Water | CHINA POWER AND UTILITIES NOMURA INTERNATIONAL (HK) LIMITED
Evan Li +852 2536 7746 [email protected] NEW Ivan Lee, CFA +852 2536 7745 [email protected] THEME ANCHOR REPORT
Turning hot again! Stocks for action China’s water resource per capita is only a quarter of the global average, but its water It is a good time to cherry-pick quality consumption (per unit of GDP) is 5.5x the international level. Over 400 cities are still players that can march forward as chronically short of water, and the growth potential is obvious. There is no shortage of industry leaders in this emerging catalysts: the government is setting harder targets and larger budgets for the water market. We prefer CEI and GDI, put industry, tariffs are being raised to support reasonable returns, and the RMB4tn CWA and BEW on our watch-list, and stimulus plan accelerates project approvals for water utilities. And yet, valuations have would avoid Tianjin Capital.
been bogged down by spill-over concerns from the credit crunch and a general Price Price aversion to small- and mid-cap stocks. Our analysis finds that core operations and Stock Ticker Rating (11 Feb) target cashflows of the water utilities we are covering in China should remain immune from CEI 257 HK BUY* 1.56 2.20 the global credit crunch, and we believe the corrected valuations present a good entry GDI 270 HK BUY 3.15 4.10 CWA 855 HK NEUTRAL* 1.11 1.25 opportunity. However, as the industry remains fragmented while major consolidation is BEW 371 HK NEUTRAL* 0.90 1.03 unlikely and track records are short, we recommend cherry-picking quality players that Hyflux HYF SP NEUTRAL 1.77 1.90 could evolve into industry leaders. China Everbright International and Guangdong Epure EPUR SP NEUTRAL* 0.32 0.35 Investments are our BUYs; CWA and BEW are on our watch-list. TCEP 1065 HK REDUCE* 1.45 0.80 * Initiating coverage c Natural water shortages exacerbated by growing pollution Prices in local currency
d Strong government support on growth Analysts Evan Li e Privatisation is key for urban tap water supply +852 2536 7746 [email protected] f Higher growth profile seen in wastewater treatment
Ivan Lee, CFA g We recommend cherry picking in a fragmented market +852 2536 7745 [email protected] Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months.
See the important disclosures and analyst certifications on pages 137 to 140. gl
Nomura 17 February 2009
Water | CHINA
POWER AND UTILITIES NOMURA INTERNATIONAL (HK) LIMITED
Evan Li +852 2536 7746 [email protected] NEW Ivan Lee, CFA +852 2536 7745 [email protected] THEME
Our view Stocks for action
Data show operations and cashflows of water utilities in China will remain immune It is a good time to cherry-pick quality to the global credit crunch. Now that valuations have corrected, we think it is a good players that can march forward as time to cherry-pick quality players that can march forward as industry leaders industry leaders in this emerging backed by government support recently reiterated by Beijing. market. We prefer CEI and GDI, put CWA and BEW on our watch-list, Anchor themes and would avoid Tianjin Capital. China’s per capita water resources are only a quarter of the global average, while its water consumption (per unit of GDP) is 5.5x the global average. Shortages, Price Price Stock Ticker Rating (11 Feb) target pollution, geographical disparity and inefficient water use cost 8-10% of the nation’s CEI 257 HK BUY* 1.56 2.20 GDP. More than 400 cities suffer water shortages of 16mn m3/day. GDI 270 HK BUY 3.15 4.10 CWA 855 HKNEUTRAL* 1.11 1.25 BEW 371 HKNEUTRAL* 0.90 1.03 The government is setting harder targets and larger budgets for the water industry Hyflux HYF SPNEUTRAL 1.77 1.90 to promote privatisation and capacity growth. Water quality has become a key Epure EPUR SPNEUTRAL* 0.32 0.35 concern for the government, and tariffs are rising to justify investment returns. TCEP 1065 HKREDUCE* 1.45 0.80 * Initiating coverage Prices in local currency
Turning hot again! Analysts Evan Li c Natural water shortages exacerbated by growing pollution +852 2536 7746 [email protected] China’s per capita water resources are only a quarter of the global
average, but its water consumption (per unit of GDP) is 5.5x higher. Ivan Lee, CFA More than 400 cities suffer water shortages and pollution, with the +852 2536 7745 shortfall of 16mn m3/day costing 8-10% of China’s GDP, according to [email protected] government statistics. d Strong government support on growth The government is setting harder targets and larger budgets for the water industry, and raising tariffs to justify reasonable returns. The RMB4tn stimulus plan should help to accelerate project approvals for water utilities. e Privatisation is key for urban tap water supply Growth in tap water supply is seen in privatisation/commercialisation, where M&A execution is a success factor. Fewer regulatory and collection risks and a flexible business mix to realign profitability are positive drivers, proven by the 4pp margin improvement in the industry since the water market was opened up in 2004. f Higher growth profile seen in wastewater treatment China’s wastewater treatment has to reach 121mn m3 by 2010F (a 19% CAGR) to meet the government’s target sewage treatment ratio of 70%. However, only 100mn m3 is included in the government’s original plan, indicating more favourable policies are required to stimulate growth. g We recommend cherry-picking in a fragmented market The emerging water industry builds on visible growth but remains fragmented due to underinvestment and the continued entry of new players. Under our cherry-picking strategy, we like China Everbright and GD Investments, put CWA and BEW on our watch-list, and avoid Tianjin Capital.
Nomura 1 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Contents
Our 12-month sector view — Positive 4 China is in a water crisis 4 Clear government support 4 Resilient growth — the nature of water utilities 5 Water tariff on an uptrend 5 Opportunities seen in privatisation for tap water supply 5 Higher growth factors seen in wastewater treatment 6 Potential waiting to be explored in solid waste treatment 6 Cherry-picking in a fragmented landscape 6
China is in a water crisis 14 Natural shortages — worsened by disparity 14 Consistent rise in water demand 15 Pollution exacerbates water scarcity 16
Identifying growth in the water market 17 Strong government support 17 Rich growth opportunities seen in privatisation 19 Demand grows on urbanisation 19
China’s water value chain 21 Water quality in China 21 Non-revenue water 23 Natural gas versus water 23
Urban water supply 24 Revenue model 24 Large potential for an underinvested market 24 Robust growth from privatisation 26 Margin expansion from efficiency improvement 27 Minimal collection risk 27 Suggested 8-12% ROE with direct cost pass-through 27 Change in water usage habit 28 Less risk from China’s slowing industrial outlook 28
Wastewater treatment 30 Revenue model 30 Huge growth potential ahead in wastewater treatment 30 Government’s wastewater treatment budget 31 Demand driven largely by the residential sector 31 In wastewater treatment, we prefer the industrial space 32 Margin expansion from entering into water-recycling 32 Key players involved in the urban wastewater treatment market 33
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China’s water tariff under reform 34 Background on water tariff evolution 34 Water tariff is on the rise 34 Faster growth in wastewater treatment tariff 37
RMB4tn stimulus package fuels growth 38 Details of the stimulus plan 38 State Council announced RMB20bn budget for 4Q08 38 Brighten the outlook of the listed water utilities 39
South-to-north water diversion project 40 Timeline 41 Financing 41
Division of power among regulators 42
China’s solid waste industry is emerging 44 China’s solid waste problem 44 Underinvested market for waste treatment 45 Boosting waste incineration 46 Government’s support in waste treatment 46
IFRIC 12 accelerates profit 48 Adoption of IFRIC 12 48
Sensitivity to global recession; trough valuation 50 Trough valuation of individual stocks 52
Latest company views China Everbright 57 Guangdong Investments Ltd 72 Tianjin Capital Environmental 88 China Water Affairs Group Ltd 98 Beijing Enterprises Water 111 Hyflux 123 Epure International Ltd 128
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Water | China Evan Li / Ivan Lee, CFA
Executive summary Our 12-month sector view — Positive Stock prices of listed water utilities in Asia have fallen by 50-75% (versus a 40% The market was overly alarmed at decline in the Hang Seng Index) during the past nine months. This came as the market water prospects, but credit is not really an issue turned sceptical about the growth prospects of these companies under the recent credit tightness, and because emerging small- to mid-cap companies, in general, were not preferred. However, the operational performance and cashflows of water projects in China remain stable, and debt financing has not been a concern since utilities and infrastructure are well supported by domestic commercial banks. Now that valuations have corrected, we recommend investors to cherry-pick quality players that can become industry leaders, backed by favourable government support, which Beijing recently reiterated following China’s RMB4tn stimulus package.
Exhibit 1. Water and environmental protection utilities: valuation summary
Price Market Nomura target Price cap Fiscal P/E (x) P/BV (x) Yield (%) Net debt/equity (%) ROE (%) Company Ticker rating (lc) (lc) (US$mn) Y/E 08F 09F 08F 09F 08F 09F 08F 09F08F 09F China Everbright Intl 257 HK BUY 2.20 1.56 631 Dec 16.9 12.8 1.8 1.6 0.9 1.2 33 36 10.7 12.6 Guangdong Investment 270 HK BUY 4.10 3.15 2,481 Dec 11.1 8.9 1.2 1.2 4.9 4.4 52 44 11.2 13.0 China Water Affairs 855 HK NEUTRAL 1.25 1.11 176 Mar 13.7 10.6 0.7 0.6 n.a. n.a. 43 17 4.9 5.4 Beijing Enterprises Water 371 HK NEUTRAL 1.03 0.90 305 Dec 39.6 24.1 1.6 1.6 n.a. n.a. 25 72 1.7 6.0 Hyflux Limited HYF SP NEUTRAL 1.90 1.77 617 Dec 16.8 14.1 3.2 2.7 1.3 1.6 112 156 21.0 20.8 Epure International EPUR SP NEUTRAL 0.35 0.32 264 Dec 8.7 7.1 1.3 1.1 n.a. n.a. Net cash Net cash16.5 17.1 Tianjin Capital * 1065 HK REDUCE 0.80 1.45 1,153 Dec 8.5 13.6 0.6 0.6 3.7 2.3 76 72 7.1 4.3
Average 16.5 14.0 1.5 1.3 2.7 2.4 57 66 10.5 11.3 Note: Prices as of 11 February, 2009; * market cap figure for Tianjin includes A and H shares; minor variance in the numbers above relative to those in the related company reports reflects that all data for the water stocks under our coverage are based on recurring earnings. Source: Company data, Nomura International (Hong Kong) Limited estimates
China is in a water crisis Natural water shortages, exacerbated by growing demand and water pollution, have Population, shortage and transformed China’s water problem into a crisis. China’s water resources per capita inefficient use are creating a (2,156m3) are only a quarter of the global average, ranking China 13th globally in water crisis terms of water deficiency. However, its water consumption (per unit of GDP) is 5.5x the global average, according to government statistics. More than 400 cities in China suffer water shortages, with an average shortfall of 16mn m3 per day. Geographical disparity worsens the situation since only 20% of water resources are available in Northern China, with per capita resources below the critical line set by the United Nations. Already, the State Environmental and Protection Administration (SEPA) estimates that water shortages and inefficient usage will cost 8-10% of the nation’s GDP, without considering health and other social concerns. While China’s population is expected to reach 1.6bn by the middle of the 21st century, according to the Ministry of Water Resources (MWR), per capita water resources will slide to 1,700 m3.
Owing to rapid growth in industrial activities and urbanisation, about 50% of the Rapid industrialisation and country’s wastewater is currently released into rivers and the sea without any urbanisation is polluting China’s treatment, according to the MWR. Shanghai, for example, is surrounded by rivers but rivers still has one of the lowest water resources per capita in the country, partly due to its large population growth and water pollution in upstream areas. According to the SEPA, 62% of the water flow from the seven major river basins is classified as non potable.
Clear government support Following the power generation and gas distribution industries, the opening up of This will be an area of huge China’s water market came rather recently (2002-04), and most water infrastructure government spending … remains in the government’s hands. China’s 11th Five-Year Plan (2006-10) sets hard targets for the water industry: 1) increase water supply to 100mn people in rural areas by 2010F; at present, 323mn people in rural areas drink unsafe water; 2) increase
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Water | China Evan Li / Ivan Lee, CFA
urban water supply by 40bn m3 pa; 3) reduce water consumption per unit of GDP by 20% (not per capita); and 4) increase the sewage ratio to 70% (from 63%). The central government budgeted more than RMB473bn of investment in water assets for 2006- 10F (RMB330bn for wastewater treatment, RMB143bn for water supply), which was subsequently raised by RMB33bn in January 2008 by the Ministry of Construction to improve water quality. Also, the State Council requires local governments to include plans for water-treatment facilities in their capital construction budgets.
Note, that the State Council’s RMB4tn stimulus package announced in November … albeit largely in rural areas and 2008 may not provide imminent benefits to the water utilities under our coverage since outside of our coverage the agenda is geared more towards improving rural water infrastructure. However, we believe that this gives a green light to all local governments to accelerate project approvals in water and environmental protection.
Resilient growth — the nature of water utilities Water has no significant raw material costs (especially in the southern regions), unlike power production, oil refining and gas distribution, which are subject to the risk of fluctuating fuel costs. Raw water resource fees, charged by the government, are generally 2-5% of the final water tariff, and these are passed on to end users.
Industrial users account for only 45% of the water supply volume in urban China (44% Water in China is less weighted for wastewater treatment), and this is trending down on improved water efficiency toward industrial use, and this among manufacturers and increased water consumption in the residential sector owing skew is likely to become more pronounced to modernisation and urbanisation. The water industry has less exposure to the recent economic turmoil and industrial slowdown than the power sector (industrial sector accounts for 76% of consumption) and gas distribution (50-80%), according to the National Bureau of Statistics and our industry checks.
Water tariff on an uptrend The government has started to view water as a commercial product, and this has seen Now that water is recognised as a water prices climb at a CAGR of 11% over 2000-07. Given that China’s water tariff is valuable resource, tariffs are on the rise and have more scope to only 20% of the international average and, per China Water Net, accounts for 1.0% of rise the average household’s disposable income in China (lower than 2-12% in the case of electricity bills and 3% recommended by the Ministry of Housing as an effective benchmark to reflect water conservation), we see greater upside in terms of tariff hikes than for other utilities. For instance, Guangzhou city has just adopted a progressive tariff mechanism for wastewater treatment, which will increase prices by 29-171% on 1 July, 2009. Also, the MWR indicated in January 2009 that China’s water tariff will have to increase to support the government’s 2010F targets to reduce water consumption (per unit of GDP) by 20% (reduce 60% by 2020F), fight pollution and raise water quality.
Existing policies guarantee an 8-12% ROE for water utilities projects, legitimate Margins are protected; regulatory justification to safeguard margins over cost escalations. And while regulatory risk risks are not that great remains a concern — water utilities have to obtain approvals from the government and at public hearings — water tariff hikes are made possible by authorities at the local level (city or municipal government), which involves less bureaucracy and fewer social concerns than at the central government level.
