中国环境与水公用事业：逐步改善

1、March 3, 2019 07:00 PM GMTMarch 3, 2019 07:00 PM GMTChinaEnvironmentandWaterUtilities | AsiaGradually improvingWe are more positive the China water and environmentalandupgradeCEIandBEWtoOW.We stayOWConchVentureandEWOriginWater.We assumecoverageandCapitalatEW.Executionofwaterrenovationfrom2019:A majo

2、rityofoperatorsthespaceareprivately-ownedentitieswithlowerMORGAN STANLEY ASIA LIMITED+Eva HouEQUITY ANALYST HYPERLINK mailto:Eva.Hou Eva.Hou+852 2848-6964Simon H.Y. Lee, CFAEQUITY ANALYST HYPERLINK mailto:Simon.Lee Simon.Lee+852 2848-1985Rachel L ZhangEQUITY ANALYST HYPERLINK mailto:Rachel.Zhang Rac

3、hel.Zhang+852 2239-1520Morgan Stanley appreciates your support in the 2019 Institutional Investor All-Asia Research Team Survey. HYPERLINK /ranking-assistance Request your ballot. ChinaUtilitiesAsia Pacificfundingcapacityandhigherfinancingcoststhanstate-ownedenterprises(SOEs). Weexpectexecutionoflar

4、gewaterpublic-privatepartnership(PPP)projectstoIndustryViewAttractivegraduallyimprove,given:1)higheraveragereturnsoftheprojectsrollingout2018, thanks to a more regulated PPP market and more rational market competition;and2)privateoperatorspartnershipswithSOEsviathelatters capitalinjection,whichaimst

5、oresolveissueswithfundingandworkingcapital, andwilllikelyresultaccesstomoreprojects.business model of solid retained: The waste-to- energy(WTE)markethasbeenworkingwellsince2017aslocalgovernments havefocusedonoperationaltrackrecordandqualitytenders,resultingmore reasonable waste treatment fees. We ar

6、e less concerned than the market consensusabouttheWTEtariffmodelchange,given:1)thecentralgovernment unlikelytochangethetariffofexistingprojects;2)localgovernmentsshould beabletoaffordtoraisewastetreatmentfeesorallocatesurplusrenewable energy(RE)surchargescollectedattheprovinciallevelthecentralgovern

7、ment shiftsREsubsidyresponsibilities(Rmb0.15/kWh)toprovincialgovernments;andoperatorsshouldbeabletoimproveefficiency(pertonpowergeneration)to offsetthetariffshortfallbytechnologyupgrades.HWremainsthemost profitableandcash-flow-generatingbusinessmodelthesolidwastevalue chain,giventheshortageofsupplya

8、ndhighentrybarriersbecauseof qualification licensepermits.Upcoming catalysts: 1) Shutdown of WTE tariff model; 2) earnings growth recovery2019thankstothefasterexecutionofwaterPPPprojects;and3) smoothfundingandworkingcapitalmanagementafterSOEscapitalinjection.Source:MorganStanleyResearch(E)estimates.

9、calls:WeupgradeCEIOWgivenitshighearningsgrowthvisibilityamid provenstrongWTEexecutionanditslikelyimprovingprojectreturnsthanksto equipmenttechnologyupgrades.WeupgradeBEWOWlightofawaterPPP recoveryandapartnershipwithYangtzePowerthatofferspotentialbusiness expansion and execution of an asset-light str

10、ategy. We are OW on Conch givenwell-positionedtheHWco-processmarket.WeareEWGDI givenitsrichvaluation,lowEPSgrowthandlackofcatalystsdespiteitsstrong cashflowandstableDPS.WeareEWonandBJCapitalduetotheir morestretchedbalancesheetsSource:MorganStanleyResearch(E)estimates.With this report, Eva Hou assume

11、s primary coverage of GDI and BJ Capital.Exhibit 1: Whats changed: Summary of changesCompany NameRatingPTUnitsUnitsEP2018ES2019E2020EEWHKD15.43HKD0.750.790.83BJEWCNY3.46CNY3OWHKD10.60HKD0.880.861.040257.HKOldEWHKD7.90HKD0.900.901.03 OWHKD32.21CNY3.363.574.010586.HKOldOWHKD36.65CNY3.123.433.95OWHKD5.

