We invited Mr. Xue Tao, Executive Director of the E20 Environmental IndustryResearch Institute, to make a presentation at the dbAccess China conference. Wesummarize the key takeaways.
幸运赛车全天稳赢计划，Two-day Environmental tour in Beijing/Anhui/Jiangsu.
Impact from recent regulations on PPP.
We hosted a two-day Environmental and Renewables tour in Beijing, Anhui andJiangsu. For the Environmental part, we visited facilities including a sponge cityPPP project, a waste collection (sanitation) management centre, a waste transferstation, a biomass treatment plant, and a hazardous waste treatment plant. Wesummarize the key takeaways below.
Both MoF’s policy paper #92 and the new regulations on asset management willaffect PPP projects financing. However he believes that most projects affected willbe environment renovation projects, rather than projects with end-user payments(i.e. projects with significant operations revenue). Some environment renovationprojects “signed-up” (under the definition of MoF) may not be able to obtain bankloans – in the case of Sichuan for example, only 30% of the signed-up projectshave obtained bank loans. If the project cannot be executed, the project companywill be fined (though the amount is unlikely to be significant). It is required inMoF’s policy paper #92 that part of the payments for construction should be doneafter evaluating project performance, and therefore actual receivables collectioncould take longer than previously expected.
Tongzhou sponge city PPP project of Beijing Enterprises Water (371 HK).
PPP project database cleanup.
The sponge city project of Tongzhou is part of the Tongzhou PPP package thatBEW won in 2016, which carries a total investment of ~RMB17bn. The spongecity project focuses on preventing waterlogging and diverting rain from sewage.
The cleanup of PPP project database is likely to be completed in March 2018. Xueexpects most projects taken out of the database to be projects not yet signedup, and he expects strict scrutiny for future projects to be included. For someprovinces, budgets for projects in the database have got close to the 10% limitof their financial budget.
BEW’s PPP projects are distinguished by its tailor-made solutions and superiordesign achieved by engaging first-class design institutes. The sponge city projectshould be completed by end 2018, while the completion timing for other projectsin the Tongzhou PPP package is not yet finalized. If the government wants toadd more projects to the package and if there is a cost overrun as a result, BEWbelieves that it can re-negotiate the terms with the government. BEW has yet notcollected payment from the government as the sponge city project is still in theconstruction stage.
Comparison of different environmental projects.
Huaiyuan biomass treatment project of China Everbright Greentech (1257 HK)and China Everbright Intl (257 HK).
Waste to Energy. WTE is still the most popular project type in environmentalamong the companies. With the development of waste sorting, there will bemore treatment projects specifically for particular types of waste (e.g. projectsspecifically for kitchen waste). China is likely to have sufficient WTE capacitiesafter three years while most new project awards by then will be projects relatedto sludge treatment and kitchen waste treatment.
The Huaiyuan project achieved very high utilization in 2017 and managementbelieves that it can consistently achieve stable utilization by properly blendingagricultural waste with forestry residuals and wooded plates. Nominal rawmaterials cost rose slightly in 2017 (compared with 2016) as result of increasedusage of straws, but effective raw materials cost was flat after taking into accountgovernment subsidies for straws. Management expects effective raw materialcosts to be flat compared with 2018. The Huaiyuan project has an exclusive rightto operate biomass treatment within the county. The project is negotiating withlocal government to convert itself (from a power only project) to a power/heat cogenerationproject. Management believes that if such conversion takes place, itwill become more profitable as thermal efficiency should improve. Managementexpects additional profit to cover the conversion capex in about three months.
Environmental sanitation. This is the second most popular project type amongthe companies. Sanitation companies generally seek IRR of ~12%. Expenditureon sanitation by the government should increase one year after another on higherenvironmental standards. Most sanitation projects are paid by district level fiscal budgets rather than at city level. The price of long-term projects is based onnegotiation, which rises if the government's requirements go up.
Zhenjiang hazardous waste treatment project of New Universe Environment(436 HK).
Air pollution treatment. Large-scale projects in desulfurization and denitrificationhave mostly been completed. Projects now are mainly small-scale projects indesulfurization and denitrification, as well as projects in VOC, which are normallyalso small-scale.
The hazardous waste treatment (HWT) incineration facilities run at 100%utilization and management expects the HWT landfill project to also run at ~100%if management has not intentionally refused waste from other cities (due to the scarcity of landfill capacities). Treatment fees have been stable over the pastfew years and management expects treatment fees to be flattish in the nearfuture unless there is a change in government policy or components of thewaste in-feeds. In the longer run, management expects the treatment fees todecline gradually as other treatment facilities within the province ramp up andas competition from new entrants intensifies. Management expects profitabilityto normalize to 25-30% (net margin) in the long run. Industrial customers usuallyprepay waste treatment fees.
Hazardous Waste Treatment. The valuation in HWT M&A projects is complicatedas projects vary from one to another, and thus the profitability of M&A project isdifficult to forecast.