.

Main businesses and development trends Solid waste project construction. Currently, solid waste EPC still contributes 75% of the firm’s total revenue. New EPC orders in 2013 reached Rmb1.61bn, growing at a fast pace.

Exhibit 119: Solid waste EPC contracts/revenue of Sound Environmental

EPC order 2010 2011 2012 2013 1Q2014 Amount of project 18 27 39 Value, Rmn mn 622 1169 1311 1612 304

Municipal construction revenue, Rmb mn 620 1161 1572 2018

Source: Company data.

WtE BOT projects. Based on the contracts awarded to Sound Environmental as of end July 2014, the contracted capacity of the firm’s WtE projects has reached 13,200 tons/day, which would require an investment of c.Rmb6.37bn.

Exhibit 120: Sound Environmental’s WtE projects

Project name Capacity, ton/day Investment, Rmb mn Estimated finishing time Scale of stage 1, t/d Hunan Jingmai industrial park waste power project 2,000 1,000 2015.6 2,000 Shandong Linqu living waste processing project 500 350 2015.12 500 Jilin Dehui Living waste incineration power project 800 350 2015.12 400 Chongqing Kai County living waste processing project (CQ Lvneng) 600 250 2015.12 600 Jiangsu Lianshui living waste processing project 700 364 2016.12 350 Hubei Julu living waste incineration power project 900 428 2016.12 600 Heilongjiang Shuangcheng living waste processing project 600 270 2016.12 600 Shandong Yishui living waste processing project 600 270 2017 300 Shandong Linqing living waste processing project 800 400 2017 400 Hubei Honghu living waste incineration power project 800 400 2017 500 Xinji living waste processing project 800 400 2017 400 Chongqing nachuan living waste processing (CQ Bangya) 1,000 440 2017 500 Hebei Wei County living waste incineration power project 800 400 2017 400 Hebei Qianan waste cleaning and incineration power project 800 350 2017 400 Liaoning Yingkou living waste processing project (incineration+landfilling) 800 400 2018 500 Shandong Chengwu waste incineration power project 700 300 2018 400 Total 13,200 6,372 8,850

Source: Company data, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 60 August 5, 2014 China: Environmental Services: Waste Management

Kitchen waste disposal. The firm has signed contracts since 2012 on five kitchen waste disposal projects with a total capacity of 610 tons/day and a total investment of Rmb398mn.

Exhibit 121: Sound Environmental’s kitchen waste disposal projects since 2012

Project Capacity, ton/day Investment, Rmb mn Anhui Huainan kitchen waste collecting and processing project 100 60.00 Shanxi Xianyang city kitchen waste processing project 100 84.24 Anhui Huaibei kitchen waste collecting and processing project 200 105.00 Zhejiang Jinhua kitchen waste processing project 110 89.01 Guizhou Bijie kitchen waste processing project 100 60.00 610 398.25

Source: Company data.

Hazardous waste disposal. Sound Environmental now has two hazardous waste disposal projects in operation, namely the Mengdong project and the Hubei project, both of which were acquired from Sound Group, its parent company.

Exhibit 122: Sound Environmental’s current hazardous waste disposal projects

Project Capacity, 10k tons/year Investment(Rmb mn) East Inner Mongolia industrial and medical hazardous waste processing project 1.64 104 Total 29k tons/year (expanding to 52k): Incineration 10k tons/year, materialization 7k tons/year, Hubei Huichu hazardous waste processing project 200 stablization 10k tons/year, safe landfilling 15.5k tons/year (including direct landfilling of 2k tons/year)

Source: Company data.

Resource recycling. On March 25, 2014, Sound Environmental announced its 60% equity acquisition of Henan Hengchang Precious Metal. The latter chalked up net profit of Rmb9.74mn in 2013 and Rmb1.47mn in 2M14. Per its announcement, Sound Environmental expects net profit contribution from Henan Hengchang of Rmb35mn in 2014 and Rmb42mn in 2015.

Water business. According to the division of business scope between Sound Environmental and its parent company, Sound Environmental will focus on its solid waste business and will not expand its water business into new markets, i.e., its water investment and operation will be limited to certain areas including Hubei province, Baotou in Inner Mongolia, Nanchang in Jiangxi province, Muyang in Jiangsu province, and Hengcun in Tonglu city, Zhejiang province. Sound Environmental’s shareholders have expressed that the firm will not have any new water investment/operation projects in the aforesaid regions. Currently, Sound Environmental has a total capacity of c.1.54mn tons in sewage treatment and tap water supply.

Goldman Sachs Global Investment Research 61 August 5, 2014 China: Environmental Services: Waste Management

Exhibit 123: Current water projects of Sound Environmental

Operating Province Company Capacity, 10k tons/day Hubei Xiangyang Hanshui Qingyi Waterworks 10

Hubei Jingmen Xiajiawan Waterworks 10 Hubei Jingmen Jingqing Waterworks South City Wastewater Plant 5 Hubei Jingmen Jingqing Waterworks Caoshi Wastewater Plant 3 Hubei Zhijiang Zhiqing Waterworks 3.5 Jiangxi Nanchang Xiang Lake Waterworks 20 Inner Mongolia Baotou Lucheng Waterworks 10 Hubei Daye Qingbo Waterworks 3 Hubei Jiayu Jiaqing Waterworks 8 Hubei Xianning Ganyuan Waterworks 3 Hubei Yichang Sanxia Waterworks 20 Hubei Jiangli Jingyuan Waterworks 3 Total 98.5 In construction Province Company Capacity, 10k tons/day Hubei Laohekou Chenfu wastewater BOT project 1

Operating municipal water supply project Province Company Capacity, 10k tons/day Hubei Yichang Sanxia Waterworks 36 Zhejiang Fuchun Waterworks Development 1.5 Hubei Jiayu Ganquan Water 6 Jiangsu Muyuan Water Supply 10 Total 53.5

Source: Company data.

Competitive advantages Full value chain: The firm’s business covers the entire value chain, including engineering design, equipment production, construction, and investment and operation. In terms of business scope, it covers domestic garbage and industrial waste disposal, and therefore is able to provide packaged solutions to address local governments’ solid waste disposal needs.

Exhibit 124: Full value chain of Sound Environmental

Engineering design Solid Waste Treatment

Equipment Manufacturing Household Waste Industrial Waste

Project Construction WtE Kitchen Waste Integrated Treatment Integrated Utilization Hazardous Waste Treatment

Operation of investment

Source: Company data.

Many years of industry experience: Sound Group – Sound Environmental’s parent company – was established in 1993 and is armed with over 20 years of operational experience in the environmental protection field. Since 2005, Sound Environmental has constructed many large-scale domestic garbage and hazardous waste disposal projects.

Exhibit 125: Solid waste EPC projects constructed by Sound Environmental since 2005

Project name Capacity, ton/day Investment, Rmb mn Beijing Asuwei living waste processing project 2000 332 Shanghai Qingpu living waste processing project 1000 116 Inner Mongolia Tongliao living waste landfilling project 800 100.00 Hubei industrial and medical waste processing project 80 128 Gansu industrial and medical waste processing project 72 121 Daqing living waste processing project 1000 258 Tianmen waste processing project 600 108 Shandong Dezhou living waste incineration power project 600 252 Total 5552 1163

Source: Company data.

Goldman Sachs Global Investment Research 62 August 5, 2014 China: Environmental Services: Waste Management

Leader of non-SOE EP companies. Sound Environmental realized revenue of Rmb2.68mn in 2013. With total assets of Rmb7.45bn and Rmb1.79bn cash in hand, the firm is the largest non-SOE company in the domestic solid waste sector. Mr Wen Yibo, Chairman of Sound Environmental, is also Chairman of the Environment Service Industry Chamber affiliated to the National Federation of Industry and Commerce.

Key risks Upside risks:

Sound Environmental’s business encompasses the area of waste management. Hence, if the government were to increase its investment in this particular segment, the company’s earnings may come in higher than expected. Downside risks:

Slower-than-expected progress on WtE projects. Sound Environmental has signed a number of WtE BOT contracts since 2011 to date, but none of these projects have begun operation. Any delay in project approval or site selection may in turn delay the launch of these projects.

Operating cash flow could be improved. The firm garnered negative operating cash flow in 2012-2013 with receivables rising sharply; this may weaken the firm’s balance sheet if not properly resolved.

History and company profile Sound Environmental is a leading player among non-SOE companies and covers the full value chain of the solid waste sector. Sound Environmental listed on the Shenzhen Stock Exchange in 2003 through a backdoor listing. Apart from Sound Environmental, Sound Group also has an H-share subsidiary, Sound International (0967.HK; Not Covered). As the biggest revenue contributor of Sound Environmental, the solid waste EPC segment chalked up revenue of Rmb2.02bn in 2013, accounting for 75% of the firm’s total revenue. However, its gross margin has been stable, and was 35.2% in 2013.

Exhibit 126: Sound Environmental’s revenue… Exhibit 127: …and gross margin breakdown

2013 Revenue breakdown(Rmb mn) Company GP Margin Solid Waste EPC Waste equipment WasteWater treatment Drinking Water Solid Waste supply, 107, 4% Treatment, 14, Drinking Water supply Solid Waste Treatment 1% WasteWater Others, 6, 0% 80% treatment, 222, 70% 8% 60% 50% Waste Solid Waste 40% equipment, EPC, 2,018, 75% 30% 316, 12% 20% 10% 0% 2009 2010 2011 2012 2013

Source: Company data. Source: Company data.

Goldman Sachs Global Investment Research 63 August 5, 2014 China: Environmental Services: Waste Management

Disclosure Appendix Reg AC We, Yong Han, CFA and Jefferson Zhang, 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. 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) Yong Han, CFA: Asia Commodities Companies, Asia Energy, China Industrials. Jefferson Zhang: Asia Commodities Companies. Asia Commodities Companies: ACC, Aluminum Corporation of China (A), Aluminum Corporation of China (H), Ambuja Cements, Angang Steel (A), Angang Steel (H), Anhui Conch Cement (A), Anhui Conch Cement (H), Banpu Public Company, Baoshan Iron & Steel, BBMG Corporation (A), BBMG Corporation (H), Beijing Zhongke Sanhuan High-Tech Co Ltd, China Coal Energy (A), China Coal Energy (H), China Conch Venture Holdings Limited, China Minmetals Rare Earth Co., Ltd, 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., Dongpeng Holdings Co Ltd, Grasim Industries, Harum Energy Tbk PT, Inner Mongolia Baotou Steel Rare-Earth Group Hi-Tech Co Ltd, Jiangxi Copper (A), Jiangxi Copper (H), Korea Zinc, Maanshan Iron & Steel (A), Maanshan Iron & Steel (H), Mongolian Mining Corp., Ningbo Yunsheng Group Co Ltd, PT Adaro Energy Tbk, PT Indo Tambangraya Megah, PT Tambang Batubara Bukit Asam, Sesa Sterlite Ltd, Shandong Gold Mining Co, Shenzhen Zhongjin Lingnan Nonfemet, Shougang Fushan Resources Group, Shree Cement Ltd, Sino-Platinum Metals Co., Ltd, Tongling Nonferrous Metals Group Co., Ultratech Cement, Xiamen Tungsten Co., Ltd., Yanzhou Coal Mining (A), Yanzhou Coal Mining (H), Zhaojin Mining Industry, Zhongjin Gold, Zijin Mining (A), Zijin Mining (H). Asia Energy: Guizhou Panjiang Refined Coal, Inner Mongolia Yitai Coal Co Ltd, Jizhong Energy Resources, Pingdingshan Tianan Coal Mining, Shanxi Lanhua Sci-Tech Venture, Shanxi Lu'an Environmental Energy Development, Shanxi Xishan Coal and Electricity Power, Yangquan Coal Industry Group, Yitai Coal. China Industrials: Beijing Enterprises Water Group Limited, Beijing Originwater Technology Co., Ltd., Beijing Water Business Doctor Co., Ltd, China Everbright International Limited, Dongjiang Environmental Company Limited, Dongjiang Environmental Company Limited, GrandBlue Environment Co Ltd, Sound Environmental Co Ltd, Tianjin Capital (A), Tianjin Capital (H), Tianjin MOTIMO Membrane Technology Co., Ltd. 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

Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 32% 54% 14% 42% 36% 30% As of July 1, 2014, Goldman Sachs Global Investment Research had investment ratings on 3,697 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below. Price target and rating history chart(s) 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

Goldman Sachs Global Investment Research 64 August 5, 2014 China: Environmental Services: Waste Management

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Goldman Sachs Global Investment Research 65 August 5, 2014 China: Environmental Services: Waste Management

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