12、90HKD0.480.540.630371.HKOldEWHKD5.30HKD0.450.550.63EWCNY10.00CNY0.430.510.60300070.SZOldEWCNY12.00CNY0.961.171.30Source: Morgan Stanley Research (E) estimates.Exhibit 2: Summary of Valuation MetricsValuation MetricsP/E (x)2018E2019E2020EGDIBJ Capital35.236.332.0CEI8.08.97.4Conch VentureBEWOriginWate

13、r18.018.315.6P/B(x)GDIBJ CapitalCEIConch VentureBEWOriginWateryieldGDI3.4%4.2%4.9%BJ Capital1.8%1.7%2.0%CEI3.8%3.4%4.1%Conch Venture2.3%2.2%2.5%BEW4.6%4.4%5.2%OriginWater0.6%0.6%0.7%ratioGDINet cashNet cashNet cashBJ Capital176.8%193.1%205.8%CEI55.9%89.7%131.0%Conch Venture5.2%13.3%16.1%BEW133.6%117

14、.9%119.9%OriginWater110.6%176.5%216.3%Morgan Stanley does and Morgan Stanley does and to do business with companiesinMorganStanleyResearch.Asa result,investorsshouldbeawarethatthefirmmayhavea conflict of that could the objectivity of Morgan Stanley Research. should consider MorganStanleyasonlyasingl

15、efactorinmaking their investmentdecision.ForanalystandotherimportantrefertotheSection,locatedattheendofthis report.+=Analystsemployedbynon-U.S.affiliatesarenotregisteredwith FINRA,maynotbeassociatedpersonsofthememberandmaynot besubjectNASD/NYSErestrictionsoncommunicationswitha subjectcompany,publica

16、ppearancesandtradingsecuritiesheldby a research analystaccount.Investment SummaryWearenowmorepositiveontheChinawaterandenvironmentalspace,andweupgrade China Everbright International (CEI) and Beijing Enterprise Water (BEW) to Overweight ratingsfromEqual-weight.Withinthespace,weprefersolidwastetreatm

17、enttowaste watertreatment(WWT)/watersupply,giventhelucrativebusinessmodelofwaste-to- energy (WTE) and hazardous waste (HW) treatment. WWT operators suffered from an executionslowdownofwaterenvironmentalrenovation/waterPPPprojectsduring4Q17 to2018,asaresultoftighteningworkingcapitalandunattractiveret

18、urns.Wethink overalloperatingconditionswillgraduallyimprovefrom2019,because1)average returnsofwaterPPPprojectsrolledout2018haveimprovedthankstoamore regulatedPPPmarketandmarketparticipantsbecomingmorerational;and2)private operatorswillbenefitfromthecapitalinjectionofstate-ownedEnterprises(SOEs)terms

19、oflowerfundingcostsandfundingsupport.Alongthewatervaluechain,we preferwastewatertreatmenttowatersupply,giventhatthewatersupplymore dominatedbylocalgovernments,withlessopportunityforlistedcompanies.WebelievemarketconcernsaboutthetariffmodeladjustmentforWTEhavebeen overdone.TheelectricitygeneratedbyWT

20、EenjoysahighertariffofRmb0.65/kWhfor thepowergenerationofpertonsolidwastebelow280kWh.Foramountsabovethe coal-fired power tariff (Rmb0.4/kWh), Rmb0.1/kWh paid by the provincial governmentandtheremainingRmb0.15/kWharenewableenergy(RE)subsidypaid bytheREfundundertheMinistryofFinance.Thegovernmentdiscus

21、singapotential shiftoftheREsubsidybacktotheprovincialgovernmentsresponsibilitymainlydueto thesignificantdeficittheREfund.Inourview,thecentralgovernmentlikelytoalter thetariffofexistingWTEprojects,whichsimilartotheprincipalforwindandsolar thatanytariffadjustmentwillbeonlyapplicabletonewprojects,consi

22、deringtheold projects bear higher construction costs. Most provincial governments can afford to take responsibilityfortheREsubsidypart,orincreasethewastetreatmentfee.Thewaste treatmentfeeofco-processmunicipalsolidwastecementproductionforConch enturesaroundRmb150/ton,muchhherthanTE.ocalovernmentspaya

23、hher treatmentfeeduetoco-processhavingnopowergenerationrevenue.Also,CEIhas preparedforatariffmodeladjustment.Thecompanydevelopinghighparameter equipmenttoraisethepertonpowergeneration(Exhibit8andExhibit9)tooffsetany tariffshortfall.CEI-AclearleaderinWTEmarket;VisibleamidWTEexecution; Upgrade OWItdem

