Utilities - RHB Invest 2015-12-02: Riding On Strong Currents

Utilities - RHB Invest 2015-12-02: Riding On Strong Currents CHINA EVERBRIGHT WATER LIMITED U9E.SI  SIIC ENVIRONMENT HOLDINGS LTD BHK.SI 

Utilities - Riding On Strong Currents

  • We resumed coverage on the utilities sector with an OVERWEIGHT rating. 
  • Greater emphasis on China’s water issues has been evident through the introduction of the Water Action Plan and 13th FYP in 2015. 
  • This wave of policy measures and targets could enable wastewater treatment operators listed on the SGX to glide through 2016. SIIC, an astute industry player, is our top sector pick. 
  • We believe it will be one of the biggest beneficiaries of the water tariff reforms. 


 All eyes on sector reforms. 

  • The Chinese Government’ firmer stance on water conservation and pollution is key to driving industry growth, moving into 2016 which is a catalysts as most of the Singapore Exchange-listed companies in the sector have operations in China. 
  • We expect stricter enforcement of pollution laws to be highlighted in the detailed targets of 13th Five-Year Plan (FYP) which would lift the revenues of wastewater companies as their utilisation rates would rise, being compelled to treat a higher proportion of effluent material. This could also lead to an overall increase in the number of projects for the wastewater industry. 

 Saving and recycling every drop. 

  • Water conservation, one of the 13th FYP’s top agendas, is likely to bring about the liberalisation of the reusable water and seawater desalination sectors. 
  • This should be beneficial as it provides an alternative source of growth for SIIC Environment Holdings (SIIC) (SIIC SP, BUY, TP: SGD1.18) and China Everbright Water (CEWL SP, BUY, TP: SGD0.81), which have expertise in water supply and reusable water projects 

 Water tariff reforms could improve returns for companies. 

  • The Water Action Plan set out in Apr 2015 called for hikes in wastewater treatment tariffs to: 
    1.  CNY0.95/tonne for residential users and CNY1.40/tonne for non-residential users in urban cities, and 
    2.  at least CNY0.85/tonne for residential users and CNY1.20/tonne for nonresidential users in counties. 
  • This is expected to be implemented going forward until the end-2016. SIIC will most likely benefit from this policy as its average tariff received is about CNY0.90/tonne. 
  • Given that China’s combined water tariff is 24% below the world’s average, we believe there could be more room for water prices to be increased in 2016. 

 Enjoy the flow with SIIC in the lead. 

  • In view of the positive political outlook, we believe that large companies with state-owned enterprise backing and strong balance sheets may continue to thrive on better access to municipal projects as well as strong financial support. 
  • SIIC is our preferred exposure in the utilities sector as we like the company for its management’s prudence in selecting acquisition targets and higher upside from future water tariff hikes.




Juliana Cai RHB Research | http://www.rhbinvest.com.sg/ 2015-12-02
RHB Research SGX Stock Analyst Report BUY Maintain BUY 1.18 Same 1.18
BUY Maintain BUY 0.81 Same 0.81


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