Opportunities seen in privatisation for tap water supply Further to the political reforms in the water industry since early-2000, recent central Tap water plants are earning government policies encourage local authorities to privatise/commercialise water higher returns utilities. Tap water supply plants in China are still fairly distressed and operating at poor returns (4.1% net margin and 0.8% ROA in 2007) due to their previous status as public welfare enterprises. But with local governments under pressure to improve water quality since the bar is being set higher at the national level, reasonable investment returns are being offered to foreign and domestic investors to take over distressed operations and turn around operations and profitability. After the opening up
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Water | China Evan Li / Ivan Lee, CFA
of the water market, gross and net profit margins of tap water supply plants in China edged up 4pp to 28% and 3pp to 4%, respectively, in 2004-07. Unlike wastewater treatment, water supply infrastructure is more developed and has grown at a steady rate (3% CAGR), in line with urbanisation and population growth. For the listed water utilities under our coverage, growth opportunities in the tap water supply sector are identified in privatisation/commercialisation, where management track records and M&A execution are key success factors.
The tap water supply segment has certain advantages over wastewater treatment, Tap water supply is a more since the latter’s standalone operations receive fixed and highly subsidised tariffs from developed and flexible market the government as its single debtor. But water supply tariffs are generally passed on to and directly collected from end users; therefore, fewer regulatory and collection risks are involved with the local government. Also, tap water supply plants are involved in pipeline expansion and meter installation, which provide more flexibility and components to realign profitability.
Higher growth factors seen in wastewater treatment Wastewater treatment is still in the development stage and existing capacity is still far below the government’s target set in the 11th Five-Year Plan. We see significant growth potential in the near term, given: 1) severe under-investment and under- penetration; 2) environmental pollution under current conditions; and 3) the sewage pipeline networks not being fully set up in many cities.
We estimate that China’s wastewater treatment has to reach a daily capacity of 121mn m3 by 2010F (19% CAGR) to meet the government’s target sewage treatment ratio of 70% (63% in 2007). But with the 11th Five-Year Plan calling for a daily capacity of only 100mn m3, this may be difficult to reach.
We see greater growth opportunities in wastewater treatment, due to prevailing More growth, but among other underdevelopment in China and the positive backdrop set by recent government things, the regulatory bar is policies, when compared with conventional tap water supply. However, we are still higher cautious on whether or not long-term earnings and margins of these build-operate- transfer (BOT) / transfer-operate-transfer (TOT) projects can be sustained, given higher regulatory risks in having concentrated reliance on local governments and intensifying competition in the market.
Potential waiting to be explored in solid waste treatment China’s waste treatment industry is still in its infancy, although proper legislation has Solid waste treatment has a ways been set to open up opportunities in this new market. Serious under-investment (only to go, but the government is acting … 62% of residential urban waste was treated properly in 2007) and rising pollution in all Chinese cities create abundant growth opportunities since the government is rolling out stricter policies. However, the competitive landscape remains fragmented and we are waiting for key players to emerge.
To encourage waste treatment coverage, the government promotes investment in … for example, by allowing higher waste-to-energy, providing profitable waste treatment fees and on-grid tariffs at a IRRs for these projects RMB0.25/kWh premium over the provincial benchmark for coal-fired power plants. On our estimates, IRRs for waste-to-energy projects are at 15-17%, beating those for tap water supply (10-12%), hydro power (12%), wastewater treatment (8-10%) and wind energy (6-7%).
Cherry-picking in a fragmented landscape
A fragmented industry China’s water industry has reasonable growth potential in various sub-sectors along The industry is really waiting for the value chain. Although we believe that competition will mount as domestic and stronger players international players enter the market, our industry outlook remains positive given China’s under-investment in water and environmental control infrastructure and
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Water | China Evan Li / Ivan Lee, CFA
favourable government policies that provide visibility for growth over the next few years. However, the industry landscape is fragmented, and we do not expect major consolidation within the next two years. Industry participants are still positioning themselves within this emerging market and generally deliver inconsistent performance.
Stock preferences Our selection criteria in cherry-picking quality players encompass: 1) a solid track- record in executing new projects for expansion; 2) superior investment returns; 3) a healthy balance sheet; 4) quality management, and; 5) undemanding valuation.
Among the water-related companies under our coverage, our preference lies with China Everbright is our top pick China Everbright International (CEI, BUY) due to its regional dominance that brings in water visible growth (14% EPS CAGR) and higher margins; its project IRRs of 10-12% in wastewater treatment and 17% in waste-to-energy have both been 2-3pp higher than those of peers over the past two years. CEI has proven success in cross-selling these two segments in the provinces in which it operates. Its recent (11 January, 2009) win of a 2,000-tonne waste-to-energy plant in Jinan has provided it a foothold to expand on Shandong province’s low penetration of solid waste treatment. At 13x FY09F P/E and 1.6x P/BV, valuations are undemanding when compared with peer averages of 14x and 1.3x, respectively. We believe CEI should trade at a wider premium over peers given its higher ROE (13% FY09F ROE, versus 5-8% for other emerging water companies in China), sustainable earnings growth (30% y-y in FY09F, versus peers’ 15-30% y-y excluding Beijing Enterprises Water), and our floor valuation on existing capacity (excludes future growth) suggests a fair NAV per share of HK$1.60. Our price target is HK$2.20. We also like Guangdong Investments (GDI, BUY) for its low risk and resilient growth We also like Guangdong profile. The new agreement signed in December 2008 for water supply to Hong Kong Investment on growth, valuation and possible asset injection at a fixed revenue came in 19-34% (2009-11F) higher than the previous agreement. Potential injection of infrastructure and utilities assets from its mainland parent should be the next catalyst to watch. GDI’s FY09F P/E of 9x appears attractive against other integrated utilities in Hong Kong, which are trading at 12-26x. Although we are cautious on China Water Affairs (CWA, NEUTRAL) because of its China Water Affairs is a eroding margins (escalating SG&A expenses) and lack of growth visibility, the NEUTRAL, but things could go well here company looks positioned to benefit in a multi-year growth cycle. As a pure play in tap water supply, earnings upside remains strong. Thus we put the stock on our watch list until we see signs that cost-control and project pipelines have been re-established.
Beijing Enterprises Water (BEW, NEUTRAL) has reinvented itself into a water utility Beijing Enterprises Water is a over the past six months since the takeover by Beijing Enterprises Holdings (BEH, rising star, but pricey in light of BUY), and we think it is equipped with a clear focus and well-defined management significant potential dilution team needed to double capacity to 3.0-3.5mn m3 by end-2009F. However, valuation looks rich due to potential share dilution of up to 67% from its convertible bonds, and we recommend investors wait for better entry points here.
We are Neutral on engineering, procurement and construction (EPC) providers for Neutral on EPC providers Hyflux wastewater treatment, including Hyflux (NEUTRAL) and Epure (NEUTRAL), due to and Epure their compromised business model, increasing competition and higher funding costs that cloud earnings visibility.
We recommend investors avoid Tianjin Capital Environmental Protection (REDUCE) Tianjin Capital Environmental given a pending major tariff cut (from RMB1.93/m3 to RMB0.8-1.2/m3) that could form Protection is looking at a tariff cut and poor prospects an overhang; the potential government compensation package also looks unattractive.
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Water | China Evan Li / Ivan Lee, CFA
Valuation comparison
Exhibit 2. Water and integrated utilities: valuation comparison (1) Market Free Nomura PTPrice cap float Rept'g Fiscal Net profit (LC mn) Net earnings growth (%) Company Ticker Rating (lc) (lc) (US$mn) (%) curr Y/E 07 08F 09F 07 08F 09F Hong Kong and Singapore listed water utilities China Everbright Intl 257 HK Buy 2.20 1.56 633 43.9 HKD Dec 07 294 290 387 150 (1) 33 Guangdong Investment 270 HK Buy 4.10 3.15 2,504 38.8 HKD Dec 07 1,476 1,743 2,185 3 18 25 China Water Affairs 855 HK Neutral 1.25 1.11 173 65.7 HKD Mar 08 44 102 134 n.a. 131 32 Beijing Enterprises Water 371 HK Neutral 1.03 0.90 302 35.7 HKD Dec 07 (3) 23 98 n.a. n.a. 326 Hyflux Limited HYF SP Neutral 1.90 1.77 618 66.2 SGD Dec 07 36 55 65 160 55 19 Epure International EPUR SP Neutral 0.35 0.32 274 37.0 CNY Dec 07 164 207 254 49 26 23 Tianjin Capital * 1065 HK Reduce 0.80 1.45 1,153 43.6 CNY Dec 07 184 216 134 16 17 (38) NWS Holdings 659 HK Buy 11.55 9.80 2,599 37.9 HKD Jun 08 2,005 3,818 2,339 21 90 (39) China Water Industry Group 1129 HK Not rated n.a. 0.13 31 75.6 HKD Dec 07 (24) n.a. n.a. 64 n.a. n.a. Xinjiang Tianye Water Savings 840 HK Not rated n.a. 0.82 55 98.6 CNY Dec 07 70 110 - 8 57 (100) Sinomem Technology SINO SP Not rated n.a. 0.12 37 41.7 SGD Dec 07 31 13 14 31 (57) 6 Bio-treat Technology BIOT SP Not rated n.a. 0.05 27 95.1 CNY Jun 08 (414) n.a. n.a. n.a. n.a. n.a.
Average 700 56 37 29
A-share listed water-related utilities Beijing Capital Company 600008 CH Not rated na 6.24 2,009 37.7 CNY Dec 07 510 213 310 13 (58) 46 Shanghai Chengtou Holdings 600649 CH Not rated na 10.46 3,518 44.0 CNY Dec 07 522 630 880 (13) 21 40 Qianjiang Water Resources 600283 CH Not rated na 8.32 347 46.3 CNY Dec 07 34 n.a. n.a. 89 n.a. n.a. Wuhan Sanzhen Industry 600168 CH Not rated na 5.19 335 37.1 CNY Dec 07 59 n.a. n.a. 15 n.a. n.a. Eguard Resources Dev 000826 CH Not rated na 11.98 725 62.7 CNY Dec 07 87 115 169 81 33 47 Jiangxi Hongcheng Waterworks 600461 CH Not rated na 7.22 148 45.2 CNY Dec 07 29 n.a. n.a. 2 n.a. n.a. Nanhai Development Co 600323 CH Not rated na 9.12 362 64.6 CNY Dec 07 93 116 134 8 25 16 Zhongyuan Environment 000544 CH Not rated na 7.85 310 41.4 CNY Dec 07 53 n.a. n.a. 1,630 n.a. n.a. Shanghai Yongsun Invest 900935 CH Not rated na 0.48 117 96.5 CNY Dec 07 13 n.a. n.a. (64) n.a. n.a.
Average 874 196 5 37
International water utilities Veolia Environment VIE FP Not rated na 18.65 6,831 92.9 EUR Dec 07 928 781 826 16 (16) 6 RWE AG RWE GR Not rated na 60.93 26,249 77.8 EUR Dec 07 2,659 3,170 3,755 17 19 18 Severn Trent Plc SVT LN Not rated na 1,131.00 1,856 100.0 GBP Mar 08 210 136 241 (16) (35) 77 Northumbrian Water Group Plc NWG LN Not rated na 232.25 838 73.4 GBP Mar 08 158 69 133 42 (56) 93 Pennon Group Plc PNN LN Not rated na 440.00 1,069 99.8 GBP Mar 08 134 123 132 44 (8) 7 United Utilities Group Plc UU/ LN Not rated na 563.00 2,669 100.0 GBP Mar 08 909 334 386 16 (63) 16 Cia Saneamento Minas Gerais CSMG3 BZ Not rated na 22.02 1,118 30.2 BRL Dec 07 329 432 486 (8) 31 13 Cia Saneamento Basico De Sp SBSP3 BZ Not rated na 25.60 2,570 49.7 BRL Dec 07 1,049 1,038 1,232 20 (1) 19 Kurita Water Industries Ltd 6370 JP Not rated na 2,150.00 3,165 84.4 JPY Mar 08 18,297 17,806 19,467 29 (3) 9 Nitto Denko Corp 6988 JP Not rated na 1,728.00 3,328 94.6 JPY Mar 08 46,634 5,873 1,658 13 (87) (72) Danaher Corp DHR US Not rated na 56.38 17,950 87.2 USD Dec 08 1,318 1,270 1,254 6 (4) (1) Gamuda Bhd GAM MK Reduce 1.50 1.92 1,068 75.1 MYR Jul 08 325 278 351 50 (15) 26 PBA Holding Bhd PBAH MK Not rated na 0.88 81 24.6 MYR Dec 07 43 26 26 30 (40) 4 Puncak Niaga Holdings Bhd PNH MK Not rated na 2.70 308 49.9 MYR Dec 07 98 34 127 (84) (66) 280 YTL Power International Bhd YTLP MK Not rated na 1.86 3,020 30.6 MYR Jun 08 1,039 946 931 (15) (9) (2) Easter Water Resources Dev EASTW TB Not rated na 2.84 135 19.2 THB Sep 08 571 476 682 6 (17) 43 Manila Water Company MWC PM Not rated na 11.75 500 67.6 PHP Dec 07 2,419 2,490 2,734 1 3 10 Ion Exchange (India) Ltd ION IN Not rated na 78.95 21 51.5 INR Mar 08 93 n.a. n.a. 91 n.a. n.a. Thai Tap Water Supply Pcl TTW TB Not rated na 4.72 536 22.5 THB Dec 07 920 1,365 1,831 33 48 34
Average 3,858 15 (18) 32
Hong Kong integrated utilities Hongkong Electric 6 HK Buy 50.40 44.20 12,170 61.1 HKD Dec 07 7,445 7,592 6,211 9 2 (18) CLP Holdings 2 HK Neutral 56.50 51.75 16,063 80.2 HKD Dec 07 10,608 9,539 8,262 7 (10) (13) Hong Kong & China Gas 3 HK Reduce 10.30 12.14 10,439 59.0 HKD Dec 07 7,011 3,261 3,803 20 (53) 17 CKI 1038 HK Buy 31.10 29.75 8,651 15.4HKD Dec 07 4,772 4,444 5,738 30 (7) 29
Average 11,831 16 (17) 4
Note: Prices as of 11 February, 2009; * market cap figure for Tianjin includes A and H shares; minor variance in the numbers above relative to those in the related company reports reflects that all data for the water stocks under our coverage are based on recurring earnings. Source: Bloomberg consensus for not rated stocks, Nomura International (Hong Kong) Limited estimates
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Water | China Evan Li / Ivan Lee, CFA
Exhibit 3. Water and integrated utilities: valuation comparison (2)
EPS (lc) EPS growth (%) P/E (x) P/BV (x) Company 07 08F09F 07 08F 09F 07 08F 09F 0708F 09F Hong Kong and Singapore listed water utilities China Everbright Intl 257 HK 0.09 0.09 0.12 133 (3) 32 16.4 16.9 12.8 2.0 1.8 1.6 Guangdong Investment 270 HK 0.24 0.28 0.36 2 18 25 13.0 11.1 8.9 1.4 1.2 1.2 China Water Affairs 855 HK 0.04 0.08 0.10 n.a. 126 29 31.0 13.7 10.6 0.8 0.7 0.6 Beijing Enterprises Water 371 HK (0.03) 0.02 0.04 n.a. n.a. 64 n.a. 39.6 24.1 2.4 1.6 1.6 Hyflux Limited HYF SP 0.06 0.11 0.13 112 67 19 28.0 16.8 14.1 3.8 3.2 2.7 Epure International EPUR SP 0.13 0.17 0.20 49 26 23 11.0 8.7 7.1 1.6 1.3 1.1 Tianjin Capital 1065 HK 0.13 0.15 0.09 8 17 (38) 9.9 8.5 13.6 0.6 0.6 0.6 NWS Holdings 659 HK 1.01 1.89 1.16 14 87 (39) 9.7 5.2 8.5 1.1 0.9 0.9 China Water Industry Group 1129 HK (0.01) n.a. n.a. 64 n.a. n.a. n.a. n.a. n.a. 0.4 n.a. n.a. Xinjiang Tianye Water Savings 840 HK 0.14 0.20 - 8 43 (100) 5.2 3.6 n.a. 0.6 0.9 n.a. Sinomem Technology SINO SP 0.07 0.02 0.03 31 (70) 50 1.8 6.0 4.0 0.3 0.3 0.3 Bio-treat Technology BIOT SP (0.00) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.1 n.a. n.a.