24、onstratedstrongnewprojectintakecompetenceandsecured23.4ktonnes dailynewWTEcapacity2018,versus13.5ktonnes2017and13.1ktonnes2016.Thestrongpipelinewillofferhigherearningsandcashflowgrowthvisibility beyond2019.Weexpectitscapacitygrowthtoaccelerate2019.CEIsWWTcapacitygrewby 21.1%yoyto43.0ktonnesbytheendo

25、f2018,ascommissioned7.5ktonnesof newcapacityontime2018.Wethinknewcapacitywillaccelerateto16.5ktonnes 2019and18.5ktons2020,withyear-endcapacitygrowthby30%bothyears.ThenewWTEprojectsreturnlikelytobeimprovedvialiftingthepertonwaste powergenerationbyusinghighparameterequipment.We raise our PT to HK$10.6

26、0 mainly by removing the 25% corporate governance discount and extending the capacity growth from 2021 to 2024 given solid execution and a strong pipeline.BEW - outlook from Yangtze Power and water PPP execution; Upgrade OWThepartnershipwithYangtzePowerlikelytofacilitateBEWsbusinessexpansion toThePr

27、otectionPlanofYangtzeRiveraswellashelpexecutinganasset-light strategyviatheleveragingofYangtzePowersstrongbalancesheet.ThereturnsofnewwaterPPPprojectwon2018improvedto7-8%termsof projectIRRfrom5-6%2017,whichimpliesthatthereturnsonnewprojectsthat willstartconstruction2019arelikelytobehigher.Uponcomple

28、tionofBEWs5%newshareplacementtoYangtzePower,likely1H19,itsshareholdingreachesorexceeds10%viabuyingsharesthesecondary market,YangtzePowerwouldhavetherighttonominateoneexecutivedirector, accordingtothesubscriptionagreement.BEWssharepricewillbeunderpinnedby anysecondarymarketshareaccumulationfromYangtz

29、ePower.WeraiseourPTtoHK$5.90mainlybyfactoringhighergrowthandreturn assumptionsforwaterPPPprojects.Wehavefactoredthepotentialdilutionfor thesubscriptiontoourPTandEPSestimates.OurPTandearningsestimateshave notyetfactoredanypotentialbusinessexpansionfrompartnershipwithYangtze PowerTheProtectionPlanofYa

30、ngtzeRiver.Conch-Well-positionedinhazardousmarket;RemainOWChina has a promising hazardous waste treatment market. HW treatment capacity in China is inadequate, with 70% of HW production may not be treated properly. Co-processing is a sound alternative to treating HW given its substantially lower inv

31、estment cost, high gross margin and mature technology.Conch Venture is a potential market leader in this market underpinned by 1) ample cement production lines supplied by Conch Cement, and 2) the formation of a strategic cooperation agreement with CNBM to develop co-processing business in the futur

32、e.It has an incentivized management team given Conch Venture is actually an employee incentive platform for Conch Holding, Conch Cement and Conch Venture itself.Besides a solid earning foundation from Conch Cement, we forecast Conch Venturescorebusinesswillreportmorethan60%growthboth2019and2020, and

33、itscoreearningscontributionwillincreaseto25%2020.WehavereviseddownourPTtoHK$32.21basedonthelatest2019PTimpliedP/E ofConchCementcoveredbyMorganStanleyanalyst,RachelZhang,aswellastherevised 2019 PT implied P/E of CEI. Our PT implied 2019e PE is 7.4x.Guangdong(GDI)-Defensiveplayvaluationandlackofcataly

34、sts; Assume atEWA defensive water supply contract with Hong Kong generates strong cash flow for future M&A opportunities in the water and other infrastructure fields.A stable water-related business offers limited downside even if there is no M&A growth ahead.DespiteGDIsstableDPS,strongbalancesheetan

35、dhighearningqualitywithless constructionprofit,alreadytradingatitspeakvaluationandofferinglower earningsgrowth.WeassumecoverageofGDIatEWwithaPTofHK$15.43.Weseelimitedcatalysts tofurtherdriveuptheshareprice.Beijing - SPIG as shareholder difficultyinfunding;RemainEWduebalancesheetasweawait thecooperat