Average 47 34 7 14.0 13.0 11.5 1.3 1.3 1.2
A-share listed water-related utilities Beijing Capital Company 600008 CH 0.23 0.10 0.14 13 (56) 38 26.9 61.2 44.3 2.8 2.9 2.8 Shanghai Chengtou Holdings 600649 CH 0.28 0.51 0.38 (13) 84 (25) 37.7 20.5 27.3 2.8 n.a. n.a. Qianjiang Water Resources 600283 CH 0.12 n.a. n.a. 89 n.a. n.a. 70.8 n.a. n.a. 2.3 n.a. n.a. Wuhan Sanzhen Industry 600168 CH 0.13 n.a. n.a. 15 n.a. n.a. 39.1 n.a. n.a. 1.6 n.a. n.a. Eguard Resources Dev 000826 CH 0.31 0.29 0.41 81 (7) 44 39.0 42.0 29.2 7.8 7.4 6.1 Jiangxi Hongcheng Waterworks 600461 CH 0.21 n.a. n.a. 2 n.a. n.a. 34.4 n.a. n.a. 2.1 n.a. n.a. Nanhai Development Co 600323 CH 0.34 0.42 0.50 8 23 18 26.6 21.7 18.4 2.8 2.6 2.4 Zhongyuan Environment 000544 CH 0.20 n.a. n.a. 1,630 n.a. n.a. 39.8 n.a. n.a. 5.5 n.a. n.a. Shanghai Yongsun Invest 900935 CH 0.05 n.a. n.a. (64) n.a. n.a. 61.0 n.a. n.a. 1.7 n.a. n.a.
Average 196 11 19 41.7 36.4 29.8 3.3 4.3 3.8
International water utilities Veolia Environment VIE FP 2.16 1.68 1.75 16 (22) 4 8.6 11.1 10.7 1.2 1.1 1.1 RWE AG RWE GR 4.73 6.14 7.18 17 30 17 12.9 9.9 8.5 2.9 2.4 2.1 Severn Trent Plc SVT LN 0.90 0.91 1.02 (16) 1 13 12.6 12.5 11.1 2.8 2.4 2.2 Northumbrian Water Group Plc NWG LN 0.31 0.23 0.26 42 (24) 11 7.6 10.0 9.0 3.8 2.9 2.5 Pennon Group Plc PNN LN 0.38 0.35 0.38 44 (9) 8 11.5 12.6 11.6 2.7 2.4 2.4 United Utilities Group Plc UU/ LN 1.03 0.53 0.57 16 (49) 7 5.5 10.6 9.9 2.9 2.5 2.2 Cia Saneamento Minas Gerais CSMG3 BZ 2.87 3.79 4.22 (8) 32 12 7.7 5.8 5.2 0.7 0.7 0.6 Cia Saneamento Basico De Sp SBSP3 BZ 4.60 4.90 5.41 20 6 10 5.6 5.2 4.7 0.6 0.6 0.5 Kurita Water Industries Ltd 6370 JP 142.21 138.81 146.59 29 (2) 6 15.1 15.5 14.7 1.6 1.5 1.4 Nitto Denko Corp 6988 JP 280.07 35.24 9.54 13 (87) (73) 6.2 49.0 181.1 0.7 0.8 0.8 Danaher Corp DHR US 4.13 3.77 3.94 6 (9) 5 13.7 15.0 14.3 1.8 1.6 1.4 Gamuda Bhd GAM MK 0.16 0.15 0.18 50 (11) 21 11.8 13.2 11.0 1.3 1.2 1.2 PBA Holding Bhd PBAH MK 0.13 0.08 0.08 30 (40) 4 6.8 11.4 11.0 0.5 0.5 n.a. Puncak Niaga Holdings Bhd PNH MK 0.24 0.09 0.31 (84) (64) 265 11.4 31.8 8.7 0.8 1.0 0.9 YTL Power International Bhd YTLP MK 0.20 0.14 0.16 (15) (29) 12 9.3 13.1 11.7 1.6 1.5 1.4 Easter Water Resources Dev EASTW TB 0.35 0.29 0.41 6 (19) 44 8.1 10.0 6.9 0.8 0.8 0.7 Manila Water Company MWC PM 1.06 1.15 1.36 1 8 19 11.1 10.2 8.6 1.9 1.7 1.5 Ion Exchange (India) Ltd ION IN 7.79 n.a. n.a. 91 n.a. n.a. 10.1 n.a. n.a. 0.8 n.a. n.a. Thai Tap Water Supply Pcl TTW TB 0.28 0.35 0.46 33 26 30 16.9 13.4 10.3 3.3 2.2 2.0
Average 15 (15) 23 10.1 14.5 19.4 1.7 1.5 1.5
Hong Kong integrated utilities Hongkong Electric 6 HK 3.49 3.56 2.91 9 2 (18) 12.7 12.4 15.2 2.0 1.8 1.8 CLP Holdings 2 HK 4.40 3.96 3.43 7 (10) (13) 11.7 13.1 15.1 2.0 1.8 1.8 Hong Kong & China Gas 3 HK 1.05 0.49 0.57 19 (53) 17 11.5 24.8 21.3 2.8 2.7 2.6 CKI 1038 HK 2.12 1.97 2.55 30 (7) 29 14.1 15.1 11.7 1.7 1.6 1.6
Average 16 (17) 4 12.5 16.3 15.8 2.1 2.0 1.9 Note: Prices as of 11 February, 2009; minor variance in the numbers above relative to those in the related company reports reflects that all data for the water stocks under our coverage are based on recurring earnings. Source: Bloomberg consensus for not rated stocks, Nomura International (Hong Kong) Limited estimates
Nomura 9 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Exhibit 4. Water and integrated utilities: valuation comparison (3)
Yield (%) Net debt/equity (%) ROE (%) ROA (%) Company 07 08F09F 07 08F 09F 07 08F 09F 0708F 09F Hong Kong and Singapore listed water utilities China Everbright Intl 257 HK 1.0 0.9 1.2 37 33 36 12.0 10.7 12.6 6.5 5.3 5.9 Guangdong Investment 270 HK 3.5 4.9 4.4 65 52 44 10.5 11.2 13.0 4.8 5.4 6.4 China Water Affairs 855 HK n.a. n.a. n.a. 59 43 17 2.5 4.9 5.4 1.0 2.2 2.6 Beijing Enterprises Water 371 HK n.a. n.a. n.a. Net cash 25 72 (8.2) 1.7 6.0 (8.0) 0.6 2.0 Hyflux Limited HYF SP 0.8 1.3 1.6 32 112 156 21.0 21.0 20.8 10.6 13.1 10.1 Epure International EPUR SP n.a. n.a. n.a. 4 Net cash Net cash 18.0 16.5 17.1 10.7 10.7 11.3 Tianjin Capital 1065 HK 3.1 3.7 2.3 75 76 72 6.4 7.1 4.3 3.1 3.6 2.1 NWS Holdings 659 HK 5.7 9.8 5.9 49 22 23 13.0 21.6 11.6 8.1 12.5 8.3 China Water Industry Group 1129 HK n.a. n.a. n.a. 48 n.a. n.a. (8.4) n.a. n.a. (3.9) n.a. n.a. Xinjiang Tianye Water Savings 840 HK 5.0 8.6 n.a. 28 n.a. n.a. 10.9 15.1 - 7.9 11.6 - Sinomem Technology SINO SP n.a. n.a. n.a. Net cash n.a. n.a. 17.2 6.6 6.6 9.8 n.a. n.a. Bio-treat Technology BIOT SP n.a. n.a. n.a. 92 n.a. n.a. (24.1) n.a. n.a. (11.9) n.a. n.a.
Average 3.2 4.9 3.1 49 52 60 5.9 11.7 9.7 3.2 7.2 5.4
A-share listed water-related utilities Beijing Capital Company 600008 CH 2.6 1.5 1.0 6 n.a. n.a. 10.8 5.7 7.3 4.7 n.a. n.a. Shanghai Chengtou Holdings 600649 CH 1.0 1.9 0.8 Net cash n.a. n.a. 7.7 n.a. n.a. 6.8 n.a. n.a. Qianjiang Water Resources 600283 CH n.a. n.a. n.a. 16 n.a. n.a. 3.4 n.a. n.a. 1.6 n.a. n.a. Wuhan Sanzhen Industry 600168 CH 1.2 n.a. n.a. 19 n.a. n.a. 4.1 n.a. n.a. 2.4 n.a. n.a. Eguard Resources Dev 000826 CH n.a. 0.2 0.6 93 n.a. n.a. 22.4 17.9 22.6 6.1 5.8 7.8 Jiangxi Hongcheng Waterworks 600461 CH 1.5 n.a. n.a. 13 n.a. n.a. 6.2 n.a. n.a. 4.5 n.a. n.a. Nanhai Development Co 600323 CH 1.5 1.9 1.5 34 n.a. n.a. 10.8 12.4 13.6 6.7 7.8 7.3 Zhongyuan Environment 000544 CH n.a. n.a. n.a. 9 n.a. n.a. 14.8 n.a. n.a. 9.6 n.a. n.a. Shanghai Yongsun Invest 900935 CH n.a. n.a. n.a. 83 n.a. n.a. 3.2 n.a. n.a. 1.2 n.a. n.a.
Average 1.5 1.4 1.0 34 n.a. n.a. 9.3 12.0 14.5 4.8 6.8 7.5
International water utilities Veolia Environment VIE FP 5.6 7.0 7.2 192 204 209 15.5 9.8 10.0 2.1 4.1 4.2 RWE AG RWE GR n.a. 7.6 6.5 5 22 31 19.3 23.0 26.8 3.0 6.4 6.7 Severn Trent Plc SVT LN 0.1 0.1 0.1 355 329 326 17.9 15.3 19.7 3.1 4.1 5.4 Northumbrian Water Group Plc NWG LN 0.1 0.1 0.1 686 525 464 36.7 13.0 32.6 4.2 3.7 5.8 Pennon Group Plc PNN LN 0.0 0.0 0.0 304 293 283 21.1 17.2 19.6 4.1 7.0 7.2 United Utilities Group Plc UU/ LN 0.1 0.1 0.1 216 309 286 30.6 15.7 22.9 8.0 7.1 7.5 Cia Saneamento Minas Gerais CSMG3 BZ n.a. 4.9 7.1 12 23 24 9.7 11.6 11.7 6.2 7.7 7.6 Cia Saneamento Basico De Sp SBSP3 BZ n.a. 4.8 5.1 50 60 60 11.1 10.8 10.8 5.7 n.a. n.a. Kurita Water Industries Ltd 6370 JP 1.5 1.6 1.7 Net cash Net cash Net cash 11.2 10.0 9.7 7.8 10.0 9.3 Nitto Denko Corp 6988 JP 4.6 4.7 4.2 Net cash Net cash Net cash 12.5 1.5 (0.9) 7.8 1.8 (0.3) Danaher Corp DHR US 0.2 0.2 0.2 23 Net cash Net cash 13.9 12.1 11.5 7.5 7.3 7.5 Gamuda Bhd GAM MK 9.4 5.3 5.5 31 37 48 10.8 9.8 11.0 6.0 5.0 5.5 PBA Holding Bhd PBAH MK 5.9 5.8 5.8 Net cash n.a. n.a. 8.0 4.6 4.5 5.1 3.0 2.9 Puncak Niaga Holdings Bhd PNH MK 3.7 2.5 3.8 191 204 204 6.2 2.3 7.7 1.5 0.5 1.5 YTL Power International Bhd YTLP MK 6.0 6.7 6.9 120 94 85 16.7 13.8 14.1 4.0 3.6 4.1 Easter Water Resources Dev EASTW TB n.a. 5.3 8.5 44 n.a. n.a. 10.7 8.3 10.9 6.0 5.9 6.2 Manila Water Company MWC PM 2.6 2.7 3.0 27 50 61 18.2 18.1 18.5 8.7 9.2 8.7 Ion Exchange (India) Ltd ION IN 2.5 n.a. n.a. 73 n.a. n.a. 8.5 n.a. n.a. 2.4 n.a. n.a. Thai Tap Water Supply Pcl TTW TB n.a. 3.9 5.2 224 93 78 21.4 20.2 20.3 6.3 7.4 10.0
Average 3.0 3.5 3.9 159 173 166 15.8 12.1 14.5 5.2 5.5 5.9
Hong Kong integrated utilities Hongkong Electric 6 HK 4.5 4.4 5.0 3 Net cash 3 16.2 15.2 11.9 12.9 12.9 10.1 CLP Holdings 2 HK 4.8 4.5 4.6 40 43 45 17.7 14.5 12.0 8.1 7.0 5.8 Hong Kong & China Gas 3 HK 2.6 2.7 2.8 10 9 13 38.5 11.4 12.6 25.5 8.5 9.4 CKI 1038 HK 3.7 4.0 5.6 Net cash Net cash Net cash 12.7 11.0 13.6 11.8 10.7 14.3
Average 3.9 3.9 4.5 18 26 20 21.3 13.0 12.5 14.5 9.8 9.9
Note: Prices as of 11 February, 2009minor variance in the numbers above relative to those in the related company reports reflects that all data for the water stocks under our coverage are based on recurring earnings. Source: Bloomberg consensus for not rated stocks, Nomura International (Hong Kong) Limited estimates
Nomura 10 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Exhibit 5. Asia power and utilities: coverage universe (1)
Last Reporting Share Free TP Price Mkt cap EPS (local $)DPS (local $) Net profit (local $ m) reported Company Type Ticker currency FY end o/s float Rating Local ($) Local ($) (US$mn) 07 08F 09F 07 08F 09F 07 08F 09F Hongkong Electric Integrated 6 HK HKD 12/2007 2,134 61.1 Buy 50.40 44.20 12,169 3.49 3.56 2.91 2.01 1.96 2.21 7,445 7,592 6,211
CLP Holdings Integrated 2 HK HKD 12/2007 2,406 80.2 Neutral 56.50 51.75 16,063 4.40 3.96 3.43 2.48 2.34 2.40 10,608 9,539 8,262
Hong Kong & China Gas Gas 3 HK HKD 12/2007 6,666 59.0 Reduce 10.30 12.14 10,439 1.05 0.49 0.57 0.32 0.32 0.34 7,011 3,261 3,803
CKI Integrated 1038 HK HKD 12/2007 2,254 15.2 Buy 31.10 29.75 8,651 2.12 1.97 2.55 1.10 1.18 1.65 4,772 4,444 5,738
HK utilities average 2.77 2.49 2.36 1.48 1.45 1.65 7,459 6,209 6,004
Datang Intl IPP 991 HK CNY 12/2007 11,757 33.0 Buy 5.40 3.71 12,828 0.29 0.02 0.30 0.12 0.01 0.12 3,406 196 3,545
Huaneng Power Intl IPP 902 HK CNY 12/2007 12,328 44.2 Buy 5.70 5.37 14,383 0.51 (0.24) 0.39 0.30 0.00 0.22 6,161 (2,935) 4,858
Huadian Power Intl IPP 1071 HK CNY 12/2007 6,021 36.1 Neutral 2.00 1.73 4,012 0.20 (0.29) 0.17 0.06 0.00 0.05 1,197 (1,761) 1,001
China Power Intl IPP 2380 HK CNY 12/2007 3,606 31.8 Neutral 1.70 1.49 786 0.16 (0.12) 0.35 0.05 0.00 0.10 592 (430) 1,252
China Resources Power IPP 836 HK HKD 12/2007 4,140 33.6 Buy 19.10 14.98 8,145 0.81 0.47 1.05 0.19 0.11 0.24 3,190 1,951 4,361 China power average 0.40 (0.03) 0.45 0.14 0.02 0.15 2,909 (596) 3,003
Suntech Solar STP US USD 12/2007 154 65.8 Buy 7.00 9.57 1,473 1.02 0.89 1.01 - - - 172 164 187
Canadian Solar Solar CSIQ US USD 12/2007 28 85.0 Neutral 3.74 5.08 181 (0.01) 1.86 1.47 - - - (0) 55 43
Trina Solar Solar TSL US USD 12/2007 25 85.0 Reduce 4.71 8.23 241 1.49 2.81 1.85 - - - 35 71 47
LDK Solar LDK US USD 12/2007 113 29.3 Neutral 14.00 10.81 1,223 1.37 2.79 1.96 - - - 139 320 225
Solargiga Solar 757 HK CNY 12/2007 1,691 42.1 Reduce 1.10 1.55 384 0.22 0.17 0.12 0.06 - - 310 271 195
China solar average 0.81 1.43 1.25 0.01 - - 126 148 140
China Everbright Intl Water 257 HK HKD 12/2007 3,144 43.9 Buy 2.20 1.56 633 0.09 0.09 0.12 0.02 0.01 0.02 294 290 387 Guangdong Investment Water 270 HK HKD 12/2007 6,104 38.8 Buy 4.10 3.15 2,504 0.24 0.28 0.36 0.11 0.15 0.14 1,697 1,743 2,185 China Water Affairs Water 855 HK HKD 3/2008 1,207 65.7 Neutral 1.25 1.11 173 0.04 0.08 0.10 - - - 44 102 134
Beijing Enterprises Water Water 371 HK HKD 12/2007 2,605 35.7 Neutral 1.03 0.90 302 (0.03) 0.02 0.04 - - - (3) 23 98
Hyflux Limited Water HYF SP SGD 12/2007 525 66.2 Neutral 1.90 1.77 618 0.06 0.11 0.13 0.01 0.02 0.03 36 55 65
Epure International Water EPUR SP CNY 12/2007 1,290 37.0 Neutral 0.35 0.32 274 0.13 0.17 0.20 - - - 164 207 254
Tianjin Capital Water 1065 HK CNY 12/2007 340 43.6 Reduce 0.80 1.45 1,153 0.13 0.15 0.09 0.04 0.05 0.03 184 216 134 China water average 0.10 0.13 0.15 0.03 0.03 0.03 345 377 465
Xinao Gas Gas 2688 HK CNY 12/2007 1,010 63.6 Buy 10.00 7.20 1,064 0.51 0.57 0.65 0.13 0.16 0.22 508 573 658
Towngas China Gas 1083 HK HKD 12/2007 1,956 24.3 Neutral 1.70 1.47 371 0.08 0.13 0.21 0.00 0.00 0.00 144 263 408
China Resources Gas Gas 1193 HK HKD 12/2007 1,414 25.0 Buy 3.00 2.71 495 0.12 0.54 0.20 0.01 0.05 0.06 344.86 259.31 284.52
China Gas Gas 384 HK HKD 03/2008 3,334 58.3 Neutral 1.20 1.18 507 0.05 0.06 0.10 0.01 0.03 0.03 168.72 199.87 341.11 China gas average 0.19 0.33 0.29 0.04 0.06 0.08 291 324 423
China High Speed Wind 658 HK CNY 12/2007 1,245 73.2 Buy 15.00 11.10 2,022 0.29 0.44 0.65 0.07 0.13 0.19 307 549 813
Shanghai Electric Equipment 2727 HK CNY 12/2007 11,892 87.0 Reduce 2.60 2.54 12,834 0.24 0.25 0.22 - 0.06 0.05 2,815 2,975 2,575
Dongfang Electric Equipment 1072 HK CNY 12/2007 817 93.1 Reduce 14.70 18.96 4,415 2.72 1.05 1.58 0.11 0.31 0.47 2,224 857 1,292
Harbin Power Equipment 1133 HK CNY 12/2007 1,377 93.1 Buy 8.00 5.95 1,199 1.12 0.86 0.88 0.09 0.22 0.22 1,528 1,187 1,216 China equipment average 1.36 0.72 0.89 0.07 0.20 0.25 2,189 1,673 1,695
Korea Electric Power Integrated 015760 KS KRW 12/2008 642 43.9 Reduce 19,000 27,550 12,684 2,363 (2,821) (1,739) 750 - - 1,516,289 (1,809,709) (1,115,541)
E-Ton Solar Tech Solar 3452 TT TWD 12/2007 101 60.0 Reduce 58.80 89.20 268 13.24 13.95 9.42 3.00 3.02 2.04 893 1,495 1,014
Motech Industries Solar 6244 TT TWD 12/2007 251 80.0 Neutral 53.40 84.50 620 12.55 6.89 7.77 7.00 4.07 4.59 2,442 1,720 1,952 Taiwan solar average 12.89 10.42 8.60 5.00 3.55 3.32 1,667 1,608 1,483
Electricity Generating IPP EGCO TB THB 12/2007 526 40.0 Not rated NA 71.00 1,065 15.96 2.27 12.89 4.75 0.00 5.28 8,402 1,193 6,787
Ratchaburi Generating IPP RATCH TB THB 12/2008 1,450 33.2 Not rated NA 39.50 1,632 4.48 1.25 4.18 2.10 1.10 2.27 6,493 1,808 6,057 Thai power average 10.22 1.76 8.53 3.43 0.55 3.78 7,447 1,501 6,422
Malaysia
Tenaga Nasional Integrated TNB MK MYR 08/2008 4,335 37.7 Not rated NA 5.80 6,969 0.60 0.04 0.52 0.15 0.00 0.20 2,594 172 2,254
Suzlon WTG SUEL IN INR 03/2008 1,497 31.0 Buy NA 45.70 1,406 29.96 8.10 12.03 5.01 0.97 1.20 8,640 11,813 18,004
NTPC IPP NATP IN INR 03/2008 8,245 10.5 Neutral 212.00 180.45 30,555 8.83 9.50 10.49 3.43 3.76 4.14 72,773 78,346 86,487
Tata Power Integrated TPWR IN INR 03/2008 221 67.1 Buy 956.00 808.40 3,675 44.91 54.19 61.70 10.25 11.09 12.34 9,810 12,576 14,500
Power Grid Grid PWGR IN INR 03/2008 4,209 13.6 Reduce 78.00 86.50 7,476 3.41 3.55 4.16 1.07 1.10 1.17 13,937 14,923 17,502
India power average 19.05 22.41 25.45 4.91 5.32 5.88 32,173 35,281 39,496
Note: Prices as of 11 February, 2009; minor variance in the numbers above relative to those in the related company reports reflects that all data for the water stocks under our coverage are based on recurring earnings. Source: Bloomberg consensus for not rate stocks, Nomura International (Hong Kong) Limited estimates
Nomura 11 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Exhibit 6. Asia power and utilities: coverage universe (2)
EPS growth (%)DPS growth (%) Net earnings growth (%) Net debt/equity (%) EV/MW (local $) P/E (x) Company 07 08F 09F 07 08F 09F 07 08F 09F 07 08F 09F 07 08F 09F 07 08F 09F Hongkong Electric 8.9 2.0 (18.2) 8.7 (2.6) 13.0 8.9 2.0 (18.2) 2.7 net cash 3.1 NA NA NA 12.7 12.4 15.2
CLP Holdings 7.2 (10.1) (13.4) 2.9 (5.8) 2.8 7.2 (10.1) (13.4) 40.0 43.0 45.4 NA NA NA 11.7 13.1 15.1
Hong Kong & China Gas 19.6 (53.5) 16.6 9.7 1.5 6.6 19.6 (53.5) 16.6 10.2 8.7 13.0 NA NA NA 11.5 24.8 21.3
CKI 30.0 (6.9) 29.1 10.0 7.5 39.9 30.0 (6.9) 29.1 net cash net cash net cash NA NA NA 14.1 15.1 11.7
HK utilities average 16.4 (17.1) 3.5 7.8 0.2 15.6 16.4 (17.1) 3.5 17.7 25.8 20.5 NA NA NA 12.5 16.3 15.8
Datang Intl 9.6 (94.3) 1,708.8 (6.7) (94.3) 1,710.6 22.6 (94.3) 1,710.6 239.9 305.3 316.5 8.00 6.84 6.16 12.6 144.3 10.9
Huaneng Power Intl 1.5 (147.1) NA 7.1 (100.0) NA 1.5 (147.6) NA 113.3 175.8 163.6 3.29 3.86 3.56 9.8 NA 10.9
Huadian Power Intl (1.2) (247.1) NA - (100.0) NA (0.3) (247.1) NA 226.7 351.8 196.5 2.61 2.75 2.24 8.9 NA 9.3
China Power Intl (25.6) (172.5) NA (32.5) (100.0) NA (15.7) (172.5) NA 76.8 116.8 118.6 1.76 1.94 1.62 8.8 NA 3.6
China Resources Power 33.7 (42.0) 123.5 (6.4) (42.6) 123.5 36.2 (38.8) 123.5 76.1 100.7 121.8 6.35 5.80 5.34 19.4 31.7 14.2 China power average 3.6 (140.6) 916.2 (7.7) (87.4) 917.1 8.8 (140.1) 917.1 146.6 210.1 183.4 4.40 4.24 3.78 11.9 88.0 9.8
Suntech 49.7 (12.8) 14.2 NA NA NA 62.3 (4.6) 14.2 25.5 125.8 92.0 NA NA NA 9.7 11.2 9.8
Canadian Solar NA NA (21.1) NA NA NA NA NA (21.1) 75.7 46.3 45.7 NA NA NA NA 2.8 3.6
Trina Solar 19.8 88.4 (34.2) NA NA NA 200.0 100.2 (34.2) 2.4 68.9 49.9 NA NA NA 5.5 2.9 4.4
LDK 291.7 103.2 (29.6) NA NA NA 437.5 130.0 (29.6) 29.7 53.5 116.7 NA NA NA 8.2 4.0 5.7
Solargiga 182.4 (22.8) (30.8) (22.6) (100.0) NA 166.5 (12.5) (28.2) net cash net cash net cash NA NA NA 7.0 8.3 11.2
China solar average 135.9 12.8 258.2 (22.6) (100.0) NA 216.5 24.1 280.1 38.2 68.4 76.1 NA NA NA 7.6 21.0 6.7
China Everbright Intl 132.7 (2.8) 32.0 0.1 (14.8) 32.0 149.6 (1.3) 33.3 37.1 33.3 35.9 NA NA NA 16.4 16.9 12.8 Guangdong Investment 1.6 17.6 24.7 (0.0) 40.3 (9.2) 2.8 18.0 25.4 65.1 52.3 43.6 NA NA NA 13.0 11.1 8.9 China Water Affairs n.a. 125.5 29.3 NA NA NA n.a. 130.8 31.6 58.8 43.0 17.3 NA NA NA 31.0 13.7 10.6
Beijing Enterprises Water n.a. n.a. 64.3 - - - n.a. n.a. 325.9 net cash 24.6 71.5 NA NA NA n.a. 39.6 24.1
Hyflux Limited 112.2 66.6 19.0 4.3 64.8 19.0 160.0 54.6 19.0 32.3 112.4 155.7 NA NA NA 28.0 16.8 14.1
Epure International 48.7 25.9 22.6 - - - 48.7 25.9 22.6 4.0 net cash net cash NA NA NA 11.0 8.7 7.1
Tianjin Capital 8.0 17.3 (37.8) 9.9 17.3 (37.8) 15.8 17.3 (37.8) 74.8 75.7 72.2 NA NA NA 9.9 8.5 13.6 China water average 60.7 41.7 22.0 2.4 17.9 0.7 75.4 40.9 60.0 45.3 56.9 66.0 NA NA NA 18.2 16.5 13.0
Xinao Gas 26.5 10.7 14.9 65.4 26.5 35.4 33.7 12.9 14.9 90.0 94.2 88.7 NA NA NA 14.2 11.9 9.5
Towngas China NA 61.1 54.9 NA NA NA NA 82.2 54.9 20.8 25.2 25.2 NA NA NA 17.6 10.9 7.1
China Resources Gas NA 338.0 (63.0) (50.3) 361.4 31.7 5.4 (24.8) 9.7 net cash net cash net cash NA NA NA 22.2 5.0 13.5
China Gas 18.3 13.3 69.2 56.1 198.0 (3.8) 28.7 18.5 70.7 137.4 148.2 155.4 NA NA NA 22.1 19.5 11.5 China gas average 22.4 105.8 19.0 23.7 195.3 21.1 22.6 22.2 37.5 82.7 89.2 89.7 NA NA NA 19.0 11.8 10.4
China High Speed 258.1 53.3 48.2 156.2 78.6 48.2 258.1 79.0 48.2 net cash 41.4 48.5 NA NA NA 37.6 23.2 15.7
Shanghai Electric 37.3 5.7 (13.5) (100.0) NA (13.5) 37.3 5.7 (13.5) net cash net cash net cash NA NA NA 9.5 8.9 10.3
Dongfang Electric (2.0) (61.4) 50.7 (60.0) 185.8 50.7 (2.0) (61.4) 50.7 net cash net cash net cash NA NA NA 6.1 15.9 10.6
Harbin Power 40.0 (23.0) 2.5 49.4 136.6 2.5 49.1 (22.3) 2.5 net cash net cash net cash NA NA NA 4.7 6.1 5.9
China equipment average 25.1 (26.3) 13.2 (36.9) 161.2 13.2 28.1 (26.0) 13.2 net cash net cash net cash NA NA NA 6.8 10.3 8.9
Korea Electric Power (26.4) (219.4) NA (34.8) (100.0) NA (26.0) (219.4) NA 31.3 42.7 52.6 NA NA NA 11.9 NA NA
E-Ton Solar Tech (27.2) 5.4 (32.5) (66.7) 0.7 (32.5) 21.9 67.5 (32.2) 154.8 163.9 140.2 NA NA NA 6.7 6.4 9.5
Motech Industries (21.6) (45.1) 12.7 (17.6) (41.8) 12.7 8.2 (29.6) 13.5 net cash net cash net cash NA NA NA 6.7 12.3 10.9 Taiwan solar average (24.4) (19.9) (9.9) (42.2) (20.6) (9.9) 15.0 19.0 (9.3) 154.8 163.9 140.2 NA NA NA 6.7 9.3 10.2
Electricity Generating 39.3 -85.8 467.9 17.6 -100.0 NA 39.3 -85.8 468.9 8.0 NA net cash NA NA NA 4.4 31.3 5.5
Ratchaburi Generating 11.4 -72.1 234.2 4.8 -47.6 106.6 11.4 -72.2 235.0 37.5 NA 10.7 NA NA NA 8.8 31.6 9.5 Thai power average 25.4 -78.9 351.0 11.2 -73.8 NA 25.4 -79.0 351.9 22.7 NA 10.7 NA NA NA 6.6 31.4 7.5
Malaysia
Tenaga Nasional -36.9 -93.3 1200.0 -44.1 -100.0 NA -36.9 -93.4 1210.5 70.4 NA 53.5 NA NA NA 9.7 145.0 11.2
Suzlon 7.8 -73.0 48.5 0.0 -80.6 23.4 19.2 36.7 52.4 103.2 37.1 86.8 NA NA NA 1.5 5.6 3.8