36、ionandSPIGFive controlling shareholders, including Chairman Mr. Wen, will transfer a total stake of 10.7% to Sichuan Provincial Investment Group (SPIG). Upon the transaction, the shareholding of the management team will be 40.7%. SPIG intends to increase its shareholding to 20% via a private placeme

37、nt or stake transfer, and become the companys biggest shareholder.OriginWater has encountered rising financing costs and geared up balance sheet issuessince2017asaresultofbeinginvolvedlargewaterPPPprojectsasapure WWT equipment supplier. We forecast the companys net gearing will continue to increase

38、2019 and2020.OriginWater will benefit from the strategic partnership with SPIG via funding supportandlowerfinancecosts.However,itsbalancesheetwillcontinuetobe gearedupduetotheshiftofitsoriginalequipmentsupplybusinessmodeltoheavy capital water PPPprojects.OriginWatertradingaathistoricaltroughvaluatio

39、nandwethinkwilloffer decentearningsgrowth2019and2020givenalowbase2018asaresultofa significantslowdownofPPPexecution.Wewillnotturnpositiveonthisstock unlesswegainmorevisibilityonPPPexecutionandaclearframeworkandabout cooperation withSPIG.BgCaalBJCaal)-agalanadlakfh; Assume atEWIt is leveraging its st

40、atus as Chinas largest water supply company in terms of capacity to penetrate into other businesses along the value chain.However,ourviewthekeysharepricedriversarepotentialwatertariffhikesand efficiencygains-visibilityforbothofwhichremainslow.Ithasademandingvaluationversuspeers;BJCapitalsharesaretra

41、dingatthehigh endofvaluationsourcoverage.2018 result preview of China Environment and Water Utilities companies under our coverageWeforecastConchVenturewillreportthehighestearninggrowthamongthisgroupof 78.4%2018,drivingby1)85%associateincomegrowthtoRmb5,460mmainlyfrom ConchCement;and2)34%corebusines

42、sgrowthtoRmb602m.ConchVentureand ConchCementreleasedapositive2018profitalertwithnetprofitupby65%and80- 100%,respectively,February2019.OurearningsforecastsforCEI,BEWandGDIare generallylinewithconsensus.WeforecastOriginWaterandBJCapitalwillrecord negative2018earninggrowthof-45.7%and-23.2%,respectively

43、.OriginWaterreleaseda 2018preliminaryresultandourforecastlinewithit.Thecompanyexplainedthe earningdeclinewasmainlydueto1)aslowdownofPPPexecution,giventhecompanys enhancedriskcontrolonitsorderbacklogandneworderintake;2)increasingoverall financingcostsandfinanceexpenses;and3)aRmb240mone-offgain2017ver

44、susnil 2018.Exhibit 3: FY18 results previewCEIConch VentureBEWGDIOriginWaterBJ CapitalNet profit(HK$ m)(Rmb m)(HK$ m)(HK$ m)(Rmb m)(Rmb m)1H182,2012,5302,3662,6723652102H18e2,1073,5392,0942,250998261FY18e4,3086,0694,4604,9221,363470YoY (%)1H1822.6%75.5%23.6%*11.1%-31.6%-19.2%2H18e22.9%80.4%16.1%18.5

45、%-49.5%-26.1%FY18e22.7%78.4%20.0%*17.7%-45.7%-23.2%Consensus2018e4,3735,8324,5384,9712,581720% difference vs. MS-1.5%4.1%-1.7%-1.0%-47.2%-34.7%Source: Company data, Bloomberg, Morgan Stanley Research (E) estimates; *Note: For GDI, it is recurring growth.Exhibit 4: Order of Preference: Prefer solid w

46、aste treatment to waste water treatment/water supplySource: Company data, Thomson Reuters, Morgan Stanley Research (E) estimates. Note: Share prices in this report are as of the market close on February 28, 2019, unless otherwise indicated.Upgrade China Everbright International to OWWeupgradeCEItoOv

47、erweight,andraiseourPTtoHK$10.60by34.1%,by1)removing the25%corporategovernancediscountlightofsmootheroperationsandsolid executionaftertheunexpectedrightsissueAugust2018;2)extendingthecapacity growthfrom2021to2024;and3)increasingtheprojectsreturnestimatesfrom2019.Visible earnings and cash flow growth