NTPC 10.2 7.7 10.4 10.5 9.9 10.0 10.2 7.7 10.4 23.2 34.1 61.4 NA NA NA 20.4 19.0 17.2
Tata Power 21.7 20.7 13.9 10.8 8.2 11.3 29.6 28.2 15.3 68.5 101.9 114.9 NA NA NA 18.0 14.9 13.1
Power Grid 5.3 4.0 17.3 13.5 2.9 6.8 16.7 7.1 17.3 169.8 165.4 182.1 NA NA NA 25.4 24.4 20.8
India power average 12.4 10.8 13.8 11.6 7.0 9.3 18.8 14.3 14.3 87.2 100.5 119.5 NA NA NA 21.3 19.4 17.0
Note: Prices as of 11 February, 2009; minor variance in the numbers above relative to those in the related company reports reflects that all data for the water stocks under our coverage are based on recurring earnings. Source: Bloomberg consensus for not rate stocks, Nomura International (Hong Kong) Limited estimates
Nomura 12 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Exhibit 7. Asia power and utilities: coverage universe (3)
Yield (%) Dividend payout (%) BV/share (local $) P/B (x) EV/EBIDTA (x) RoE (%) RoA (%) Company 07 08F 09F 07 08F 09F 07 08F 09F 07 08F 09F 07 08F 09F 07 08F 09F 07 08F 09F Hongkong Electric 4.5 4.4 5.0 57.6 55.0 76.0 22.5 24.1 24.8 2.0 1.8 1.8 9.7 9.4 11.9 16.2 15.2 11.9 10.8 10.8 8.7
CLP Holdings 4.8 4.5 4.6 56.3 59.0 70.0 26.5 28.2 29.2 2.0 1.8 1.8 8.0 8.0 8.6 17.7 14.5 12.0 7.9 6.9 5.7
Hong Kong & China Gas 2.6 2.7 2.8 30.2 66.0 60.3 4.3 4.5 4.7 2.8 2.7 2.6 9.6 15.9 15.9 38.5 11.4 12.6 23.3 7.5 8.5
CKI 3.7 4.0 5.6 52.0 60.0 65.0 17.5 18.3 19.2 1.7 1.6 1.6 14.5 10.7 11.7 12.7 11.0 13.6 9.8 9.0 11.3
HK utilities average 3.9 3.9 4.5 49.0 60.0 67.8 17.7 18.8 19.5 2.1 2.0 1.9 10.4 11.0 12.0 21.3 13.0 12.5 13.0 8.5 8.5
Datang Intl 3.2 0.2 3.7 40.9 41.3 41.3 2.5 2.6 2.8 1.5 1.3 1.1 9.2 15.8 9.9 12.7 0.6 11.1 3.2 0.1 2.1
Huaneng Power Intl 5.8 - 4.9 58.7 - 55.6 3.9 3.8 3.9 1.3 1.2 1.1 7.5 17.3 7.3 13.6 (6.3) 10.2 5.2 (2.1) 3.1
Huadian Power Intl 3.5 - 3.3 31.2 - 31.2 2.4 2.1 3.2 0.7 0.8 0.5 7.3 15.9 5.6 8.6 (13.1) 6.3 2.0 (2.5) 1.3
China Power Intl 3.7 - 8.4 32.9 - 30.0 3.1 3.0 3.2 0.5 0.4 0.4 11.0 23.0 6.0 5.9 (3.9) 11.2 3.0 (1.6) 3.8
China Resources Power 1.2 0.7 1.6 23.0 22.8 22.8 6.0 6.4 7.2 2.5 2.4 2.1 12.8 13.7 9.8 15.9 7.6 15.6 6.3 2.7 5.0 China power average 3.5 0.2 4.4 37.3 12.8 36.2 3.6 3.6 4.1 1.3 1.2 1.0 9.5 17.1 7.7 11.4 (3.0) 10.9 3.9 (0.7) 3.1
Suntech ------5.9 6.8 8.0 1.7 1.5 1.2 8.8 10.8 8.5 22.3 17.0 16.5 11.3 6.4 5.7
Canadian Solar ------4.6 10.5 12.1 1.1 0.5 0.4 NA 3.8 4.5 (0.2) 30.4 18.3 (0.1) 12.1 6.4
Trina Solar ------15.7 17.7 19.5 0.5 0.5 0.4 6.0 4.2 4.7 13.6 17.0 10.0 8.4 8.5 4.5
LDK ------7.5 9.5 11.1 1.5 1.2 1.0 8.8 5.3 7.5 37.1 37.1 19.7 17.4 13.2 6.3
Solargiga 4.0 - - 28.4 - - 0.4 0.8 0.9 3.3 1.7 1.4 8.5 5.4 5.1 71.1 15.5 13.8 43.3 11.1 10.3
China solar average 0.7 - - 4.7 - - 6.6 8.8 9.9 1.5 1.0 0.9 8.7 5.9 5.4 26.7 19.3 15.3 14.6 8.6 7.3
China Everbright Intl 1.0 0.9 1.2 16.9 14.8 14.8 0.8 0.9 1.0 2.0 1.8 1.6 14.3 11.2 8.7 12.0 10.7 12.6 6.5 5.3 5.9 Guangdong Investment 3.5 4.9 4.4 45.4 54.2 39.5 2.3 2.5 2.7 1.4 1.2 1.2 7.7 7.4 6.0 10.5 11.2 13.0 4.8 5.4 6.4 China Water Affairs n.a. n.a. n.a. - - - 1.4 1.6 1.9 0.8 0.7 0.6 10.5 10.7 4.2 2.5 4.9 5.4 1.0 2.2 2.6
Beijing Enterprises Water n.a. n.a. n.a. - - - 0.4 0.5 0.6 2.4 1.6 1.6 NA 23.2 13.3 (8.2) 1.7 6.0 (8.0) 0.6 2.0
Hyflux Limited 0.8 1.3 1.6 22.2 22.0 22.0 0.5 0.6 0.7 3.8 3.2 2.7 20.2 13.5 12.4 21.0 21.0 20.8 10.6 13.1 10.1
Epure International n.a. n.a. n.a. - - - 0.9 1.1 1.3 1.6 1.3 1.1 NA NA NA 18.0 16.5 17.1 10.7 10.7 11.3
Tianjin Capital 3.1 3.7 2.3 31.1 31.1 31.1 2.0 2.1 2.2 0.6 0.6 0.6 4.3 4.4 5.4 6.4 7.1 4.3 3.1 3.6 2.1 China water average 2.1 2.7 2.4 16.5 17.4 15.3 1.2 1.3 1.5 1.8 1.5 1.3 11.4 11.7 8.4 8.9 10.5 11.3 4.1 5.8 5.8
Xinao Gas 1.8 2.4 3.6 24.5 28.0 33.0 3.7 4.1 4.5 1.9 1.5 1.3 8.4 7.9 7.1 14.9 14.5 15.1 4.5 4.5 4.8
Towngas China ------2.9 3.1 3.3 0.5 0.5 0.4 10.5 9.3 6.7 2.5 4.4 6.4 2.1 2.8 4.1
China Resources Gas 0.4 1.7 2.2 8.0 8.4 30.0 1.2 1.3 1.5 2.3 2.0 1.8 3.0 4.9 5.8 - 10.0 14.4 11.3 5.4 7.7
China Gas 0.9 2.8 2.7 20.7 54.5 31.0 0.9 1.0 1.1 1.3 1.2 1.1 14.7 10.5 7.5 6.6 6.3 9.5 3.6 3.8 3.8 China gas average 0.8 1.7 2.1 13.3 22.7 23.5 2.2 2.4 2.6 1.5 1.3 1.2 9.2 8.1 6.8 6.0 8.8 11.3 5.4 4.1 5.1
China High Speed 0.7 1.3 2.1 24.9 29.0 29.0 2.5 2.9 3.4 4.2 3.3 2.6 48.8 20.8 14.6 16.9 16.5 20.9 8.8 8.5 8.5
Shanghai Electric - 2.8 2.4 - 25.0 25.0 1.7 1.8 2.0 1.4 1.2 1.1 3.2 3.6 3.5 15.6 15.4 11.7 5.6 5.3 4.4
Dongfang Electric 0.7 1.9 2.8 4.0 30.0 30.0 3.1 0.3 1.9 5.4 55.4 8.9 3.8 5.7 4.0 70.9 105.8 61.5 6.7 1.9 2.8
Harbin Power 1.7 4.1 4.2 8.1 25.0 25.0 5.3 6.0 6.9 1.0 0.9 0.8 1.4 1.5 1.2 21.2 15.5 13.7 4.3 3.3 2.9 China equipment average 0.8 2.9 3.2 4.1 26.7 26.7 3.4 2.7 3.6 2.6 19.2 3.6 2.8 3.6 2.9 35.9 45.6 29.0 5.5 3.5 3.4
Korea Electric Power 2.7 - - 31.7 - - 68,633 68,026 66,966 0.4 0.4 0.4 4.1 10.8 8.9 3.5 (4.1) (2.6) 1.9 (2.1) (1.3)
E-Ton Solar Tech 3.4 3.4 2.3 22.7 21.7 21.6 59.4 62.8 70.6 1.5 1.4 1.3 16.1 8.5 9.3 27.4 30.0 15.0 10.6 10.0 5.2
Motech Industries 8.3 4.8 5.4 55.8 59.1 59.1 65.1 54.9 59.5 1.3 1.5 1.4 3.8 4.5 3.4 25.7 12.7 13.6 18.3 9.6 10.3 Taiwan solar average 5.8 4.1 3.9 39.2 40.4 40.4 62.2 58.9 65.1 1.4 1.5 1.3 9.9 6.5 6.4 26.6 21.4 14.3 14.5 9.8 7.7
Electricity Generating 6.7 - 7.4 29.8 - 41.0 84.9 91.9 94.0 0.8 0.8 0.8 6.5 NA 5.6 21.9 23.0 13.8 13.4 NA 11.5
Ratchaburi Generating 5.3 2.8 5.8 46.9 88.0 54.4 27.3 29.0 32.4 1.4 1.4 1.2 9.2 NA 6.8 16.2 18.3 13.4 8.2 NA 8.9 Thai power average 6.0 1.4 6.6 38.3 44.0 47.7 56.1 60.5 63.2 1.1 1.1 1.0 7.8 NA 6.2 19.0 20.6 13.6 10.8 NA 10.2
Malaysia
Tenaga Nasional 2.6 - 3.4 24.9 - 38.3 5.7 - 6.5 1.0 NA 0.9 5.9 NA 5.5 10.4 NA 8.4 3.8 NA 3.4
Suzlon 11.0 2.1 2.6 16.7 12.0 10.0 122.1 54.1 65.0 0.4 0.8 0.7 4.9 5.2 3.6 27.7 17.7 20.2 9.8 5.2 6.4
NTPC 1.9 2.1 2.3 38.8 39.6 39.5 62.6 67.8 73.6 2.9 2.7 2.5 10.6 10.8 10.3 14.1 14.0 14.3 8.3 7.8 7.1
Tata Power 1.3 1.4 1.5 22.8 20.5 20.0 239.0 318.4 393.5 3.4 2.5 2.1 10.3 7.9 7.4 18.5 17.9 16.7 4.9 4.8 4.9
Power Grid 1.2 1.3 1.4 31.3 31.0 28.2 30.4 33.8 36.6 2.8 2.6 2.4 12.9 11.7 10.5 10.9 10.5 11.3 3.3 3.3 3.4
India power average 1.5 1.6 1.7 31.0 30.4 29.2 110.7 140.0 167.9 3.0 2.6 2.3 11.3 10.1 9.4 14.5 14.1 14.1 5.5 5.3 5.1
Note: Prices as of 11 February, 2009; minor variance in the numbers above relative to those in the related company reports reflects that all data for the water stocks under our coverage are based on recurring earnings. Source: Bloomberg consensus for not rate stocks, Nomura International (Hong Kong) Limited estimates
Nomura 13 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Industry description China is in a water crisis Natural water shortages, exacerbated by growing demand and water pollution, have transformed China’s water problem into a crisis. New policy frameworks since 2004 are in place to reform the water industry, but strong industrialisation and urbanisation across the country have exerted greater pressure. Government officials have also realised the need for improvement to secure this resource that has no substitute.
We believe more serious political measures will be rolled-out to drive stricter standards, A full spectrum of action to realign bureaucracies/administrations, promote water infrastructure development and address this crisis efficiency and reduce pollution.
Natural shortages — worsened by disparity China has total annual average water resources of 2.8tn m3, making the country the Though China does lie south and fourth-largest water source in the world with three of the world’s 10 longest rivers north of great rivers … (Yangtze, Huang He and Heilongjiang). However, due to China’s large population, water resources per capita only came in at … its population puts an 2,156 m3, compared with the global average of 8,462 m3, making China one of the 13 understandable strain on resources most water-deficient countries in the world, according to the World Bank. While China’s population is estimated by the MWR to reach 1.6bn by the middle of the 21st century, per capita water resources will likely slide further to 1,700 m3.
Exhibit 8. Water resources per capita around the world
(m3) 100,000 90,000 80,000 70,000 60,000
50,000 China's water resources 40,000 per capita: 2,156m3 30,000 20,000 Global average 10,000 0 US UK India Brazil Spain Korea China Japan France Finland Canada Sweden Belgium Thailand Malaysia Australia Germany Indonesia Phillippines Switzerland New Zealand Source: World Bank – World Development Indicators 2008, Nomura International (Hong Kong) Limited
The MWR indicated that 100mn people in over 400 cities (out of 660 in total) in China Limited access to drinking water have limited access to drinking water, while 320mn people in the countryside have across China unsafe water sources. The MWR estimates the annual water shortage at 40bn m3, affecting economic production to the tune of about RMB500bn. Further, water resources are unevenly distributed between the north and south, which worsens the shortage problems in some metropolitan areas. Due to the drier climate in Northern China, per capita water volume is 20% that of southern China and only 10% of the world’s average. Northern China, meanwhile, accounts for 46% of the country’s total population, 60% of cultivated lands, and 44% of GDP, but the region’s water resources make up only 19% of the nation’s total, according to government statistics. Also, the water resources in the north are mostly exploited, with relatively high utilisation ratios for surface (66%) and ground (90%) water.
Nomura 14 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Since China is still an industrial country, inefficient use of water during production and consumption, as well as leakage and theft of water supply (collectively referred as “non-revenue water”), put China’s water consumption per unit of GDP at 5.5x the international average.
Consistent rise in water demand China’s national water demand (includes both urban and rural areas) rose consistently Demand is also rising faster than at a 0.8% CAGR during 2000-07, compared with 0.4% growth in water supply volume. supply MWR statistics suggest that industrialisation and urbanisation have contributed to an increase in annual demand by 100mn m3 and 1.9bn m3, respectively, aggravating China’s water shortage.
Exhibit 9. China: water supply mix (2007) Exhibit 10. China: water demand mix (2007)
Others Environmental Residential Underground 0.4% 2% 12% water 18%
Industrial 23% Surface water Agriculture 82% 63%
Source: China Statistical Yearbook, Nomura International (Hong Kong) Limited Source: China Statistical Yearbook, Nomura International (Hong Kong) Limited
We forecast that China’s growing economy will see total water demand rise consistently at a 1-3% CAGR from 580bn m3 in 2007 to 640bn m3 by 2010F and 1,208bn m3 by 2050F.
Exhibit 11. China: water demand trend and forecasts
(bn m3) 1,400 Environmental Agriculture 1208 Industrial Residential 1,200 148 975 1,000 119 279 800 640 225 550 580 600 78 71 58 148 400 114 134 760 613 200 378 365 402
0 2000 2007 2010F 2030F 2050F
Source: China Statistical Yearbook, Nomura International (Hong Kong) Limited
Nomura 15 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Pollution exacerbates water scarcity Natural landscapes and rainfall variations are not the only factors affecting water Untreated waste released into resources in major cities. Due to rapid growth in the industrial sector, China’s rivers makes matters worse … environmental problems are becoming more acute than ever. According to government statistics in 2007, about 50% of the country’s wastewater was released into rivers and the sea without any treatment. Shanghai, for example, is surrounded by rivers but still has one of the lowest water resource per capita in the country, partly due to its large population growth and water pollution in upstream areas. Over 14mn tonnes of Chemical Oxidation Demand (COD) from industrial and … this includes serious industrial residential water consumption are being discharged into China’s rivers and the sea pollutants annually, in addition to 1.5mn tonnes of ammonia and nitrogen. According to SEPA, 62% of the water flow from the seven major river basins is classified as non-potable. Economic losses caused by environmental pollution accounted for 3% of GDP in 2004, 56% of which involved water pollution. SEPA also states that out of 161 emergency incidents concerning the environment in 2006, 59% involved water.
A SEPA official stated, citing local press, said that the agency recorded 70 water As anywhere, official statistics pollution incidents between November 2007 to February 2008, but recent academic likely understate the problem research published by the Chinese Research Academy of Environmental Sciences suggests that the actual number of water sources in key cities that failed to meet standards could be six times the official figure.
How much can water pollution cost? The World Health Organization (WHO) and SEPA suggest that water scarcity due to China might be forfeiting as much pollution costs China RMB95-199bn pa, and such pollution-caused scarcity is believed as a tenth of GDP in issues to be the cause of drought, which causes China another RMB25bn pa on loss of grains related to water pollution … and other crops. Seawater pollution along the coastline also causes loss of fish and other aquatic life. The Ministry of Agriculture estimates that RMB4.3bn in losses at fisheries alone was due to short-term water pollution incidents, while the long-term impact can be much greater. Overall, the World Bank and SEPA estimate that water shortages, inefficient water usage, and pollution can cost 8-10% of the nation’s GDP.
Other than economic losses, polluted water can also affect health in the long-term, … not to mention the human cost while WHO statistics show that incidents of liver cancer in China’s rural areas are well above the world’s average; this could be associated with water pollution as well.
What constitutes water pollution? Water pollution can occur in organic (eg, dead or decaying bodies) or inorganic (eg, heavy metals, untreated acids, salts, agricultural and industrial runoffs) forms, which require oxygen to decompose. Insoluble particles that block sunlight to the water systems thus preventing oxygen production, as well as excessive nutrients (eg, nitrates and phosphates from fertilisers or industrial waste) that cause algae/plankton to bloom and consume most of the oxygen in the water, is another form of pollution that degrades water quality. High temperature water consumed by factories and power plants in their cooling systems is known as thermal pollution, and reduces the oxygen being carried in the water. Acid rain from air pollution also indirectly affects aquatic life and biodiversity.
Nomura 16 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
China water market Identifying growth in the water market The water industry in China was previously a commonwealth service run by the government, with limited fees levied for water treatment and the consumption of resources. This system led to significant amounts of water being squandered and polluted, as well as to a lack of capital in the construction, renovation, operation, and maintenance of water and wastewater infrastructure.
In 2000, China made its first reform in the 10th Five-Year Plan (2001-05) to view water A key change has been to think of as a commercial product, rather than a public welfare product. Following China’s water as a product accession into the World Trade Organization, the water market was liberalised with strong legislative reforms (eg, the new Water Resources Law in 2002, and the Quickening the Commercialisation of City Utilities Policy in 2003) to attract capital from private and foreign enterprises. China has budgeted RMB473bn in the 11th Five-Year Plan (2006-10F) for the water industry, which was subsequently raised by RMB33bn in January 2008 by the Ministry of Construction to promote better water quality. Following China’s RMB4tn stimulus package announced in November 2008, the State Council immediately approved RMB20bn to be spent on rural water conservation.
Exhibit 12. China: fixed assets investment in water
(RMBmn) (%) Fixed assets investment in water (LHS) 120,000 y-y growth (RHS) 40 35 100,000 30 80,000 25
60,000 20 15 40,000 10 20,000 5
0 0 2004 2005 2006 2007 2008
Source: CEIC, Nomura International (Hong Kong) Limited
Recent legislative developments reflect China’s new political willingness to take action Another key change has been a on water supply penetration, conservation and pollution, and we believe more willingness to act on the government initiatives will emerge over the next decade. government’s part
Strong government support Following the opening up of the water market in the early 2000s, the government set hard targets in the 11th Five-Year Plan (2006-10F) to promote and implement policies in the development of the water industry.
Nomura 17 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Exhibit 13. Targets set in China’s 11th Five-Year Plan (2006-10F)
Event Details Remarks China’s 11th Five-Year Plan 1. Increase penetration of water supply to serve 100mn people in According to State Council directives, (2006-10F) rural areas by 2010F. At the present, 250mn people in rural areas plans for water-treatment facilities should do not have a safe drinking water supply. be included in local government budgets 2. Increase wastewater treatment ratio to 70%. as capital construction. 3. Increase urban water supply capacity by 40bn m3 annually. 4. Project to spend RMB470bn for water improvement (RMB330bn for sewage improvement) during 2006-10, with the majority of this to come from foreign investment. 5. Reduce water consumption per unit of GDP figure by 20%.
Source: NDRC, Nomura International (Hong Kong) Limited
According to State Council directives, plans for water-treatment facilities should be Water treatment to figure more included in local capital construction budgets, where the government has projected strongly in local planning over RMB473bn of investment into water assets during 2006-10F (RMB330bn for wastewater treatment; RMB143bn for water supply). This policy has jump-started investment into water utilities, including the expansion, upgrade and replacement of water plants and pipelines.
Exhibit 14. Pipeline reconstruction policy
Government authority Details Remarks Pipeline Reconstruction Policy 1. Reduce leakage by 5%, which would reduce non-revenue water by This policy encourages municipal issued by the Ministry of 1bn m3. governments and water companies to Construction and NDRC 2. Improve water service stability and hygienic conditions of water raise investments for the replacement pipelines. and addition of new pipelines, and provides an allowance to raise water 3. Restore even water pressure over pipelines to reduce bottleneck tariffs in order to recover additional problems. investment costs. 4. Increase water supply penetration by 5%, benefiting a population of 229mn (non-agricultural population is 159mn)
Source: NDRC, Ministry of Construction, Nomura International (Hong Kong) Limited
In addition to an existing underinvested water market, recent water pollution incidents More careful monitoring being put across China have pushed the government to speed up development in the water in place market, particularly in wastewater treatment. The government aims to accelerate investment by setting harder sewage treatment ratios and quality standards nationwide. Also, water safety and environmental protection has become a top priority among provincial and municipal government bodies, and has also become a performance criterion to be evaluated by the central government. With consistent inspection by the NDRC and SEPA, local governments are motivated to support and implement these policies.
Exhibit 15. Recent policies to counter water pollution
Government authority Details Ministry of Construction 1. In July 2007, the ministry stated that about 42% of the cities in China are without sewage treatment capabilities. The policy is set to achieve certain national targets by 2010, such as achieving a waste-water treatment rate of above 70% (major cities: above 70%; smaller towns and suburb areas: 30–60%), adding sewage capacity of 45mn m3, and increasing the use of recycled water by 3.5bn m3. 2. In January, 2008, the Ministry of Water Resources approved a plan to spend RMB33bn to raise water quality for 2008, which was 40% more than the original budget.
SEPA 1. In January, 2008, SEPA stated it aims to reduce COD (chemical oxygen demand), a measure of water pollution, by 5% from the 2005 level this year. 2. Authorities will step up the country's waste water treatment capacity by 12mn tonnes in 2008, with the aim of making sure all waste water in 36 major cities is treated by end-2009.
Source: NDRC, Nomura International (Hong Kong) Limited
Nomura 18 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Tai Lake incident — a good case-in-point The algae outbreak in Tai Lake in May 2007 due to heavy industrial water pollution Algae bloom in Tai Lake threatened the water supply of more than 2mn people in Jiangsu Province. Following underscored the problem this incident, SEPA ordered the worst polluting factories along four major water basins to suspend production and government officials set plans that require 20,000 chemical plants in the Tai Lake valley to meet tougher standards for sulphur dioxide emissions and chemical oxygen demand. The Jiangsu area has an urgent need for new sewage facilities, since untreated water can no longer be discharged into the Tai Lake. The provincial government is willing to spend 15% of Jiangsu’s GDP on improving wastewater treatment and environmental protection. Many provinces and municipalities (eg, Shandong, Anhui and Liaoning) have adopted similar policies, and we believe more will follow as environmental protection has become a priority for the central government. China Everbright International has a strong presence in Jiangsu province and is likely to benefit from such strong support from the regional government.
Rich growth opportunities seen in privatisation In recent policy documents, including the “Opinion on Commercialisation of City Utilities” (2003) issued by the Ministry of Construction and “Water Tariff Management Scheme” (2004) jointly enacted by NDRC and MWR, the government set a positive goal of privatising the water sector by offering reasonable investment returns.
Due to its earlier status as a public welfare enterprise, most existing water Water infrastructure may be infrastructure entities in China are distressed and are operated by local governments better off in private hands at poor returns (low single-digit net profit margin and ROAs). The political reform from a few years ago encourages the local government to privatise/commercialise water utilities as a channel to raise operational efficiency, penetration and treatment quality.
Exhibit 16. Financial performance of all urban water utilities in China
Urban tap water supply Urban wastewater treatment Measurement 2004 2005 2006 2007 2004 2005 2006 2007 Gross profit margin (%) 24.0 22.9 26.9 27.7 27.5 25.7 17.9 14.1 Net profit margin (%) 1.3 (0.3) 3.6 4.1 4.7 0.5 3.7 (2.7) Return on assets (%) 0.2 (0.1) 0.7 0.8 2.4 0.8 1.1 0.5 Liabilities-assets ratio (%) 45.3 47.8 50.5 51.5 62.4 47.4 46.0 45.2 Revenue growth (%) 20.0 10.6 23.6 11.3 52.8 58.1 27.2 38.1 Receivables turnover (days) 5.1 5.3 6.4 5.6 11.4 7.1 8.4 5.3
Note: Year 2007 represents financial information for 11M07 only Source: State Bureau (Shijing Future) reports; Nomura International (Hong Kong) Limited
Given that most water assets are held by the government, private and/or listed organisations have a strong upside potential to expand capacity in the form of joint ventures or TOT arrangements.
Demand grows on urbanisation In view of historical urbanisation growth of 3-5% (which improves urban water supply We see urban water demand penetration) and annual population growth in China of 2%, we estimate that China’s ticking along 1pp ahead of urban water demand will mark at a steady 3% CAGR over 2009-12F. population growth
Nomura 19 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Exhibit 17. China: population Exhibit 18. China: urbanisation level
(mn) (%) Total population Urban Rural 1,400 40
1,200 35
1,000 30 25 800 20 600 15 400 Urbanisation level 10 (ie, urban population/total population) 200 5 0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: CEIC, Nomura International (Hong Kong) Limited Source: Tsinghua University, Nomura International (Hong Kong) Limited
Nomura 20 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Value chain analysis China’s water value chain The typical water supply value chain in China can be broken down into three major stages: raw water distribution, tap water supply and wastewater treatment. Upstream raw water distribution mainly involves the transportation of raw water from natural water sources to downstream water treatment plants, and in some cases, water exploitation and preservation projects (eg, reservoir construction). Tap water operators treat raw water and supply it to end users through their pipeline network. As stipulated by the regulations, the water supplier is also responsible for installing water meters to measure water usage and correctly bill and collect integrated tariff from its customers. Finally, the sewage produced by end users is collected through a sewage network and is treated before it is released into the sea/river.
Exhibit 19. China: water sector value chain
Fresh Raw water Tap water Wastewater Discharge to water distribution supply treatment rivers/sea resources
Mainly involved in the transportation Purification of raw water for Treatment of waste water before of raw water from natural sources drinking or industrial use discharging into river/sea to water treatment plant Installation of water meters Usually operate under BOT/TOT Also invest in raw water projects, arrangements e.g. water dams, reservoirs, long- Construction of local water distance transfer pipelines pipelines to end-users Deal directly with the local government for tariff collection End-user billing and tariff collection Concessionary contracts are usually heavily subsidised
Guangdong Investment China Water Affairs
Shanghai Municipal Raw Water NWS Holdings Tianjin Capital
China Everbright
Hyflux Limited
Epure International
Source: Nomura International (Hong Kong) Limited
Water quality in China
Fresh water quality classification Currently, one-fourth of China’s population (ie, approximately 300mn people) are still More than 50% of China’s water is drinking underground water, of which 33% is considered moderately polluted and 64% not up to potable quality is considered heavily polluted. Even water from the surface (such as rivers and lakes) is of poor quality. Therefore, over 50% of China’s water resources are considered grade 4 or above (ie, non-drinkable), according to government statistics. The national surface water quality standards of China have five categories for fresh water resources: ie, grade 1 to 3 as suitable for drinking, grade 4 for industrial and recreational use, and grade 5 for agricultural use.