48、 backed by solid project execution and strong project pipelineCEIcommissionednewWTEprojectswithdailyprocessingvolumeof7.5ktonnes, includingone400tonnesprojectVietnam,2018,linewithguidanceatthestart of2018.Thenewcommissioningwillaccelerateto16.5ktonsandrecordahistoricalhigh 2019,backedby22.75ktonnesa

49、tprojectsunderconstruction.Thecompanysyear endtreatmentcapacityreached43.0ktons,up21.1%yoy,bytheendof2018,andwe expectitstreatmentcapacitytogrow33.6%to59.5ktonnesby2019.Weexpectnew projectcommissiontoincreaseto18.5ktons2020giventhestrongprojectpipeline andsolidexecutiontermsofneworderintake,aswellas

50、projectconstructionand operationaltrackrecord,andoperationalcapacitytoincreasebyanother32.2%to 75.95k tonnes by2020.Exhibit5: treatmentcapacitytoacceleratefrom2019Entrusted project in WuxiandEntrusted project in WuxiandDongguanExhibit 6: Maintain 30% treatment capacity growth 2019 and 2020 backed by

51、 strong Year-endWTEoperationalcapacity(ktonnes)YoYGrowth18,00016,00014,00012,00010,0008,0006,0004,0002,000-8460%CapacityYoYCapacityYoYGrowth6040%4830%3620%241210%2006200720082009201020112012201320142015201620172018E2019E2020E-0%2006200720082009201020112012201320142015201620172018E2019E2020E200620072

52、00820092010201120122013201420152006200720082009201020112012201320142015201620172018E2019E2020ESource: Company data, Morgan Stanley Research; E=Morgan Stanley Research estimatesCEIcontinuedtodemonstratestrongnewprojectintakecompetenceWTEbusiness, andsecured23.4ktonnesofdailynewcapacity2018,upfrom13.5

53、ktons2017and 13.1ktonnes2016,benefitingfromthecompanysstrongoperationaltrackrecord,its goodrelationshipwithlocalgovernmentbyleveragingitsSOEbackground,andthe growing demand for processing municipal solid waste with more projects available for bidding2018.Itstargettosecurenolessthan20ktonsnewprojects

54、annually over2018-20,andtoacquiremorethan10ktonsprojectsduringthatperiod.Thecompanyalsoachievedahighernewprojectintakewastewatertreatmentbusinessandgreentechbusinesswithsigningupto21projects2019from142018, and22projects2019from192018,respectively.Exhibit 7: New project intake accelerating in 2018201

55、620172018WTENo.ofprojects(units)142028Investment(Rmbm)6,4458,00914,927Processingvolume(ktons/day)13.113.523.4CEWLNo.ofprojects(units)121421Investment(Rmbm)2,4656,0813,069GreentechNo.ofprojects(units)171922Investment(Rmbm)4,5695,4734,430TotalNo.ofprojects(units)435371Investment(Rmbm)13,47919,56322,42

56、6Source: Company data, Morgan Stanley ResearchImprovingpowergenerationandnewprojectreturnsbyintroducinghigh parameterequipmentCEI has successfully introduced medium temperature sub-high pressure technology to its self-produced steam generator since the Guangdong Boluo project was commssonednJuly015.

57、Theeffcencyratepertonwetmuncpalsoldwaste generation)hasbeenimprovedto534kWh/tonundermediumtemperaturesub-high pressure technology, from 468kWh/ton under medium temperature medium pressure technology. The efficiency could be further improved to 560kWh/ton by adding a reheating system to medium temper

58、ature sub-high pressure equipment, and CEI has adoptedthistechnologytheJiangyinphaseIIIprojectcommissioned2018.According toCEI,thetotalpowergenerationofJiangyinphaseIIIcanbeincreasedby40%,while thetotalinvestmentwasonlyupby20%.Thecompanydevelopingmedium temperatureultra-highpressuretechnologywithare

59、heatingsystem,andaimsto improvetheefficiencyto627kWh/ton.Thankstoadoptionofthenewtechnology,we thinkthenewprojectreturnlikelytobehigherthanthatoftheexistingprojectsoperation.Exhibit 8: Relationship between per ton power generation and WTE equipment parameterSource: Company data, Morgan Stanley Resea

60、rch.Exhibit 9: Operation comparison of WTE equipment under different parametersPower plantUnitConventionalpowerMedium temperature and sub-high pressureMediumtemperature and sub-high pressurewithreheatMediumtemperature and ultrahigh pressurewithreheatProcessing volume(t/d)2x7502x7502x7502x750Designed