Nomura 21 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Exhibit 20. China: water quality
Beyond grade 5 Grade 1 5% 4%
Grade 2 Grade 5 23% 26%
Grade 4 Grade 3 23% 19%
Source: State Environmental Protection Administration of China
Exhibit 21. Quality classification of water resources
Content Measurement Class I Class II Class III Chrome (degree) 15 20 30 Turbidity (degree) 3 10 20 Total dissolved solids (mg/L, CaCO3) 450 550 700 Iron (mg/L) 0.3 0.5 1.0 Manganese (mg/L) 0.1 0.3 0.5 COD (mg/L) 3.0 6.0 6.0 Chlorate (mg/L) 250 300 450 Sulfate (mg/L) 250 300 400 Fluoride (mg/L) 1.0 1.2 1.5 Arsenic (mg/L) 0.1 0.1 0.1 Nitrate (mg/L) 20 20 20 Total bacteria (/mL) 100 200 500 Total coliform (/L) 3 11 27
Source: SEPA, Nomura International (Hong Kong) Limited
Wastewater treatment output quality classification Treated water output from wastewater treatment plants is generally classified as grade There are several grades of water 1A, 1B, and 2, etc, within which there are multiple sub-categories depending on the concentration of COD and other micro-organisms.
Exhibit 22. Quality breakdown of treated wastewater
(mg/L) IA IB II III COD 50 60 100 120 BOD 10 20 30 60 SS 10 20 30 50 Fat 13520 Petroleum 1 3 5 15 Anionic Surfactant 0.5125 Nitrogen 15 20 - - Ammonian - temperature above 12'c (at or below 12'c) 5(8) 8(15) 25(30) - Phosphorus - on and before 31 Dec 2005 1 1.5 3 5 Phosphorus - from 1 Jan 2006 0.5135 Chroma 30 30 40 50 PH 6~9nanana Coli group (unit/L) 103 104 104 -
Source: SEPA; Nomura International (Hong Kong) Limited
Nomura 22 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Non-revenue water Apart from water scarcity and growing demand, non-revenue water (arising from In China, about 30% of water that leakages, lack of meters and theft) continues to be a national concern. Asian countries, should be paid for, is not such as Thailand and the Philippines, have high levels of non-revenue water (40-60%). China’s non-revenue water is also high at around 30%, compared with 18% in the US, 10% in Japan and 5% in Singapore, according to China Water Net). Non-revenue water curbs profit margins. The government expects to raise efficiency through aggressive capital expenditure and privatisation.
Natural gas versus water Both the natural gas and water industries receive support from the government. A good entry point to water National policies have been set for cleaner energy use, as well as for conserving water investment consumption. Although there is excessive demand for water, it has no direct substitute and its volume demand is relatively inelastic to price changes. Regulator reforms in the water industry over the past few years have raised investment opportunities to a good entry point, in our view.
Exhibit 23. Comparison between water and gas utilities
Urban tap water supply and Urban natural gas supply wastewater treatment Government policies Government encourages use of clean energy to reduce Encourage conservation of water consumption green house gas emissions. (targeted to reduce water consumption per unit of GDP figure by 20%) and increase water supply capacity by 40bn m3 annually.
Environmental and social Reduces green house gases significantly, such as SO2, Improve water quality and minimise endangered use benefits NOx, and CO2. of underground water. Market potential for investors The gas distribution sector started privatising over a China revised the Water Resource Law in 2002 to fully decade ago. open up the market for private sectors. Set up cost and market China’s natural gas industry is still in its infancy. Many Tap water supply: most urban cities in China have penetration cities are without gas pipelines. Therefore, initial setup existing supply pipelines, market penetration more costs will be high, but will benefit from high future established but yet to be improved. Wastewater growth owing to low penetration rate at initial stage. treatment: market rather underdeveloped and the government targets reaching a sewage treatment ratio of 70% by 2010 (from 63% in 2007). Revenue mix One-off connection fees (which are for initial pipeline Tap water supply: revenue is driven by recurring water expansion and represents over 50% of total revenue) tariff as pipelines are pre-existing, one-off connection and recurring gas supply tariff. fees represents small portion of total revenue. Wastewater treatment: treatment tariff receivable from the government. Available resources China is one of the world's largest gas reserve Water resource volume per capita is only 2,152 m3, a countries, with proven reserves of 2,500bn m3. However, quarter of the world’s average. China suffers a water available production supply is still scarce and the nation shortage of 40bn m3 annually. expects to rely on imports in the near future. Input cost The NDRC has introduced a gradual market-driven Tap water supply: water resources fees charged by pricing policy for natural gas. Under certain restrictions, the government at minimal amount are automatically increases in well-head gas prices can be passed passed through to end-users. Wastewater treatment: through to industrial end-users through tariff hikes. No wastewater intake is guaranteed and provided by the such mechanism for residential end-users; residential government at no cost. tariffs are closely regulated. Substitutes Electricity. No found substitute.
Source: Nomura International (Hong Kong) Limited
Nomura 23 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Value chain — urban water supply Urban water supply
Revenue model The urban water supply business is driven by three types of revenue — water How to make money in urban treatment charges, connection fees (meter installation) and construction fees. The water supply — revenue model is detailed as follows: Tap water treatment and supply: Urban water companies collect tariffs directly from end users — residential and commercial and industrial (C&I) customers — for treating and distributing fresh water. However, given that urban water suppliers own the last mile of the pipeline and face end users directly, they are given the right to collect not only the tap water supply fee, but are also responsible for collecting water-resources, city-construction and wastewater treatment fees on behalf of the municipal government and wastewater operators. Also, unlike city gas companies which face challenges in passing on the rise of “well-head” gas charges, water suppliers are able to pass through their raw material cost (ie, water resources fee) automatically and entirely. Growth in water treatment revenue is driven by tariff hikes, improvements in plant utilisation, reduction in leakages (non-revenue water), and urbanisation and population expansion. Connection (meter installation) fees: City water companies charge one-off meter installation fees for new connections or for users without a meter. Growth is driven by increasing household penetration for safe water usage (large population in China not connected to water pipes), regular urbanisation and population growth. Although this is a business monopolised by regional entities, with profit margins at 50%-plus, income from connection fees is generally one-off upon initial setup and cannot be sustained over the long term. Construction income: Establishing pipelines for connecting end users and the supply network, as well as other one-off water exploitation projects such as construction of reservoirs and dams, can offer additional revenue from which urban water utilities may benefit.
Large potential for an underinvested market By end-2007, China had more than 1,735 water supply companies in urban areas, with pipelines of 447,229km (up a 7.7% CAGR during 2005-07) and serving a population of 348mn (4.6%), according to the National Bureau of Statistics.
Exhibit 24. Urban population with access to water Exhibit 25. Length of urban water pipeline
(Population in thousands) (km) 400,000 500,000 450,000 350,000 400,000
300,000 350,000 300,000 250,000 250,000 200,000 200,000 150,000 150,000 100,000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: CEIC, Nomura International (Hong Kong) Limited Source: CEIC, Nomura International (Hong Kong) Limited
Nomura 24 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Apart from steady urbanisation and population growth, one of the main growth factors Growth aside, China in urban water supply is its existing under-penetration. In China, 54% of households infrastructure is sketchy … are not connected to water pipelines, 74% are not equipped with bathing facilities and 77% lack proper or any type of lavatories, according to the China County Population Census.
Basic water utilities are necessities in China’s development plan, and we expect … hence the RMB143bn budgeted demand for urban water supply to grow at 2% CAGR during 2008-10F, which is line to be spent here with the long-term growth rate suggested by the Ministry of Construction. According to the Eleventh Five-Year Plan, RMB143bn will be spent in urban water supply during 2006-10 (RMB29bn pa), which includes raw water projects, improvement in water efficiency, and pipeline restructuring and replacements. We believe such infrastructure will provide a more positive backdrop for water utilities to penetrate households.
Exhibit 26. Budget for urban water supply in the Eleventh Five-Year Plan (2006-10)
Urban water supply budget during the 11th 5-Year Plan: RMB143bn Rebuild aged water supply Urbanisation network growth 16% 35%
Automated water Water sources supply for urban and quality population 35% 14%
Source: Ministry of Construction, Nomura International (Hong Kong) Limited
Exhibit 27. Availability of tap water Exhibit 28. Proportion of types of drinking water
Other (surface) Rain 15.4% collection Piped water 2.6% Well Piped water Non-piped 45.7% 6.5% 49.7% water 54.3% Hand pump 25.8%
Source: China County Population Census Source: Third National Health Service Survey
Exhibit 29. Availability of bathing facilities Exhibit 30. Availability of lavatories
Lavatories Centralised Water No lavatory at home support of heater at home 28.0% 18.0% hot water Sharing 15.4% 0.9% lavatories Other facility with for bath neighbors 9.7% Other type 0.7% of lavatory No facility at home for bath 53.3% 74.0%
Source: China County Population Census Source: China County Population Census
Nomura 25 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Robust growth from privatisation In accordance with “Quickening the Commercialisation of City Utilities Policy” China water supply infrastructure published by the Ministry of Construction in 2003, local governments are encouraged is run down to privatise existing water assets. Unlike wastewater treatment, water supply infrastructure is more developed and capex is mainly required for maintenance and water quality upgrades. Having been part of the public welfare system for decades, Chinese water supply assets are mostly distressed with unattractive profitability and through the privatisation process local governments are searching for investments and management to turn around operations.
Exhibit 31. Gross profit margins of different industries in China
(Gross profit margins %) 30 Power Water Gas
25 The power industry was 20 opened up in 1990s The water industry was opened up in 2002 15 The gas supply industry 10 was opened up in 1998
5
0 2000 2001 2002 2003 2004 2005 2006 2007
Source: CEIC, Nomura International (Hong Kong) Limited
Exhibit 32. Industry revenue of water and gas Exhibit 33. Industry revenue of power producers
(RMBbn) (RMBbn) 120 Gas Water 3,000 Power
100 2,500
80 2,000
60 1,500
40 1,000
20 500
0 0 2000 2001 2002 2003 2004 2005 2006 2007 2000 2001 2002 2003 2004 2005 2006 2007
Source: CEIC, Nomura International (Hong Kong) Limited Source: CEIC, Nomura International (Hong Kong) Limited
Privatisation can be carried out in the form of concessionary agreements, such as TOT Assets are overwhelmingly state leases or perpetually through joint ventures. The majority of existing water held infrastructure is held by the government, indicating large potential growth is available for foreign and private enterprises to extend through M&A.
Nomura 26 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Exhibit 34. China: urban water supply
(mn m3) 60,000
55,000
50,000
45,000
40,000
35,000
30,000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F 2009F 2010F 2011F 2012F Source: Ministry of Construction
Margin expansion from efficiency improvement Owing to the earlier state-owned status for water supply operations, some end users Quite a bit of water is supplied are connected to the water pipeline network without being charged for water use. This, but not paid for … in addition to pipeline leakages and intentional water theft, form non-revenue water (NRW), ie, water supplied without being paid for.
Following the “One Household, One Meter” policy that was pushed forward by the … but installation of meters will Ministry of Construction in 2002, water supply operators are given the right to install cut down on this water meters in each urban household and collect tariffs for water supplied. Such improvement in NRW would translate into a direct expansion of profit margin. We expect China’s NRW to improve gradually to 18% in 2010, from 22% in 2007.
Minimal collection risk Water supply operators not only have the right to collect the tap water supply fee (for treatment and distribution to end users), but are also responsible for collecting water- resources, city-construction and wastewater treatment fees on behalf of the municipal government and wastewater operators. Due to its direct exposure to the fee-collection process, water supply operators generally have a very low debtor turnover period.
Besides, water suppliers also have the right to shut down water supply when users Water suppliers can turn off the default on payment by more than 60 days, which minimises collection risks. tap if not paid
Suggested 8-12% ROE with direct cost pass-through In 1998, the City Water Supply Pricing Scheme guided that urban water suppliers Of course tariff hikes have to be should be allowed a return on equity (net assets) of 8-12%. Upon escalating operating approved but there is a costs from power, labour, upgrade and maintenance, water suppliers can ask for a mechanism for this … tariff hike to maintain the allowable return. Even without an application for a tariff hike, the water tariff is generally reviewed by the local government every two years to adjust for inflationary cost effects. Although the water tariff is ultimately controlled by the local pricing bureau of the municipal government and a tariff hike has to be approved through public hearings, this policy allows water utilities a legitimate channel to justify reasonable returns, in our view. Unlike wastewater treatment operations, which are still highly subsidised by the … and not as onerous as in some government, water supply tariffs are mostly passed through to end users. Therefore, kindred industries there are fewer regulatory and collection risks involved in negotiating for a water supply tariff hike.
Nomura 27 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Most importantly, water has no significant raw material cost (especially in the southern regions), unlike power, oil and gas, which are subject to the risk of fluctuating fuel costs. Raw water resource fees charged by the government are generally 2-5% of the final water tariff and are generally passed through to end users.
Change in water usage habit Currently, Chinese residents consume only 15-20 litres of fresh water per day, since: 1) Modern habits are much more a large amount of the population in rural areas does not have stable water supply, and; water-intensive 2) China has only recently built up the infrastructure for heavier water use. However, modernisation and urbanisation would gradually promote higher per capita water consumption, prompting greater demand for water in the long run. In developed countries, on an average, residents consume 150-300 litres of water daily, while in developing countries this figure is 20-100 litres daily, according to UNESCO. A conventional toilet flush consumes 10-15 litres per use, while a shower consumes 15-35 litres per minute and a full bath would use 150 litres.
Exhibit 35. Water consumption by activity
Activities Litres used Toilet flushes 10 - 15 Shower (per minute) 15 - 35 Bath (full tub) 150 Laundry machine (full load) 160 - 220 Dishwasher 25 - 55 Dishwashing by hand (tap running) 110 Shaving (tap running) 20 - 30 Brushing teeth (tap running) 10 - 30
Source: GWM Water
Less risk from China’s slowing industrial outlook Industrial users account for only 45% of the total water supply in urban areas (23% at At the same time, modern the national level, per the National Bureau of Statistics), and this number too is on a infrastructure makes more efficient use of water downtrend as water efficiency rises among manufacturers and water consumption by households increases with modernisation and urbanisation.
The recent economic turmoil has slowed production in various industries, as is evident Demand here is largely inelastic from the drop in industrial output growth to 5.7% in December 2008 from 8.2% in October 2008 and 11-16% in 9M08. Our economics team expects industrial output growth to continue its downtrend in the months to come, possibly reporting negative year-on-year growth in early 2009. However, the impact on water supply volume is still not significant when compared with the power sector (where the industrial sector accounts for 76% of total consumption) and gas distribution (where the industrial sector accounts for 50-80%), according to the National Bureau of Statistics and our industry checks. We believe water plant utilisation in China is less exposed to macro- economic conditions — due mainly to inelastic demand from the residential sector and the growth outlook for water utilities is more resilient and defensive.
Nomura 28 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Exhibit 36. China: water supply mix
Residential Industrial 100% 90% 80% 46% 45% 53% 49% 48% 48% 53% 70% 61% 59% 58% 55% 60% 60% 50% 40% 30% 54% 55% 47% 51% 52% 52% 47% 20% 39% 41% 42% 45% 40% 10% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: CEIC, Nomura International (Hong Kong) Limited
Nomura 29 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Value chain — wastewater treatment Wastewater treatment
Revenue model Standalone wastewater treatment operations receive tariffs directly from the government, which are generally highly subsidised. Generally, the government is responsible for setting up sewage pipelines and the provision of wastewater intake, while wastewater treatment plants carry out the treatment process independently.
Due to the standalone nature of the business, privatisation is usually in the form of BOT with long concession BOT/TOT arrangements for a concession period of 25-30 years. As an incentive to periods, if privatised encourage investments, local governments may guarantee a minimum volume being supplied to the wastewater treatment plant. Many cities don’t have existing wastewater treatment facilities and thus demand is generally in excess of supply, making it easier to ramp up plant utilisation to optimal levels (90%-plus).
Huge growth potential ahead in wastewater treatment Unlike urban water supply, which has existing infrastructure, wastewater treatment is Wastewater much less developed still in the development stage and far behind the government’s target in the 11th Five- than water supply Year Plan. We see significant growth potential in the near term on the following: Severe under-investment and under-penetration. Environmental pollution under current conditions. Sewage pipeline network has not been fully set up in many cities.
Aggressive expansion implied from the government’s 2010 target According to the National Bureau of Statistics, China’s daily capacity of wastewater Nearly 300 cities in China do not treatment grew to 71.5mn m3 in 2007 (from 27.5 m3 in 2000), representing a 14.6% have sewage treatment plants CAGR. Wastewater emissions in China increased to 55.7bn m3 in 2007 (from 41.5bn m3 in 2000), representing a CAGR of 4.4%. Despite significant development, we see higher potential growth in the next few years given that 42% of the cities in China (or 297 cities) are still without sewage treatment capabilities. Specific policies have been announced by the Ministry of Construction for 2010 to support such aggressive development, which targets a wastewater treatment ratio of 70% for major cities (30- 60% for smaller towns and suburbs) by 2010, up from 63% in 2007.
Exhibit 37. China: urban wastewater emission Exhibit 38. China: wastewater treatment capacity
(bn m3) (mn m3/day) 80 Industry Non-industrial 140 121 70 63 61 120 58 56 102 60 53 54 100 48 85 50 44 46 42 43 34 35 80 71 40 31 32 64 28 30 57 25 26 60 49 30 22 23 23 40 33 20 24 25 26 27 28 10 19 20 21 21 22 24 20
0 0 2000 2001 2002 2003 2004 2005 2006 20072008F2009F2010F 2003 2004 2005 2006 2007 2008F 2009F 2010F
Source: SEPA, Nomura International (Hong Kong) Limited Source: SEPA, Nomura International (Hong Kong) Limited
Nomura 30 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
If we assume that China’s wastewater emissions continue to grow at their historical More aggressive policies may be CAGR of 4.4% until 2010, annual sewage is likely to reach 63.3bn m3 by 2010. Taking needed into account the government’s target of raising the sewage treatment ratio to 70% by 2010, China would need to have a daily treatment capacity of 121mn m3 by then, implying a potential CAGR of 19% in 2008-10F. However, only a daily capacity of 100mn m3 was planned in the 11th Five-Year Plan, indicating that the government’s target may not be met unless it implements further policies to push for higher growth. We see higher growth opportunities in wastewater treatment due to prevailing underdevelopment in China and the positive backdrop set by recent government policies (especially following China’s RMB4tn stimulus package announced in November 2008), when compared with conventional tap water supply.
Exhibit 39. China: sewage treatment ratio in urban areas
(%) 70 63% 58% 60 48% 50 44% 40% 42% 40 34% 36%
30
20
10
0 2000 2001 2002 2003 2004 2005 2006 2007
Source: National Bureau of Statistics, Xinhua News
Government’s wastewater treatment budget In accordance with the 11th Five-Year Plan to increase wastewater treatment Government investment in penetration and improve water quality, the Ministry of Construction has budgeted an wastewater is about twice that in investment of RMB330bn (RMB66bn pa) in wastewater treatment, compared with urban water supply RMB143bn (RMB29bn pa) for urban water supply.
Exhibit 40. Wastewater treatment budget in 11th Five-Year Plan (2006-10F)
Wastewater treatment budget for the 11th 5-Year Plan: RMB330bn
Wastewater treatment plans 35%
Collection ducts and pipelines 65%
Source: Ministry of Construction, Nomura International (Hong Kong) Limited
Demand driven largely by the residential sector According to a study by the US Department of Commerce, China has only one treatment facility for every 1.5mn urban and suburban dwellers, compared with one for every 10,000 persons in the US.
Nomura 31 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Sewage output has been increasing rapidly in volume and the residential sector is Growth from the cities is the becoming a major contributor to this growth rate. In 1999, the residential wastewater fastest, outstripping industrial emission volume exceeded that of the industrial sector, and continued to increase at a use higher rate thereafter. Due to the high rate of urbanisation in China, sewage facilities are needed more urgently in urban areas, to keep up with economic development.
Exhibit 41. Wastewater output comparison
Industrial Residential 100% 90% 80% 45.4% 49.3% 50.8% 53.3% 53.1% 52.8% 53.8% 53.7% 70% 54.1% 55.3% 55.7% 60% 50% 40%
30% 54.6% 50.7% 49.2% 46.7% 46.9% 47.2% 46.2% 46.3% 20% 45.9% 44.7% 44.3% 10% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: SEPA, Nomura International (Hong Kong) Limited
In wastewater treatment, we prefer the industrial space We prefer industrial wastewater treatment to residential, because: Industrial use pays better On our estimates, the tariff for industrial wastewater treatment is 2-6x higher than that of residential, with estimated project IRRs at 10% (compared to 8-9% for residential). The wastewater treatment tariff is mostly passed through to industrial users who can afford the cost. In contrast, the residential wastewater tariff is highly subsidised by the government. Following the government’s goal to counter pollution and promote water efficiency, tariff hikes are more likely among industrial users. We believe industrial wastewater treatment plants face less regulatory and collection risks with the local government, and the existing underinvested market should provide stable growth opportunities for operators to expand capacity.
Margin expansion from entering into water-recycling At most of the wastewater treatment plants in China, processed water output is directly Amid a water shortage no reason discharged into rivers or the sea. Many municipal governments in the north-eastern to use potable water for industrial provinces have recently pushed for initiatives to promote the use of recycled water. applications The aim is to avoid using potable water for industrial use, such as for cooling off power plants, cement production, and flushing toilets, where recycled water can be used. The encouragement for recycling water and the escalating water tariffs in most northern provinces (due to water shortages), lead us to believe that recycled water would be a high-margin business, since treatment cost would already have been taken care of during sewage treatment, and additional supply/distribution costs would be minimal. Following the government’s target to increase the use of recycled water by 3.5bn m3, as announced by the Ministry of Construction in early 2007, we see growing opportunities in this business segment.
Nomura 32 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Key players involved in the urban wastewater treatment market Key players that are involved in China’s wastewater treatment market in the urban area are as follows:
Exhibit 42. China: top players in wastewater treatment market Daily capacity % of total urban Rank Company Ticker (mn m3) capacity in China 1 Beijing Capital 600008 CH 7.60 10.6 2 Shanghai Chengtou Holding Co 600649 CH 3.50 4.9 3 Tianjin Capital Environmental Protection * 1065 HK 2.69 3.8 4 Shenzhen Water Group unlisted 1.86 2.6 5 Sound Group unlisted 1.77 2.5 6 General Water of China (listed parent: Shanghai Industrial Investment) (a) 1.66 2.3 7 Beijing Enterprises Water * 371 HK 1.63 2.3 8 China Everbright International * 257 HK 1.28 1.8 9 Tsinghua Tongfang unlisted 1.20 1.7 10 Veolia Water of China (listed parent: Veolia Environment) VIE FP 1.17 1.6 11 Sino French Water (JV of NWS Holdings and Suez) (b) 0.55 0.8 12 Golden State Holdings unlisted 0.25 0.3 13 Hyflux Limited * HYF SP 0.14 0.2 Notes: (a) General Water of China - listed parent is Shanghai Industrial Investment (363 HK, BUY); (b) Sino French Water - joint-venture of NWS Holdings (659 HK, BUY) and Suez (SEV FP, BUY) * For companies under coverage, capacity based on our estimates for end-2008; others quoted from H2O-China as of end-2007 Source: H2O-China, Nomura International (Hong Kong) Limited
Nomura 33 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Revenue and regulation China’s water tariff under reform
Background on water tariff evolution Over the past two decades, the Chinese government has made noticeable reforms in Giving water away did not the pricing mechanism of water tariffs. Before 1985, water in China was provided to promote economic use … citizens free of cost. Following severe water shortages, government officials realised this situation would hinder China’s economic growth and began to create awareness about the need for water conservation.
Exhibit 43. Evolution of the Water Resources Law
New Water Resource Law (2002) Old Water Resource Law (1988) Article 7: The state will establish a water abstraction permit system, and Article 32: the state will establish a water abstraction permitting anyone who consumes the water resource shall pay accordingly for this system. usage. Article 12: The State Council's Ministry of Water Resources shall be in Article 9: The state shall carry out a system of unified charge of the unified administration of water resources throughout the administration on water resources in association with administration entire country. at various levels and by various departments. Article 30: The Ministry of Water Resources should consider No corresponding rules maintaining the flux in rivers, the water level in lakes and water reservoirs, and the water table of groundwater at a reasonable level and should consider maintaining the self-purification capability for water bodies when drafting the development and utilisation plan of water resources. Article 49: Water consumption will be charged based on the actual No corresponding rules amount of water consumption, and the progressive water tariff system will be executed if users exceed their water quotas.
Source: US Department of Commerce, International Trade Administration
Water pricing reforms were planned in 21 provinces, autonomous regions and … now more people will pay more municipalities, with 12 provinces and cities implementing firm methods of water price management by 2005. According to the policy outline provided by the NDRC and the MWR in 2005, “…the number of people who should pay for water consumption will increase, and the amount they pay will see a moderate hike.”
Water tariff is on the rise
Water tariff has been on an uptrend Ever since the government recommended in the Tenth Five-Year Plan (2001-05) that water should be viewed as a commercial product and prices should be set according to its scarcity, water prices have been on the rise. In 2007, the integrated water price of 100 large and medium-sized cities was RMB2.8/m3, a CAGR of 11% for 2000-07, according to H2O China and Ministry of Water Resources.
Nomura 34 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Exhibit 44. Average water tariff among China’s 100 largest cities
3.0 Wastewater Water tariff Integrated
2.5
2.0
1.5
1.0
0.5
0.0 2000 2001 2002 2003 2004 2005 2006 2007
Source: H2O-China, Ministry of Water Resources, Nomura International (Hong Kong) Limited
Government is reducing water consumption per unit of GDP by 20% As set out in the 11th Five-Year Plan, China aims to reduce water consumption per unit Charging more will also promote of GDP by 20% during 2006-10F. Water consumption per RMB10,000 of GDP was environmental ends 229 m3 in 2008, down from 306 m3 in 2005. Meanwhile, the MWR aims to cut this ratio by another 45% by 2020F from current level (or down 60% from 2005 level), given the severe water shortages and China’s long-term goal to improve water conservation and efficiency, according to the latest press conference in February 2009.
We believe that aggressive tariff hikes are a possible solution to achieve these targets, given the natural price inelasticity of water. Also, the MWR indicated in January 2009 that China’s water tariffs will have to rise to support the government’s targets of cutting water consumption per unit of GDP by 20%, fighting pollution and raising water quality.
China’s urban water tariff is only 20% of the world’s average China’s current water tariff in urban areas is only 20% of the world’s average, although demand for water is more inelastic than that for other utilities. In line with the government’s agenda to benchmark water tariffs to international standards, as well as to reflect the value of water scarcity, we see an upward trend in China’s water prices.
Exhibit 45. Water tariffs in different countries/cities
(RMB/m3) 45
40
35
30
25
20
15
10
5
0 New York Turkey Germany Paris Denmark Germany United Belgium Japan Italy Canada China South Kingdom Korea
Source: H2O, NUS Consulting, International Trade Administration, Nomura International (Hong Kong) Limited
Nomura 35 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Larger upside potential in tariff hike than other utilities China’s water tariff only accounts for 1.0% of average disposable income among In proportion to income, China Chinese households, lower than the 2-12% in the case of electricity bills and 3% households are paying little for recommended by the Ministry of Housing as an effective benchmark to reflect water water conservation. Unlike the electricity tariff which is centrally controlled by NDRC, water tariff hikes are regulated and approved by local governments. Since 2000, water tariffs (water supply and wastewater treatment) have seen a larger gain than electricity and piped natural gas, since: 1) water prices have historically been below those for other utilities due to water’s earlier public-welfare status, and; 2) water accounts for a relatively small portion of production costs as compared with other types of energy sources.
Exhibit 46. Changes in residential utilities prices
300 Residential wastewater treatment tariff Residential tariff for piped gas 250 Residential water tariff (excluding wastewater treatment) Residential tariff for piped natural gas 200 Retail electricity tariff for residents (220v)
150
100
50 Jan 01 Oct 01 Jul 02 Apr 03 Jan 04 Oct 04 Jul 05 Apr 06 Jan 07 Oct 07 Jul 08
Note: Rebased to 100 Source: CEIC, Nomura International (Hong Kong) Limited
Exhibit 47. Water bill as a percentage of disposable household income among Chinese cities
(%) 3
2
1
0 Xian Hefei Jinan Hotter Xining Dalian Tianjin Harbin Beijing Haikou Ningbo Wuhan Xiamen Fuzhou Nanjing Taiyuan Guiyang Nanning Qingdao Lanzhou Urumchi Kunming Chengdu Yinchuan Shanghai Shenyang Shenzhen Hangzhou Nanchang Changsha Chongqing Zhengzhou Changchun Guangzhou Shijiazhuang Source: Bureau Statistics of China, Nomura International (Hong Kong) Limited
Nomura 36 17 February 2009
Water | China Evan Li / Ivan Lee, CFA
Faster growth in wastewater treatment tariff We believe the wastewater tariff will be raised sooner and by a larger magnitude, mainly due to the prevailing underinvestment and the government’s aggressive push to boost water quality across all cities in China. Historically, China has had very few wastewater treatment plants, operated in poor conditions and low tariffs to end users. To meet the central government’s target of a 70% sewage treatment ratio by 2010, local governments will allow a higher tariff for wastewater treatment projects, as an instrument to attract investments, in our view.
Also, the State Council has set a guidance in June 2007 that the wastewater treatment Wastewater treatment tariffs tariff should benchmark at RMB0.8/m3, which implies a 25% rise from current could go quite a bit higher averages. The government also aims to upgrade treatment output from wastewater plants to Grade 1B (from Grade 2 or below). As a result, we see further upside from the RMB0.8/m3 benchmark. For instance, Guangzhou city (Guangdong province) adopted a progressive water tariff mechanism on 30 December, 2008, which will increase wastewater treatment fees by 29-171% effective 1 July, 2009, according to a local press report on 16 January, 2009. New tariffs would bring Guangzhou in line with other cities in the Pearl River Delta area.
Exhibit 48. Proposed tariff hike in Guangzhou, Guangdong province
After Before Water consumption Wastewater treatment fee Change (RMB/m3) (m3/month) (RMB/tonne) (%) Residential 0.7 < 22 0.90 29 23 - 30 1.20 71 > 30 1.50 114 Non-residential 0.7 Civil service 1.20 71 Industrial 1.40 100 Servicing 1.40 100 Specialised industry 1.90 171
Note: Public hearing held on 30 December, 2008 Source: People's Daily, Nomura International (Hong Kong) Limited
Risks associated with wastewater treatment tariff However, we see the following risks associated with wastewater treatment operations: