initiation: trash to cash china solid...

See important disclosures, including any required research certifications, beginning on page 104

14 November 2014

Initiation: trash to cash • WTE operators look poised to ride on government initiatives to

treat municipal solid waste in a sustainable and economical way • Leading operators should have the edge in acquiring new projects

and the potential to consolidate smaller players • Preferred WTE pick is CEI (Outperform [2]); CTE (Buy [1]) looks

well placed in the emerging hazardous waste treatment market

China Solid Waste Sector

Utilities / China

Positive (initiation)

Neutral

Negative

How do we justify our view?How do we justify our view?

China Solid Waste Sector 14 November 2014

Investment thesis ........................................................................................................................ 4

Trash to cash ............................................................................................................................ 4

Besieged by waste ......................................................................................................................... 7

China, the largest MSW producer............................................................................................. 7

Huge potential underpinned by demand and government policies ....................................... 9

WTE: set to grow ........................................................................................................................ 14

The best applicable solution ................................................................................................... 14

Accelerating capacity expansion in the next 2 years .............................................................. 18

The top-10 players dominate the market ............................................................................... 19

Higher incineration emissions standard drives growth ......................................................... 21

Other underdeveloped waste treatment segments .................................................................... 25

Hazardous waste treatment .................................................................................................... 25

Cement kiln waste co-processing ........................................................................................... 30

Valuation .................................................................................................................................... 31

Industry risks ............................................................................................................................. 33

Appendix I: Example of a WTE project ..................................................................................... 35

Appendix II: 12th FYP targets for MSW treatment .................................................................... 37

Appendix III: WTE industry statistics ...................................................................................... 39

Appendix IV: HWT industry statistics ....................................................................................... 41

Appendix V: categorising hazardous waste .............................................................................. 44

Company Section

CT Environmental Group .......................................................................................................45

China Everbright International ..............................................................................................65

Dynagreen Environmental Protection Group ....................................................................... 89

Contents


■ Investment case

We initiate coverage of the China Solid Waste Sector with a Positive rating, highlighting 2 themes: 1) the growth of the waste-to-energy (WTE) market underpinned by improving municipal solid waste (MSW) collection and treatment rates, and 2) the untapped potential of the hazardous waste treatment (HWT) market driven by unfulfilled demand. WTE is the best MSW treatment method, given: 1) it takes up only 50% of the land consumed by composite waste disposal, and 15% of the land consumed by landfills, and 2) WTE generates a reasonable IRR of 10-15% thanks to its dual revenue sources of waste treatment fees and electricity sales. We forecast at least 150 new WTE plants (154ktpd) to be installed from 2013-15, and a further 300 (294ktpd) put in place over 2015-20E (2012: 123ktpd). We prefer leading WTE operators like China Everbright (CEI) (257 HK, HKD10.86, Outperform [2]), which has a solid track record in the industry and strong relationships

with local governments, thus making it more capable of securing and executing projects. Potential for HWT to provide the next investment opportunity. Early players, such as CT Environmental Group (CTE) (1363 HK, HKD7.81, Buy [1]), would have first-mover advantage in this area, if government policies enable stricter enforcement and guarantee the returns on HWT. ■ Catalysts

We highlight the following as sector-wide share-price catalysts:

New government policies to facilitate the development of the WTE industry (we expect WTE to remain a key policy focus over 2015-20).

The raising of WTE emissions standards, which may accelerate market consolidation and lead to higher waste treatment tariffs.

Higher waste incineration on-grid power tariffs.

■ Recommendation

We reiterate our Buy (1) rating on CTE, and raise our 6-month target price to HKD10.50 after taking into account the earnings contribution from its Guangzhou HWT facility, based on which we lift our 2015/16E earnings by 14%/11%, respectively. We initiate on CEI with an Outperform (2) rating and 6-month target price of HKD12.20. The company has 13 WTE projects with a

capacity of 13.25ktpd in operation, 7 projects with capacity of 4.8ktpd under construction and a further 31 projects with a capacity of 21.15ktpd at the preparation stages as of October 2014. We like CEI for its strong ability to secure and execute WTE projects, and its business exposure to HWT. We forecast an EPS CAGR of 24% in 2013-16E. We initiate on Dynagreen with a Hold (3) rating and 6-month target price of HKD5.60. Dynagreen has 7 WTE projects with a total capacity of 5.25ktpd in operation, 3 WTE projects with a capacity of 2.1ktpd under construction, and by 1H14 had secured a further 10 projects with a capacity of 10.05ktpd (to be completed in 3-5 years). Its implied target PER of 19x for 2015E is at a 20% discount to CEI’s due to Dynagreen’s shorter track record and smaller project base. ■ Risks

The major risk is its dependence on government policies, whereby any scaling back or elimination of such policies would have a material adverse effect on the WTE industry.

x

14 November 2014

Initiation: trash to cash

WTE operators look poised to ride on government initiatives to

treat municipal solid waste in a sustainable and economical way

Leading operators should have the edge in acquiring new projects

and the potential to consolidate smaller players

Preferred WTE pick is CEI (Outperform [2]); CTE (Buy [1]) looks

well placed in the emerging hazardous waste treatment market

China Solid Waste Sector

Key stock calls

Source: Daiwa forecasts.

Utilities / China


Neutral

Negative

Dennis Ip, CFA(852) 2848 4068

[email protected]

Cindy Li(852) 2773 8535

[email protected]

New Prev.

CT Environmental Group (1363 HK)

Rating Buy Buy

Target 10.50 9.60

Upside p 34.4%

China Everbright International (257 HK)

Rating Outperform

Target 12.20

Upside p 12.3%



- 2 -

How do we justify our view?

Growth outlook

Valuation

Earnings revisions

Growth outlook China: urban WTE capacity forecast

Based on the 12th FYP and our forecasts, at least 150 new WTE plants (154ktpd) need to be installed in cities from 2013-15E in order to fulfil China’s target by 2015. This translates into a capacity CAGR of 31% during the period. Underpinned by supportive policies, preferential on-grid power tariffs, and the raising of related industry emission standards, which we think could benefit the market leaders, the WTE market looks poised to boom. In our view, leading WTE operators, such as CEI, will be key beneficiaries.

Source: National Bureau of Statistics, State Council, Daiwa forecasts

Valuation CEI vs. Dynagreen: 1-year forward PER

Dynagreen is trading at a 19x 1-year forward PER, a 12% discount to CEI. We argue that such a discount is reasonable given Dynagreen was only listed on the HKEx on 19 June 2014 and so has a short track record and smaller project base. CEI is trading at a 22x 1-year forward PER, 0.6x standard deviation above its average since 2008. We argue that CEI’s rich valuation is justified by its large WTE exposure and solid execution record, and as such we forecast a 28% net profit CAGR over 2013-16E driven by a 44% year-end WTE capacity CAGR. CTE is entering the HWT market with its potential facility in Guangzhou through acquisition. Its 20x 1-year forward PER is supported by our 52% net profit CAGR for 2013-16E.

Source: Daiwa forecasts, Bloomberg

Earnings revisions Consensus 2015E EPS revisions

The Bloomberg consensus 2015 EPS forecasts for CTE have been gradually revised up YTD thanks to its good execution of green-field industrial WWT projects and its momentum in acquiring new sludge treatment and HWT assets. Meanwhile, those for CEI have also been on an upward trend as the company secures new projects. These are in contrast to Dynagreen, whose 2015E consensus EPS forecast have fluctuated over the past few months, mostly as it is an under-covered stock.

Source: Daiwa forecasts, Bloomberg


Neutral

Negative

15 17 33 40 45 52 71 85 94

123

276

570

0

100

200

300

400

500

600

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2015E 2020E

(ktpd)

CEI, mkt cap USD6,280m

Dynagreen, mkt cap USD728m

CTE, mkt cap USD1,452m

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

18.0 19.0 20.0 21.0 22.0 23.0

(PERx )

(2013-16E EPS CAGR)

80

85

90

95

100

105

110

115

120

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

CEI Dynagreen CTE

(Rebased to 100)


- 3 -

Source: Daiwa forecasts

Sector stocks: key indicators

Share

Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg

China Everbright International 257 HK 10.86 Outperform 12.20 0.390 0.512

CT Environmental Group 1363 HK 7.81 Buy Buy 10.50 9.60 9.4% 0.280 0.280 0.0% 0.416 0.366 13.7%

Dynagreen Environmental Protection Group 1330 HK 5.40 Hold 5.60 0.152 0.232

Rating Target price (local curr.) FY1

EPS (local curr.)

FY2


- 4 -

Investment thesis

We initiate coverage of the China Solid Waste Sector with a Positive rating, highlighting in particular the potential of the WTE and HWT markets.

Trash to cash

We are positive on the China Solid Waste Sector, especially MSW treatment, with the amount of MSW generated in China looks set to continue to increase as a result of better living standards and continuous urbanisation. We expect the government to place more effort on improving the MSW treatment-to-generation rate (ie, the percentage of treated MSW to total MSW generated), which remains below 50% based on our estimates. This compares with almost full treatment in developed countries such as the OECD, even though China has already made significant progress in this area. Waste hierarchy

Source: World Bank, Daiwa research

WTE is our top sector investment theme for MSW treatment

Among the non-hazardous treatment methods for MSW, WTE is the best approach, in our view, given:

1) After WTE treatment, the volume of waste is reduced to just 10-20% of the original treated volume amount, compared with a reduction of only 50% for composite waste disposal, and just 20% for landfill disposal;

2) WTE treatment consumes only 50% of the land consumed by composite treatments, and just 15% of the land consumed by landfills, implying plenty of room for growth;

3) The WTE method generates a reasonable IRR of 10-15% thanks to its dual revenue sources of waste treatment fees and the sale of electricity;

4) The adoption of WTE has mutual benefits for the government and WTE operators. For the government, it is able to protect the environment with the use of an environmentally friendly waste disposal method like WTE, and have someone else help with the investment, while the WTE operators can conduct their business, expand their capacity, and generate profits.

We forecast at least 150 new WTE plants (154ktpd capacity, 31% CAGR) to be installed during 2013-15E, and a possible further 300 new plants (294ktpd capacity, 16% CAGR) during 2016-20E to reach 55% share of the MSW treatment market (2012: 27% share), compared with 34 new WTE plants that were installed during 2010-12. We prefer the leading WTE players which have established solid track records in the industry and strong relationships with their respective local governments, and thus are better at operating existing projects as well as acquiring new projects. Moreover, the leading players already have large portfolios of operating projects, which not only provide them with stable cash inflow, but also lower the risk of short-term earnings distortion for any new project delays. We also like companies like CEI and Dynagreen, with their SOE backgrounds, as they are likely to have stronger bargaining power with the local governments in reaching more preferential contract terms, as well as access to more competitive financing terms to develop their businesses in this capital-intensive industry and acquire smaller players.

HWT could provide the next investment opportunity

Apart from MSW treatment, we see potential for HWT to be the next investment opportunity if government policies can enable stricter enforcement and help guarantee a minimum return from HWT projects. Early entrants to this business would have first-mover advantage should stricter enforcement materialise. Currently, we like operators with exposure to HWT and with reasonable earnings visibility, like CTE and CEI.

Reduce

Reuse

Recycle

Recover

(digestion, composting)

Incineration / WTE

Landfill

(Controlled) Dump

Mos

t pre

ferr

edLe

ast p

refe

rred

Was

te D

iver

sion

Was

te D

ispo

sal Investment Theme


- 5 -

Stock recommendations

We reaffirm our Buy (1) rating on CTE and raise our 6-month target price to HKD10.5 after taking into account the earnings impact from its newly-acquired Guangzhou HWT facility, based on which we are revising up our 2015E earnings by 14%, and 2016E by 11%. We initiate coverage of CEI with an Outperform (2) rating and 6-month target price of HKD12.20. The company has 13 WTE projects with a capacity of 13.25ktpd in operation, 7 WTE projects with a capacity of 4.8ktpd under construction, and by October this year, had secured a total of 48 projects with a capacity of 34.4ktpd. We like CEI for its well proven ability to secure and execute WTE projects, its strong SOE background, as well as its business exposure to treating hazardous waste. As such, we forecast the company’s EPS to rise at a solid CAGR of 24% in 2013-16E.

We initiate coverage of Dynagreen with a Hold (3) rating and 6-month target price of HKD5.60. The company has 7 WTE projects with a capacity of 5.25ktpd in operation, 3 WTE projects with a capacity of 2.1ktpd under construction, and by 1H14 had secured a further 10 projects with a capacity of 10.05ktpd (to be completed in 3-5 years). Our implied target PER for the stock of 19x for 2015E is at a 20% discount to our target PER for CEI due to Dynagreen’s shorter track record, smaller project base, and investor concerns about further project delays in the future. We think it will take time for investor confidence in Dynagreen to be restored and for its valuation gap with CEI to narrow.

China waste treatment and water utility peer comparison

Ticker Company Rating Price

Target price

(HKD) Upside Mkt cap (USDm)

Turnover (USDm)

PER (x)

PBR (x)

ROE (%)

Net Debt-to-Equity (%)

EPS

CAGR

2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2013-2016E

China waste treatment operators

257 HK CHINA EVERBRIGHT INTL LTD Outperform 10.86 12.20 12% 6,280 10.7 27.8 21.2 17.5 3.3 3.0 2.6 12.5 14.7 15.9 31 57 57 24%

1330 HK DYNAGREEN ENVIRONMENTAL PR-H Hold 5.40 5.60 4% 728 4.2 28.1 18.4 13.8 1.9 1.8 1.6 7.7 10.1 12.0 29 64 102 13%

154 HK BEIJING DEVELOPMENT (HK) NR 2.82

544 1.7 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

3989 HK CAPITAL ENVIRONMENT HOLDINGS NR 0.59

354 0.5 98.3 18.4 12.0 3.47 2.65 2.19 3.8 16.0 19.8 67 77 138 -34%

895 HK DONGJIANG ENVIRONMENTAL-H NR 32.25

1,747 1.5 30.4 19.1 14.7 3.43 2.97 2.52 11.9 15.8 21.6 19 41 42 37%

586 HK CHINA CONCH VENTURE HOLDINGS NR 16.56

3,854 1.9 9.9 8.6 7.5 1.57 1.36 1.15 17.8 17.1 16.6 Net cash Net cash Net cash 17%

000826 CH SOUND ENVIRONMENTAL RESOUR-A NR 23.05

3,173 45.1 24.2 18.6 14.7 3.64 3.17 2.71 15.4 17.7 18.7 15 30 33 30%

600649 CH SHANGHAI CHENGTOU HOLDING-A NR 7.23

3,525 24.4 13.9 11.9 10.5 n.a. n.a. n.a. 10.0 10.7 11.0 n.a. n.a. n.a. 7%

300187 CH YONKER ENVIRONMENTAL PROTE-A NR 29.87

977 12.6 76.0 57.8 87.9 6.59 6.18 5.87 8.2 9.6 n.a. 3 58 n.a. 3%

Simple average

38.6 21.7 22.3 3.4 3.0 2.7 10.9 14.0 16.5 28 55 75 0.1

Weighted average

25.3 18.3 16.9 3.1 2.8 2.4 12.9 14.7 16.0 25 51 55 19%

H-share listed China water utilities

1363 HK CT ENVIRONMENTAL GROUP LTD Buy 7.81 10.50 34% 1,452 4.9 27.9 18.8 14.1 6.2 4.9 3.8 27.3 29.9 31.1 114 90 67 40%

6136 HK KANGDA INTERNATIONAL ENVIRON Outperform 4.02 4.10 2% 1,072 6.5 22.5 16.2 13.5 2.3 2.0 1.7 13.9 13.2 13.9 81 103 128 31%

371 HK BEIJING ENTERPRISES WATER GR Outperform 5.40 6.30 17% 6,063 8.4 27.9 22.7 18.5 3.27 3.01 2.74 11.8 13.8 15.5 122 144 155 28%

967 HK SOUND GLOBAL LTD NR 8.96

1,695 4.2 18.2 14.1 10.6 2.6 2.2 1.8 15.8 16.9 17.7 1 14 16 28%

855 HK CHINA WATER AFFAIRS GROUP NR 4.26

784 2.5 18.9 20.8 n.a 1.7 1.6 n.a 7.4 8.1 n.a 59 70 n.a. n.a.

1065 HK TIANJIN CAPITAL ENVIRON-H NR 6.34

1,768 2.7 23.6 22.4 19.4 1.7 1.6 1.5 7.9 8.1 8.8 73 69 59 10%

270 HK GUANGDONG INVESTMENT LTD NR 10.58


Simple average

23.0 19.0 15.6 2.9 2.5 2.3 13.7 14.7 16.4 68 76 80 25%

Weighted average

23.1 19.1 16.4 2.9 2.6 2.3 13.1 14.1 15.0 69 82 90 21%

A-share listed China water utilities

601158 CH CHONGQING WATER GROUP-A NR 6.28

4,919 16.7 15.4 14.8 13.5 2.2 2.1 2.0 14.2 14.1 14.7 n.a. n.a. n.a. 4%

600874 CH TIANJIN CAPITAL ENVIRON-A NR 8.40

1,768 19.2 44.9 40.6 34.3 2.9 2.7 2.6 n.a. n.a. n.a. n.a. n.a. n.a. 7%

600008 CH BEIJING CAPITAL CO LTD-A NR 7.39

2,653 24.9 26.4 21.7 17.1 1.9 1.8 1.6 7.9 8.9 7.1 63 81 70 15%

300070 CH BEIJING ORIGINWATER TECHNO-A NR 28.03


600649 CH SHANGHAI CHENGTOU HOLDING-A NR 7.23

3,525 24.4 13.9 11.9 10.5 n.a. n.a. n.a. 10.0 10.7 11.0 n.a. n.a. n.a. 7%

Simple average

25.0 21.3 17.8 3.0 2.6 2.3 13.3 14.2 14.0 63 81 70 14%

Weighted average

22.1 18.6 15.5 3.2 2.7 2.4 14.3 15.2 15.2 63 81 70 16%

Regional China water utilities

HYF SP HYFLUX LTD NR 0.975

618 0.6 n.a 121.9 20.3 0.8 0.9 0.8 7.2 0.6 5.3 Net cash 49 145 -7%

VE US VEOLIA ENVIRONNEMENT-ADR NR 17.68

9,941 2.4 30.9 22.2 n.a. n.a. n.a. n.a. 3.0 3.1 n.a n.a. n.a. n.a. n.a.

SIIC SP SIIC ENVIRONMENT HOLDINGS LT NR 0.169

1,257 2.9 25.9 21.7 17.1 2.0 1.8 1.6 7.8 9.1 9.1 33 64 81 17%

HANKORE SP HANKORE ENVIRONMENT TECH GRP NR 0.955

378 1.1 21.6 18.2 16.2 1.2 1.1 n.a 6.3 7.7 7.4 14 48 66 4%

UENV SP UNITED ENVIROTECH LTD NR 1.515

1,073 2.5 36.1 27.1 19.7 3.6 3.2 n.a 9.3 10.2 11.7 16 23 45 33%

MWC PM MANILA WATER COMPANY NR 28.80

1,294 1.1 10.5 9.8 9.4 1.8 1.6 1.4 17.9 16.9 15.4 58 60 50 7%

Simple average

25.0 36.8 16.5 1.9 1.7 1.3 8.6 7.9 9.8 30 49 77 11%

Weighted average

28.7 25.6 15.9 2.1 1.9 1.4 5.4 5.4 10.8 34 50 71 14%

Source: Bloomberg forecasts for non-rated stocks, Daiwa forecasts for rated stocks

Note: prices as at 12 November 2014


- 6 -

China: solid waste generation, collection, treatment and WTE 2010 2011 2012 2013 2014E 2015E 2020E 2025E

MSW generation (mtpa)

Urban

251 270 290 310 330 350

425

510

Rural

147 148 148 149 149 147

149

150

Total

398 418 438 459 479 497

574

660

Growth

5.0% 4.9% 4.8% 4.2% 3.8%

2.9%

2.8%

Urban

7.6% 7.4% 6.9% 6.5% 6.1%

4.0%

3.7%

Rural

0.5% 0.5% 0.6% -0.3% -1.1%

0.3%

0.1%

Urban MSW collection (mtpa) 158 164 171 173 177 182

319

459

Urban MSW treatment (mtpa) 123 131 145 154 158 164

303

459

Urban MSW WTE treatment (mtpa) 23 26 36 n.a. n.a. 81

177

282

Growth

Urban MSW collection

3.7% 4.2% 1.3% 2.1% 3.1%

11.9%

7.6%

Urban MSW treatment

6.3% 10.7% 6.3% 2.8% 3.5%

13.1%

8.7%

Urban MSW WTE treatment

12.2% 37.9% 31.1% 31.1% 31.1%

17.0%

9.8%

Urban MSW collection-to-generation rate (%) 63% 61% 59% 56% 54% 52%

75%

90%

Urban MSW treatment-to-collection rate (%) 78% 80% 85% 89% 90% 90%

95%

100%

Urban MSW treatment-to-generation rate (%) 49% 48% 50% 50% 48% 47%

71%

90%

Urban MSW WTE-to-total treatment rate (%) 19% 20% 25% n.a. n.a. 49%

58%

61%

Urban MSW WTE-to-total collection rate (%) 15% 16% 21% n.a. n.a. 44%

56%

61%

Urban MSW WTE-to-total generation rate (%) 9% 10% 12% n.a. n.a. 23%

42%

55%

Urban MSW treatment capacity (ktpd) 388 409 449 493 567 653

1,037

1,397

Urban MSW treatment capacity (mtpa) 141 149 164 180 207 238

379

510

Urban MSW treatment plants average utilization rate (%) 87% 88% 88% 86% 76% 69%

80%

90%

Urban WTE capacity (ktpd) 85 94 123 n.a. n.a. 276

570

908

Urban WTE capacity (mtpa) 31 34 45 n.a. n.a. 101

208

332

Growth

10.8% 30.3% 31.1% 31.1% 31.1%

15.6%

9.8%

Urban WTE utilization rate (%) 75% 76% 80% n.a. n.a. 80%

85%

85%

Source: World Bank, United Nations, Ministry of Environmental Protection, National Bureau of Statistics, Daiwa forecasts


- 7 -

Besieged by waste

The environment has become an increasing concern for China as it makes its way toward economic prosperity

China, the largest MSW producer

Generates more than 20% of the world’s MSW

Around 1.3bn tonnes of MSW are generated in urban regions each year worldwide, according to the World Bank. It further forecasts generation of 2.2bn tpa in 2025, driven by an enlarged urban population and an increased per capita generation. Taking rural populations into account, and using the World Bank figures as a guide, we estimate world MSW generation to increase from 1.9bn tonnes to 3.0bn tonnes in 2025. The World Bank expects East Asia & the Pacific to record the most significant increment of 60% during 2012-25, or a 4% CAGR, as the average per capita urban MSW generation rises from 0.95kg/day to 1.52kg/day. We expect China’s MSW generation growth rate to be in-line with the Asia regional average. China surpassed the US to become the largest MSW producer in the world in 2005. We estimate that it currently accounts for 21% of urban MSW generation and 23% of total MSW generation globally. In 2025, we forecast China to contribute 23% of global urban MSW generation. World: MSW generation forecasts (2012-25E)

Source: World Bank, Daiwa forecasts

World: urban MSW generation forecasts (2012-25)

Source: World Bank

World: top-10 urban MSW-generating countries (2012E)

Source: World Bank

World: top-10 urban MSW-generating countries (2025E)

Source: World Bank

China to generate 660m tonnes of MSW by 2025

We look for China to mark a 4.4% CAGR in annual MSW generation in 2012-15E, followed by 2.9%/2.8% CAGRs in 2015-20E/2020-25E respectively, to 660m tonnes by 2025. We expect higher growth rate for urban MSW generation as a result of continuous urbanisation and improving living standards: a 6.5% CAGR for 2012-15E, 4.0% for 2015-20E, and 3.7% for 2020-25E to 510m tonnes by 2025E.

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

2012E

2025E

(bn tonnes)

Urban MSW Rural MSW

0.00.51.01.52.02.5

0

500

1,000

1,500

2,000

Afr

ica

Eas

t Asi

a &

Pac

ific

Eas

tern

& C

entr

al A

sia

Latin

Am

eric

a &

the

Car

ibbe

an

Mid

dle

Eas

t & N

orth

Afr

ica

OE

DC

Sou

th A

sia

(kg/capita/day)(ktpd)

MSW Generation 2012 (LHS) MSW Generation 2025E (LHS)

Per Capita MSW Generation 2012 (RHS) Per Capita MSW Generation 2025E (RHS)

China21%

United States16%

Brazil4%

Japan4%

Germany3%

India3%

Russia3%

Mexico3%

United Kingdom2%

France2%

Other countries39%

China23%

United States12%

India6%

Brazil5%Mexico

3%Japan

2%Germany

2%

Russia2%

United Kingdom2%

France2%

Other countries41%


- 8 -

China: MSW generation forecasts (2010-25E) 2010 2011 2012 2013E 2014E 2015E 2020E 2025E

Annual generation (m tonnes)

Urban 251 270 290 310 330 350 425 510

Rural 147 148 148 149 149 147 149 150

Total 398 418 438 459 479 497 574 660

Per capita generation (Kg/day)

Urban 1.03 1.07 1.12 1.16 1.21 1.26 1.40 1.64

Rural 0.6 0.62 0.63 0.65 0.66 0.66 0.73 0.75

Blended average 0.81 0.85 0.89 0.92 0.96 0.99 1.13 1.29

Source: World Bank, United Nations, Ministry of Environmental Protection, National Bureau of Statistics, Daiwa forecasts

1) Urbanisation China’s urbanisation rate based on residency increased from 36% in 2000 to 52.6% in 2012, with accelerating growth during the period compared with the years before 2000. In the latest urbanisation plan (click here for the Chinese-language version) released by the State Council in March 2014, China plans to reach an urbanisation rate of 60% by 2020 – and is well on track to achieve this target, in our view. We believe urbanisation can lead to higher MSW generation not only in urban regions, but on an overall basis, because per capita MSW generation is substantially higher in urban regions. The UN has disclosed that global average rural MSW generation is 0.65Kg/day, compared with 1.2Kg/day in urban regions. As China keeps its high pace of urbanisation, we expect MSW generation to keep growing along with the process. China: urbanisation process

Source: State Council

Note: Urbanisation rate based on residency includes the residents from other provinces without household registration

2) Improving living standards As a function of population and national wealth, per capita MSW generation is positively correlated to people’s standard of living, which usually can be measured by their income level. According to the World Bank, a significant gap exists among urban per capita MSW generation for different income groups, with high income countries generating 3.5x more MSW per capita than lower income countries in 2012.

As China has pushed forward with economic development, per capita disposable incomes have risen at a 13% CAGR over the past 10 years (2003-13), and will likely keep up this momentum as the government continues to target a high single-digit GDP YoY growth in the next few years. Based on World Bank forecasts, we estimate per capita MSW generation in China will increase by almost 50% up to 2025, from 0.89Kg/day in 2012 to 1.29Kg/day by 2025E. We see further upside to this forecast, given that in Hong Kong, which has similar cultural norms to China, MSW generation per capita was 2.44Kg/day in 2011, according to the Hong Kong Legislative Council report, which was based on information provided by the Environmental Protection Department of HK. World: per capita urban MSW generation

Source: World Bank

China: disposable income per capita

Source: National Bureau of Statistics

53%

60%

35%

45%

0%

10%

20%

30%

40%

50%

60%

70%

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2020

Tar

get

Urbanization rate based on residency Urbanization rate based on registration

0.600.78

1.16

2.13

1.12 0.86

1.30

1.60

2.10

1.64

0.0

0.5

1.0

1.5

2.0

2.5

Lower Income Lower-MidIncome

Upper-MidIncome

High Income China

(kg/capita/day)

2012 2025E

0%

5%

10%

15%

20%

0

5,000

10,000

15,000

20,000

25,000

30,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

(CNY)

Disposable incomer per capita (LHS) YoY (RHS)

http://www.gov.cn/zhengce/2014-03/16/content_2640075.htm

http://www.legco.gov.hk/yr12-13/english/panels/ea/duty_v/eavp1304-3-e.pdf


- 9 -

Huge potential underpinned by demand and government policies

Both collection rates and treatment rates need to improve

The actual MSW disposal amount differs significantly when comparing the world’s richest countries, the OECD countries, with the world’s poorest, Africa. OECD countries disposed of more than 100x more MSW than Africa, according to the World Bank estimated annual average, although both regions have roughly the same population of 1bn. World: MSW disposal amount

Source: World Bank

We see potential for China to improve its MSW collection and treatment rates, which would contribute to the development of the MSW treatment market. On our forecasts, China’s annual urban MSW hazardous-free treatment volume will rise from 154m tonnes in 2013 to 164m tonnes in 2015E (a 3.2% CAGR over 2013-15E), 303m tonnes in 2020E (a 10.1% CAGR over 2013-20E) and 459m tonnes in 2025E (an 9.5% CAGR over 2013-25E). China: urban MSW treatment volume forecasts (2010-25E) (mtpa) 2010 2011 2012 2013E 2014E 2015E 2020E 2025E

Generation 251 270 290 310 330 350 425 510

Collection 158 164 171 173 177 182 319 459

Treatment capacity 141 149 164 180 207 238 379 510

Treatment volume 123 131 145 154 158 164 303 459

Treatment-to-collection rate 78% 80% 85% 89% 90% 90% 95% 100%

Treatment-to-generation rate 49% 48% 50% 50% 48% 47% 71% 90%

Source: World Bank, United Nations, State Council, Ministry of Environmental Protection, National Bureau of Statistics, State Council, Daiwa forecasts

China: urban MSW collection (2012)


588

136

55

4

573

5

0

100

200

300

400

500

600

HighIncome

Upper-MidIncome

Lower-MidIncome

Low Income OECD(richest)

Africa(poorest)

(mtpa)

> 10,000

7,000 - 9,999

4,000 - 6,999

3,000 - 3,999

< 3,000

Shanghai

Guangdong

Hainan

Hubei

Hunan Jiangxi

Fujian

Heilongjiang

Inner Mongolia

Henan

Shandong

Anhui

Guangxi

Guizhou

Beijing

Tianjin

Jilin

Gansu

Qinghai

Xinjiang

Tibet

Ningxia

Zhejiang

Yunnan

Liaoning

Sichuan Chongqing

Hebei

Shaanxi Jiangsu

City MSW collection, 2012 (‘000 tonnes)

Shanxi


- 10 -

China: urban MSW treatment-to-collection rate (2012)


1) Collection rates For the 1.3bn tonnes of urban MSW generated each year worldwide, only part of it is properly collected. Broadly speaking, developed countries with higher income levels tend to more carefully collect their MSW. Among the highest and best developed countries (the OEDC countries), most have achieved full collection of urban MSW. China reported an urban MSW collection rate of 63% in 2010, according to the State Council. Based on our estimates, the MSW collection rate in cities actually dropped to 56% in 2013, as the growth in collection fell behind that of generation (possibly because the government was focusing primarily on improving the treatment-to-collection rate, and not on properly collecting the generated waste). We estimate that the national MSW collection rate, after taking rural MSW generation into account, remains at below 40% currently. We believe the uncollected waste are being disposed of in open areas or uncontrolled landfills. The current urban MSW collection rate in China is at an average level in the East Asia and Pacific region, yet at the low-end among lower-mid income countries.

World: urban MSW collection-to-generation rate (2012)

Source: World Bank, National Bureau of Statistics

China collected 173m tonnes of MSW in cities in 2012, a mere CAGR of 2% during 2002-12. The EY Advisory expects China’s city MSW clearance amount to maintain an average annual growth rate of 2% during 2012-15. Under such a scenario, we estimate the urban MSW collection rate would drop to 52%, and the national MSW collection rate would hit 37% in 2015E.

98% - 100%

90% - 97%

85% - 89%

75% - 84%

< 75%

Shanghai

Guangdong

Hainan

Hubei

Hunan Jiangxi

Fujian

Heilongjiang

Inner Mongolia

Henan

Shandong

Anhui

Guangxi

Guizhou

Beijing

Tianjin

Jilin

Gansu

Qinghai

Xinjiang

Tibet

Ningxia

Zhejiang

Yunnan

Liaoning

Shanxi

Sichuan Chongqing

Hebei

Shaanxi Jiangsu

City MSW treatment rate, 2012

0%

20%

40%

60%

80%

100%

Uni

ted

Sta

tes

Aus

tria

Den

mar

kP

ortu

gal

Net

herla

nds

Ger

man

yF

ranc

eU

nite

d K

ingd

omJa

pan

Sin

gapo

reS

witz

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outh

Kor

eaC

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bia

Mex

ico

Bra

zil

Indo

nesi

a

Afr

ica

Eas

t Asi

a &

Pac

ific

Eas

tern

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NA

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me

Upp

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id In

com

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igh

Inco

me

Chi

na (

Dai

wa

estim

ate)


- 11 -

In its war against pollution, China will likely fight to at least maintain the urban MSW collection rate at the above-50% level. We see considerable room for an improvement in the MSW collection rate, as the “real” urban MSW treatment rate, which is measured by the treatment-to-generation rate, will remain at a low level if nearly half of MSW were not collected in the first place. China: urban MSW collection

Source: National Bureau of Statistics, World Bank, EY Advisory, Daiwa forecasts

2) Treatment rates According to the World Bank, the average worldwide urban MSW treatment-to-generation rate is 60%. In China, while the Ministry of Environmental Protection reported an urban MSW treatment-to-collection rate of 89% in 2013, the urban treatment-to-generation rate was only 50%, based on our estimates. China made good progress in improving its MSW treatment-to-collection rate during 2010-13, which rose from 77.9% to 89.3% in cities, and from 27.4% to 66.7% in counties. By 2012, 13 provinces had already reached the country’s 2015 target treatment-to-collection of 90% in cities. We expect sticky demand for MSW treatment in China driven by: 1) the nation’s ambition to reach 100% treatment-to-collection rate for MSW, 2) the growing MSW generation amount, for which we forecast a 5% CAGR in urban MSW generation during 2012-20E, and 3) a potentially improving collection rate, which could lead to a higher growth rate for MSW collected and waiting to be treated, than that for generation. We forecast urban MSW treatment volume in China to grow at a 9.7% CAGR over 2012-20E.

China: urban MSW treatment

Source: National Bureau of Statistics, World Bank, EY Advisory, Daiwa forecast

China: MSW treatment-to-collection rate in cities (2012)

Source: National Bureau of Statistics, State Council

Policies driving the development of the MSW treatment industry

China failed to reach several targets set out in the 11th FYP regarding MSW treatment, mainly in terms of capacity as a result of unfulfilled investment, due we believe to a lack of attention on the environment and poor enforcement. The New Environmental Protection Law (click here for the Chinese-language version) issued by the State Council in April 2014, and which will come into effect on 1 January 2015, provides clearer and stricter guidance to the authorities. The law allows for civil/criminal action to be taken against government officials who fail to comply with the regulations, and the inclusion of the environmental status in the local government appraisal process. This could lead to more disciplined enforcement.

158 164 171 173 177 182

35%

40%

45%

50%

55%

60%

65%

0

40

80

120

160

200

2010 2011 2012 2013 2014E 2015E

(mtpa)

Urban MSW collection (LHS) Urban MSW collection rate (RHS)

National MSW collection rate (RHS)

123 131145

154 158 164

35%

45%

55%

65%

75%

85%

95%

0

40

80

120

160

200

2010 2011 2012 2013 2014E 2015E

(mtpa)

Urban MSW treatment volumn (LHS) Treatment/collection rate (RHS)

Treatment/generation rate (RHS)

0%

20%

40%

60%

80%

100%H

aina

nT

ianj

inC

hong

qing

Zhe

jiang

Sha

ndon

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uang

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angs

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r M

ongo

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Sha

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Liao

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Hen

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hai

Yun

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Heb

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Xin

jiang

Hub

eiN

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linG

ansu

Tib

et

National Average 2015 Target



- 12 -

In the 12th FYP issued by the State Council in April 2012 regarding the Construction of non-hazardous treatment facilities for municipal solid waste (click here for the Chinese-language version), the government plans to invest a total of CNY263.6bn in the MSW treatment market, among which the largest part of CNY173bn (accounting for 65.6% of the total) is to be invested in the construction of MSW treatment plants. The investment planned for the 12th FYP is more than triple that for the 11th FYP, or 4.7x the actual investment during the 11th FYP period (2006-10). We regard this as an indication of an increasing government focus and public awareness regarding environmental protection (MSW treatment); and we see this is a positive sign for a long-term development of the waste treatment market in China.

China: 12th FYP investment in MSW treatment market


China: 11th and 12th FYP for MSW treatment

2005 2010

Target 2010 11th FYP

review 2013 2015

Target 2013-2015 Target

Increment 12th FYP comment

Non-hazardous treatment-to-collection rate (%)

34.8% 60.0% 63.5% 3.5ppt

- Cities 51.7% 70.0% 77.9% 7.9ppt 89.3% 90.0% 0.7ppt 100% for major cities

- County 7.2% 30.0% 27.4% -2.6ppt 66.7% 70.0% 3.3ppt

Non-hazardous treatment plants (units) 614

1076

- Cities 397 917 628 (289)

- County 217

448

Landfill plants 503

919

Incinerate plants 48

119

Others 63

38

Non-hazardous treatment capacity (tpd) 236,548 556,548 456,917 (99,631)

871,491

Add 580,114tpd, and close 165,500tpd

- Cities 210,578 463,578 387,607 (75,971) 492,000 653,000 161,000 Add 398ktpd

- County 2,597 69,597 69,310 (287) 152,000 218,000 66,000 Add 182ktpd

Landfill 18,474

352,038

513,748

Incinerate 26,075

89,625

307,155

35% of total treatment capacity; 48% in Eastern China

Others 25,733

15,254

50,588

Accumulated Investment (CNYbn)

86.3 56 (30.2)

263.6

- Cities

69.6 37 (32.9)

- County

16.7 19 2.7

Source: State Council, Ministry of Housing and Urban-Rural Development

In an attempt to alleviate the capacity shortage and increase the treatment-to-collection rate to 90% in cities and 70% in counties, MSW non-hazardous treatment capacity – including landfills, incineration and composition – is expected to reach 871.5ktpd by 2015, as targeted in the 12th FYP. Specifically for cities, MSW treatment capacity is targeted to expand at an 11% CAGR during 2010-15 to 653ktpd, or a 15% CAGR during 2013-15, given that 493ktpd of capacity had already been installed by end-2013. The accelerating growth during 2013-15 supports our view that the MSW treatment industry in China will strengthen over the next few years.

China: MSW treatment-to-collection rate in cities

Source: National Bureau of Statistics, State Council, Ministry of Housing and Urban-Rural Development

New treatment plant

52.5%

Plants under construction

13.1%

Transfer facility13.3%

Upgrade or disable of non-

complying facility8.0%

Sorting facility8.0%

Food waste treatment facility

4.1%

Monitoring and regulating

0.9%

89%

95%90%

40%

50%

60%

70%

80%

90%

100%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2015

Tar

get

2020

Tar

get

http://www.gov.cn/zwgk/2012-05/04/content_2129302.htm



- 13 -

China: MSW non-hazardous capacity in cities

Source: National Bureau of Statistics, Ministry of Housing and Urban-Rural Development, State Council, Daiwa forecast (2014)

Upside exists for our forecasts

Based on our forecasts for urban MSW collection and treatment volume in China, which we derive by referencing the forecasts made by the World Bank and E&Y Consulting, the MSW treatment capacity utilisation rate will drop to 69% in 2015E, from an average of 87% during 2010-13, based on the China targeted MSW treatment volume target during the 12th FYP. We believe such a drop would be the result of an accelerating ramp-up of treatment capacity, while the actual target MSW treatment-to-collection rate could exceed the government target of 90% in cities or 70% in counties by 2015E.

If we assume a back-to-normal capacity utilisation rate of 80%/90% in 2020/2025, the urban MSW treatment capacity could see a CAGR of 13%/9% during 2015-20E and 2020-25E, respectively. China: MSW treatment capacity utilisation

Source: National Bureau of Statistics, State Council, World Bank, EY Advisory, Daiwa forecast

0%

4%

8%

12%

16%

20%

0

100

200

300

400

500

600

700

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

E

2015

targ

et

(ktpd)

Urban MSW treatment capacity YoY (RHS)

0%

20%

40%

60%

80%

100%

0

50

100

150

200

250

300

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

E

2014

E

2015

E

(mtpa)

Urban MSW treatment capacity Treatment volumn

Capacity utilization rate (RHS)


- 14 -

WTE: set to grow

WTE could lead to a more balanced relationship between the economy and the environment The global mainstream disposal methods for collected MSW include landfills, composting, recycling and incineration. Among them, landfill is the most widely adopted, accounting for 43% of the total urban MSW disposal amount globally in 2012 – especially for those countries with large land areas, according to the World Bank. Such wide adoption of landfills results from both the low technical requirements and lower monetary cost of landfills, although this comes at a cost to the environment. World: MSW disposal methods

Source: World Bank

Solid waste management costs (USD/ton) Low Income Lower-Mid Income Upper-Mid Income High Income

Collection 20-50 30-75 40-90 85-250

Sanitary landfill 10-30 15-40 25-65 40-100

Controlled dump 2-8 3-10 NA NA

Compost 5-30 10-40 20-75 35-90

WTE NA 40-100 60-150 70-200

Anaerobic digestion NA 20-80 50-100 65-150

Source: World Bank

By end-2012, China had an urban non-hazardous MSW treatment capacity of 449ktpd. Of the 3 major treatment methods, landfill is the dominant one with 70%/73% market share in terms of capacity/treatment volume in 2012; in Gansu, Guizhou, Jiangxi, Ningxia and Qinghai provinces, landfill is even the only available treatment method.

China: MSW treatment capacity in cities


China: urban MSW treatment capacity by provinces, 2012


The best applicable solution

Richer countries tend to have a higher adoption rate for WTE – high income countries together have a 21% adoption rate, while there’s almost no application of WTE among other lower income countries, according to the World Bank. We think the reason for the above-mentioned discrepancy is that WTE, unlike landfills or dumps, requires more advanced technology and a higher initial capital investment. China, with the nation’s rising concerns over environmental sustainability and its limited land area to accommodate the largest population in the world, is an active adopter of WTE technology.

Landfills338mtpd

43%

Recycled134mtpd

17%

WTE122mtpd

16%

Controlled dump72mtpd, 9%

Compost69mtpd, 9%

Other48mtpd, 6%

0

100

200

300

400

500

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(ktpd)

Landfill Incineration Others (mainly compost)

0%

20%

40%

60%

80%

100%

Anh

uiB

eijin

gC

hong

qing

Fuj

ian

Gan

suG

uang

dong

Gua

ngxi

Gui

zhou

Hai

nan

Heb

eiH

eilo

ngjia

ngH

enan

Hub

eiH

unan

Inne

r M

ongo

liaJi

angs

uJi

angx

iJi

linLi

aoni

ngN

ingx

iaQ

ingh

aiS

haan

xiS

hand

ong

Sha

ngha

iS

hanx

iS

ichu

anT

ianj

inT

ibet

Xin

jiang

Yun

nan

Zhe

jiang

Incineration Landfill Others


- 15 -

Comparison of MSW non-hazardous treatment methods Landfill Incineration (WTE) Composite

Land Requirement (cu.m / tpd) Large: 1,350 - 1,500 Small: 200 Medium: 400

Site Selection Difficult: impact on landscape, soil, surface and underground water need to be taken into consideration Long transportation distance

Relatively Easy: at least 300m away from residential .areas Short transportation distance

Medium: avoid densely populated areas due to odour Medium transportation distance

Investment (CNYm/tpd) Low: 0.2 - 0.3 High: 0.4 - 0.6 Medium: 0.25 - 0.4

Operating Cost (CNY/ton) Low: 35 - 55 High: 80 - 140 Medium: 50 - 80

Waste treatment Fee (CNY/ton) Low: 50 - 80 Medium: 65 - 100 High

Applicable Conditions Inorganic compound > 60% Moisture rate < 30% Density > 0.5t/cu.m

Heat value > 3,300KJ/Kg Non-hazardous treatment: biodegradable organic > 10% Composite: biodegradable organic > 40%

Processing Time Daily; Biological decomposing takes more than 100 years

Within a week One week - one month

Volume after Treatment Large Small: 10% - 20% of original Medium: 20% - 25% of original

Risk Exposures Water pollution, soil pollution Air pollution Soil pollution

Source: Environmental Department Centre of Ministry of Environmental Protection, CIConsulting, E2O Environmental Platform

World: MSW disposal methods

Source: World Bank, National Bureau of Statistics

MSW in China is naturally suitable for incineration treatment given its high organic composition of 40-60%. We believe WTE is the best applicable and most sustainable solution for China compared with other treatment methods, as it can control pollution (odour or soil) more easily, requires less land and is more economical. China targets a 28% capacity CAGR for waste incineration in its 12th FYP, while only a 14% CAGR for the whole non-hazardous MSW treatment capacity. China: urban MSW treatment capacity target

Source: State Council, National Bureau of Statistics

World: waste composition

Source: World Bank, United Nation

More environmentally friendly

MSW can be reduced to 10-20% of its original volume after incineration, compared with 20-25% for compost and almost 100% for landfill. The volume reduction is achieved through incineration of MSW at more than 850◦C with duration of longer than 2 seconds, a temperature that not only leads to more thorough waste incineration but also eliminates the air pollution particulates such as dioxin. The remaining 10-20% of solid residue consists mainly of bottom ash and fly ash, which can be recycled as construction material or buried as isolation layers for landfills. Waste water treatment facilities are equipped inside WTE projects adopting grate furnaces to treat the waste leachate, with treated water used as cooling water during power generation or landscape recreational water. For WTE projects using fluidized bed furnaces, the waste leachate can be burned together with the waste.

0%

20%

40%

60%

80%

100%

Japa

n

Den

mar

k

Sw

itzer

land

Net

herla

nds

Chi

na

Aus

tria

Por

tuga

l

Sou

th K

orea

Uni

ted

Sta

tes

Uni

ted

Kin

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Spa

in

Can

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Col

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a

Mex

ico

Sin

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Upp

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com

e

Low

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id In

com

e

Low

Inco

me

Afr

ica

(poo

rest

)

OE

CD

(ric

hest

)

Controlled dump Landfills Compost Recycled WTE Other

0

200

400

600

800

1,000

2010 2015 Target

(ktpd)

Landfill Incineration Others (composition)

0%

20%

40%

60%

80%

100%E

ast A

sia

& P

acifi

c

ME

NA

Afr

ica

LAC

Sou

th A

sia

Eas

tern

& C

entr

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sia

OE

DC

Hig

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com

e

Upp

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com

e

Low

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Low

Inco

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Indo

nesi

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Chi

na

Mal

aysi

a

Tha

iland

Phi

lippi

nes

Kor

ea

Sin

gapo

re

Japa

n

Organic Paper Plastic Glass Metal Other


- 16 -

Waste control measures for the WTE process

Source: World Energy Council, European Commission, Daiwa

Less land consumption

WTE is the least land-consuming MSW non-hazardous treatment method, occupying only 15% and 50% of the area needed compared with the landfill and composite methods. In densely populated and generally better developed coastal areas with rising land values, the

limited land requirements of WTE become its key advantage. As a result, WTE has been better developed in eastern China. The 12th FYP WTE development target also focuses on this region, with Central government targeting WTE capacity to account for 48% of total urban MSW treatment capacity in eastern China by the end of 2015, compared with a national average target of 35%. China: WTE capacity in cities (2012)


China: number of WTE plants in cities (2012)


Waste storage pit

(3-7 days anaerobic fermentation)

Incineration furnace

(main/secondary combustion)

Negative pressure to pipe gas into

furnace

WWT

Air pollution control system

Fabric filter

布袋除塵器

Selective catalytic/non-catalytic

reduction technology

Low-temp combustion

Wet/Semi-dry/dry scrubber

濕式/干式/半干式脫酸法

Fabric filter+ activated carbon filter

布袋除塵器 +活性碳

Fabric filter+ activated carbon filter

Stabilize then landfill

Recycle as building material

Ammonia, Thiol,

Hydrogen sulfide

Leachate

滲濾液

Particulate matter

(PMx)

NOx

Acid gas

(HCI, SOx)

Heavy metals

Dioxin

Fly ash

Complete combustion at 850⁰C for

more than 2 seconds

Bottom ash

Dioxin

二噁英

Flue gas treated in the A

PC

system

Waste Control MeasuresWasteWTE facility

Waste

Zhejiang18.2%

Jiangsu17.3%

Guangdong12.9%

Fujian7.8%

Shandong6.7%

Other provinces37.0%

> 20

11 - 19

5 - 10

1 - 4

0

Shanghai

2

Guangdong

18

Hainan

3

Hubei

7

Hunan

1

Jiangxi

Fujian

12

Heilongjiang

2

Inner Mongolia

Henan

3

Shandong

9

Anhui

4

Guangxi

2

Guizhou

Beijing

3Tianjin

3

Jilin

3

Gansu

Qinghai

Xinjiang

Tibet

Ningxia

Zhejiang

26

Yunnan

5

Liaoning

1

Shanxi

4

Sichuan

3

Chongqing

2

Hebei

4

Shaanxi Jiangsu

21


- 17 -

China: WTE capacity (2012)


China: urban population density (2012)


Reasonable IRR

WTE is an economical waste treatment and alternative method of generating energy. It has 2 revenue sources, namely waste treatment fees, which are negotiated directly with local governments and vary by project (usually CNY65-CNY100/tonne), and the sale of electricity, at an on-grid power tariff of CNY0.65/KWh for benchmark on-grid electricity generation of 280KWh/tonne. This can also eliminate the abuse of favourable on-grid tariff by adding coal to waste. We believe having a benchmark on-grid power generation of 280KWh/tonne is justified considering: MSW on average has a heat value of 3,300-3,500KJ/Kg, which can generate power of about 350KWh/tonne, with around 15-20% of the electricity generated consumed in-house and the rest distributed through grid networks. We estimate an equity IRR of around 12% for WTE projects thanks to its 2 revenue sources (waste treatment fees, which are exempt from VAT, and the sale of electricity, which is eligible for a 100% VAT refund), according to the Ministry of Finance and State Administration of Taxation. We also like WTE projects as they carry no fuel cost risks.

China: on-grid tariffs for electricity generated by WTE plants Electricity generation Tariff

On-grid electricity generation ≥ 560KWh/tonne

Local coal-fired power on-grid tariff (CNY0.43/KWh on average)

280KWh/tonne ≤ on-grid electricity generation < 560KWh/tonne

For every 280KWh/tonne, apply on-grid tariff of CNY0.65/KWh For the remaining electricity (ie, actual generation/ton minus 280KWh/tonne), apply coal-fired power on-grid tariff

On-grid electricity generation < 280KWh/ton On-grid tariff of CNY0.65/KWh

Source: National Development and Reform Commission

China: composition of benchmark on-grid tariff for electricity generated by WTE plants

Source: National Development and Reform Commission

Heat value comparison of various fuels

Source: National Energy Administration

Mutual benefit with local government

Apart from the environmental benefits it brings, WTE is also an economical way for the government to treat MSW, especially in the better-developed areas, as land resources for landfill and power generation plants are limited. Also, most WTE projects are under a build-operate-transfer (BOT) concession agreement between the local government and a project company, according to which the local government pays a waste treatment fee to the company and guarantees a certain amount of waste supply, which is usually enough to fulfil 50-80% of the project capacity. Meanwhile, the company (on its own) invests in, builds and operates the project, and transfers the project back to the government at the end

0

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(Unit: tpd)

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National Avg: 2,307 people per square km in urban area

(People per square km of urban land area)

Benchmark on-grid tariff of CNY0.65/KWh

Local coal-fired power

on-grid tariff

Subsidy

CNY0.1/KWh from local

provincial grid company

Renewable energy

surcharge

0

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9,000

12,000

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Cru

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Coa

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met

hane

MS

W

(KJ/Kg)


- 18 -

of the concession period (usually 20-30 years). Through this BOT business model, the government is more motivated to develop WTE projects because it can pass on the risks to the project companies, no large capital investment is needed, and it can reach its environmental protection targets.

Accelerating capacity expansion in the next 2 years

Based on China’s 12th FYP, we estimate urban WTE capacity will grow at a 27% CAGR over 2010-15E. Given that China had 123ktpd of urban WTE capacity at the end of 2012, we expect growth to accelerate, at a 31% CAGR during 2012-15E. In the long term, we forecast steady urban WTE capacity expansion, at CAGRs of 16% and 10% over 2015-20E and 2020-25E, respectively. China: urban MSW WTE treatment volume forecasts

2010 2011 2012 2015E 2020E 2025E

Total treatment capacity (ktpd) 388 409 449 653 1,037 1,397

- WTE treatment capacity (ktpd) 85 94 123 276 570 908

- % of capacity belonging to WTE 22% 23% 27% 42% 55% 65%

Total treatment volume (m tonnes) 123 131 145 164 303 459

- WTE treatment volume (m tones) 23 26 36 81 177 282

- % of MSW treated using WTE 19% 20% 25% 49% 58% 61%

Source: World Bank, United Nations, State Council, Ministry of Environmental Protection, National Bureau of Statistics, State Council, Daiwa forecasts

At least 150 new WTE plants to be installed in cities over 2012-15E

In 2010, the total national WTE was 90ktpd, of which the county WTE capacity accounted for 5%. In the 12th FYP, the government targets to reach a WTE capacity of 307ktpd by 2015 in urban and rural regions (28% CAGR over 2010-15). We estimate the counties to account for at most 10% of WTE capacity by 2015. China: WTE capacity

Source: State Council, Daiwa forecasts (2015)

We derive this 10% WTE capacity forecast after considering: 1) WTE projects are more accepted and well adopted in more developed areas; therefore, cities will remain the focus for development, 2) the government is still focusing on developing WTE in the wealthy eastern region, for which it targets to install WTE capacity to account for 48% of total non-hazardous treatment capacity in the 12th FYP, compared with the national average of 35%, which supports our point 1, and 3) WTE capacity in cities is significantly higher than in the counties (18x in 2010), thus it is possible for WTE capacity expansion in cities to be a bit slower than that in counties. China: urban WTE capacity

Source: National Bureau of Statistics, State Council, Daiwa forecast (2015)

By the end of 2012, China’s average capacity per WTE plant was 890tpd, marking a continuous increase from the 320tpd per plant in 2003, thanks to more up-to-date technology and economies of scale. Assuming an average capacity of 1,000tpd per new plant that came into operation after 2012, we expect at least 150 new WTE plants to be installed in cities over the 2012-2015E. China: number of WTE plants in cities

Source: National Bureau of Statistics, State Council, Daiwa forecasts (2015)

0

50

100

150

200

250

300

350

2005 2010 2015 Target

(ktpd)

WTE capacity in cities WTE capacity in counties

15 17 33 40 45 52

71 85 94

123

276

0

200

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600

800

1,000

0

50

100

150

200

250

300

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2015E

(tpd)(ktpd)

WTE capacity (LHS) Average capacity per plant (RHS)

47 5467 69 66 74

93104 109

138

292

0

50

100

150

200

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300

350

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2015E


- 19 -

300 new WTE plants to be installed in cities over both 2015-20E and 2020-25E,

Although the government targets the MSW treatment-to-collection rate to reach as high as 90% and 70% for cities/counties by 2015, respectively, we see considerable room to add new treatment capacity to achieve a 100% treatment-to-collection rate, not to mention the continuous growth in MSW generation and collection amount. We forecast urban WTE capacity to account for 55% and 65% of total urban MSW treatment capacity by 2020 and 2025, respectively. Assuming an improved WTE plant utilisation rate of 85% for both 2020 and 2025, from 80% in 2012, we forecast steady urban WTE capacity expansion, at CAGRs of 16% and 10% over 2015-20E and 2020-25E, to 570ktpd and 908ktpd, respectively; and this would translate into a further 300 WTE plants to be installed in cities over the 2015-20E and 2020-25E periods, respectively. We regard this as a solid foundation for long-term growth in the urban WTE market. China: WTE capacity forecasts

Source: State Council, National Bureau of Statistics, Daiwa forecast

The top-10 players dominate the market

Regional champions

By the end of 2013, the top-10 WTE companies accounted for 53% of the China market share in terms of operating capacity, or 70% of market share in terms of contracted capacity (includes projects under construction and those at the preparation stage, with Hangzhou Jinjiang and Shanghai Environment Group being the dominant market players. CEI took third place in terms of contracted capacity.

China: top-10 WTE companies (end 2013)

Source: E2O Environmental Platform, Company, Daiwa estimates

China: top-10 WTE companies Company Contracted capacity Operating capacity

Hangzhou Jinjiang 17.6% 15.4%

Shanghai Environment Group 11.0% 8.1%

China Everbright International 9.1% 6.7%

Weiming Group 3.6% 5.2%

Shenzhen Energy 8.8% 4.9%

China Science Group 3.7% 4.1%

Dynagreen 7.3% 3.6%

Capital Environment 1.8% 2.2%

Veolia 1.0% 1.8%

Grandblue Environment 5.7% 1.0%

Others 30.3% 47.1%

National total 100% 100.0%

Source: E2O Environmental Platform, Company, Daiwa estimates

In our opinion, the more concentrated market share (in terms of contracted capacity compared with operating capacity) of the leading companies has shown their strong ability to secure new projects, which we think can be attributed to their solid track record in the industry and their good relationships with local governments. We think there are regionally dominating players in the China WTE market as: 1) SOEs backed by local/central governments tend to have a lead in project wins in certain provinces, although non-SOEs can often make up for this by being more nimble with their public relations efforts, and 2) companies tend to have an advantage in winning projects in places where they have established brand awareness and good cooperating history with the local government, and stronger bargaining power to secure more preferential contract terms, such as higher waste treatment fees or higher guaranteed waste treatment volumes. For example, CEI, whose parent is China Everbright Group, which operates under the supervision of the State Council, has national coverage with a dominating market position in Jiangsu and Shandong Province, where it has 35-45% and 20-30% provincial market shares accordingly.

15 17 33 40 45 52 71 85 94

123

276

570

0

100

200

300

400

500

600

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2015E 2020E

(ktpd)

17.6%

15.4%

11.0%

8.1%

9.1%

6.7%

30.3%

47.1%

0% 20% 40% 60% 80% 100%

Contractedcapacity

Operatingcapacity

Hangzhou Jinjiang Shanghai Environment Group China Everbright International

Weiming Group Shenzhen Energy China Science Group

Dynagreen Capital Environment Veolia

Grandblue Environment Others


- 20 -

Based on our estimates, Beijing, Guangdong, Jiangsu, Shandong, Shanghai and Zhejiang have been the provinces with the greatest demand for WTE plants over 2012-15. Companies with a special focus on these regions are likely to be the key beneficiaries. China: number of WTE plants in cities by province

Source: National Bureau of Statistics, State Council, Daiwa forecasts (2015)

Listed companies or companies with SOE backgrounds have an advantage in the WTE industry, mainly in the following areas:

1) it is easier for them to become regional leaders as listcos generally have solid operating and safety track records with good project execution, and SOEs are likely to have more of an edge in managing government relationships, as well as better bargaining power with the local governments in certain regions to secure projects, as we discussed above, 2) most of their projects are run under BOT/TOT business models that require large initial investments; the WTE industry is capital intensive. The listcos have more access to funding through loan financing or equity financing, and SOEs can get strong support from the government or major banks in acquiring more competitive financing, and 3) these companies’ strong emissions controls also open up the potential for them to consolidate smaller players when emission standards are raised.

Comparison of selected listed WTE players

Stock Code Company Regional dominance SOE background

As at end-2013

Financing activities in 2013 Number of operating

WTE projects Operating

capacity (ktpa)

257 HK CEI Jiangsu Province

(35-45% provincial market share) Shandong province

(20-30% provincial market share)

SOE (41% owned by China Everbright Group, operating under the supervision of the State Council)

11 3,522 1. Entered into a USD70m loan agreement with International Finance Corporation on 5 June 2013 2. Issued 430m new shares (9.59% of enlarged share capital) at HKD8.52 on 10 Dec 2013

CNGI SP C&G Environmental Protection

Fujian City in Guangdong Province

(25-35% provincial market share)

Non-SOE 8 1,971 Proposed to sell 100% of its WTE business in China to Grandblue Environment, at a consideration of CNY1.85bn (CNY1.1bn cash and CNY0.75bn through consideration shares)

600323 CH Grandblue Environment

Nanhai district in Guangdong Province

SOE (40% owned by Foshan City Nanhai district Public Asset Management Committee)

1 548 Proposed to issue 136m shares at CNY8.34/share on 23 Dec 2013, of which 90m shares were for the share consideration of CNY0.75bn for the acquisition of C&G (CNY1.1bn was as cash consideration), and 46m shares for the share consideration of CNY384m for the acquisition of a 30% of interest in Nanhai Gas

3989 HK Capital Environment No SOE (56% owned by Beijing Capital Group, which operates under the supervision of Beijing Municipal State-owned Assets Supervision and Administration Commission)

4 1,159 Rights Issue of 2.8bn rights shares on the basis of 3 rights shares for every 2 existing shares (at HKD0.20/rights share) on 7 July 2013

ZEF GR ZhongDe Waste Technology

No Non-SOE 1 73 Received a 3-year CNY200m loan from Bank of China for its Lanzhou BOT project, effective interest rate was 8.3% in 2013

1330 HK Dynagreen Environmental

No SOE (50% owned by Beijing State-owned Assets Management)

7 1,916 Obtained a USD100m loan facility from Asian Development Bank on 12 Apr 2013. The loan is granted pursuant to a corporate guarantee granted by the Beijing State-owned Asset Management in favour of Asian Development Bank.

000826 CH Sound Environment No Non-SOE 1 266 Issued 1-year notes of CNY600m on 27 Sep 2013, with a 6% coupon

000027 CH Shenzhen Energy Shenzhen City in Guangdong Province

SOE (48% owned by Shenzhen Municipal Government State-owned Assets Supervision and Administration Commission)

5 2,573

Source: Company

(5)

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2010 2010-2012 2012-2015 Target


- 21 -

Venturing into the upstream business

Great moves have been made to deliver the infrastructure required to treat MSW. A number of WTE players that were originally engaged in downstream investment and the operation of WTE projects have ventured into upstream equipment manufacturing by tailor-making their own furnaces, in an attempt to lower their initial capital investment, reduce operating and maintenance costs, or increasing their per unit power generation capability. For example, CEI has designed its own grate furnace. It has supplied 26 such furnaces to its own projects and is also actively sourcing external market demand, with 4 contracts under negotiation as at August 2014. The grate furnace it developed facilitates a more thorough incineration process and is more suitable for the waste in China, which usually has a low heat value of around 3,000-3,500KJ/Kg due to a high moisture rate of 25-50%, as a result of cultural norms. According to the company, CEI’s self-designed grate furnace can generate power from MSW of as high as 450KWh/tonne of dry waste, compared with imported furnaces at around 420KWh/tonne, and consumes less electricity at the same time. Based on the company information, we estimate that by using its own grate furnace, CEI could recognise incremental annual electricity sales of CNY5m for a 500tpd WTE project. Grate furnace comparison

CEI’s self-designed

grate furnace

Imported grate

furnace

Difference Note

Electricity generation

(KWh/ton)

450.6 421.2 +29.4 Per tonne of dry waste

Electricity consumption

(KWh/ton)

57.3 76.0 -18.6

Annual on-grid electricity

generation (GWh)

65.5 57.5 +8.0

Annual electricity

sales (CNYm)

42.6 37.4 +5.2 Operates 8,000 hours a year

Consumption of

calcium hydroxide

(Kg/tonne)

135.6 207.5 -71.9 Used to remove acid gases

Consumption of

ammonium hydroxide

(L/ton)

1.9 2.4 -0.5 Used to reduce NOx in furnaces, neutralise agents (e.g. Ca(OH)2) and adsorb materials (eg, activated carbon)

Source: Company

Other companies have come up with their own furnace technology. Dynagreen’s WTE plants use the company’s self-designed grate furnace. Hangzhou Jinjiang is the pioneer in localization of the technology of fluidized bed furnaces and all the components for its furnaces, which we believe are more popular in the lower-tier cities and rural areas as these furnaces require 30-50% less initial investment compared with grate furnaces, although they need auxiliary fuel

(usually coal) to operate and generate 10x more fly ash than a grate furnace. CEI: self-designed grate furnace

Source: Company

Heat value comparison of various fuels

Source: National Energy Administration

Higher incineration emissions standard drives growth

Higher emissions standards …

China released the updated Standard for pollution control for municipal solid waste incineration (click here for the Chinese-language version) in May 2014, applicable to all newly built WTE plants starting on 1

July 2014 and to all existing plants starting on 1 January 2016. Aiming to limit secondary pollution via emissions discharged by WTE plants, China now has stricter emissions standards, with some of the criteria matching that of the Euro 2000 standard. Significantly, China has tightened its standard on dioxin, with the new standard at the same level as the Euro 2000 standard, and 10x stricter than the previous

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http://kjs.mep.gov.cn/hjbhbz/bzwb/gthw/gtfwwrkzbz/201405/t20140530_276307.htm



- 22 -

one. Dioxin is a class of chemical contaminants that are formed during the combustion process (especially the incomplete (partial) combustion process where the temperature is below 800◦C) and can cause several skin diseases, reproductive problems, and lead to higher chance of getting cancer, according to the US National Institute of Environmental Health Sciences. As such, dioxin, apart from the foul odour it emits, is probably the main reason that some people are strongly against waste incineration.

With the stricter standard issued and applied, and with stronger enforcement encouraged by China’s New Environmental Protection Law, WTE plants can lead to more sustainable environmental development and at the same time lower the potential risk to the environment. We think people are becoming more open to waste incineration, which should be able to facilitate the growth of the WTE market and partially reduce the risks of project delays.

Pollution control standards: comparison of China’s standards and Euro2000

1-hour average 24-hour average

Pollutants (mg/m3) China’s new standard China’s old standard Euro 2000 standard China’s new standard China’s old standard Euro 2000 standard

TSP 30 80 10 20 80 10

Nox 300 400 200 250 N/A 200-400

SO2 100 260 50 80 N/A 50

HCI 60 75 10 50 N/A 10

Hg 0.05 0.2 0.05 0.05 0.2 0.05

Cd+Ti 0.1 0.1 (Cd only) 0.05 0.1 0.1 (Cd only) 0.05

Sb+As+Pb+Cr+Co+Cu+Mn+Ni 1.0 1.6 (Pb only) 0.5 1.0 1.6 (Pb only) 0.5

Dioxin (ng TEQ/m3) 0.1 1 0.1 0.1 1 0.1

CO 100 150 50 80 N/A 10

Source: Ministry of Environmental Protection, European Integrated Pollution Prevention and Control Bureau

… likely to be accompanied by higher tariff …

Waste treatment fees are negotiated between the company and the local government for any specific project, and therefore vary by province and by project, although the usual range is CNY65-CNY100/tonne in China. There is no national standard that details the methodology on how the tariff should be set, implemented or collected. Wealthy regions – those along the eastern coast of China and the major cities – tend to have higher waste treatment fees. Compared with the other more developed WTE markets in the world, the waste treatment fees in China are significantly lower. To accompany the higher waste discharge standard and to facilitate healthy industry development, together with more up to date WTE technologies, we see the potential for the local governments to provide higher waste treatment fees for both new and existing WTE projects.

Waste treatment fees for WTE plants

Source: European Union, European Neighbourhood and Partnership Instrument, Eunomia Research & Consulting, Federal Office of the Environment, UK Waste & Resources Action Programme, Japan National Institute of Advanced Industrial Science and Technology, Singapore National Environment Agency, US Business Council for Sustainable Energy, Global Energy Network Institute

… and facilitates market consolidation

Concern about the environment, together with the Promotion of the application of grate furnace (click here for the Chinese-language version) by the Ministry of Housing and Urban-Rural Development, has led to the wide adoption of grate furnaces, which accounted for more than 55% of the furnaces used in the China WTE industry in 2012, according to Shanghai Environmental Engineering Design Institute.

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http://www.mohurd.gov.cn/zcfg/jsbwj_0/jsbwjcsjs/200611/t20061101_157018.html


- 23 -

In general, grate furnaces require an initial investment of CNY0.4-0.5m/tonne – over 20% higher than the capex demand for circulating fluidized bed furnaces. Given this, we think smaller players without sufficient access to affordable financing might be at a disadvantage when trying to acquire new projects. Comparison of grate furnaces and fluidized bed furnaces

Grate furnace Fluidized bed furnace

Capex CNY0.4-0.5m/ton CNY0.3-0.4m/ton

Pre-process Simple Complex

Auxiliary fuel No Yes, coal

Fly ash generation Low High

Bottom ash generation 2.5% - 3% 20% - 30%

Source: China Energy conservation and Protection Group, Ministry of Housing and Urban-Rural Development

A standardised WTE plant using a grate furnace

Source: China Science and Environment Net

A standardised WTE plant using a fluidized bed furnace

Source: China Science and Environment Net

Moreover, all existing WTE plants are required to meet new emission standards starting in 2016, which may require some existing incinerators to be upgraded. As leading players like CEI already meet the Euro2000 emission standards in all their projects, they have less capex constraints. With their advanced technology and vast experience in the WTE market, we believe they are more flexible to explore both green-field projects and/or acquisitions. Equipped with a larger project portfolio in hand and with better ability in securing new projects, leading WTE players can benefit from economies of scale and attain better profitability. Moreover, a large project base means they are more defensive against any project delays, which happen from time to time mainly due to insufficient waste supply in the local region. Such delays can significantly affect the profitability of small players, such as Dynagreen, whose 1H14 net profit decreased by 70% YoY due to project delays.

MSW

Leachate

treatment

Grate

Furnace

Incineration

Steam

Steam turbine

generator unit

Electricity Heat

Flue gas

treatment

Eliminate SO2

by calcium

hydroxide

Bag filter

Slag

treatment

Metal

recycling

Emission

Landfill

Fly ash

treatment

Utilization

e.g. construction

material

MSW

Dehydration

Fluidized

bed Furnace

Incineration

Steam

Steam turbine

generator unit

Electricity Heat

Flue gas

treatment

Eliminate SO2

by calcium

hydroxide

Bag filter

Slag

treatment

Metal

recycling

Emission

Landfill

Fly ash

treatment

Utilization

e.g. construction

material

Crushing

Coal


- 24 -

China: recent policies affecting the WTE industry

Policy (Chinese-language versions) Issuing date Issuing authority Key points Investment

(CNYbn)

12th FYP for environmental protection 15-Dec-2011 State Council Specify the pollutant reduction target for 2015 Increase city MSW treatment-to-collection rate to 80%

3,400

12th FYP for utilization of large solid waste

17-Dec-2011 Ministry of Industry and Information Technology

For large industrial solid waste treatment, target to reach annual utilization of 1.6bn tonnes and utilization rate of 50%

100

Notification on improving on-grid tariff for waste incineration power generation

10-Apr-2012 National Development and Reform Commission

Set benchmark tariff of CNY0.65/KWh (VAT inclusive) for electricity generation of 280KWh/ton of waste, with the remaining part use local coal-fired tariff

12th FYP for construction of non-hazardous treatment facilities for municipal solid waste

19-Apr-2012 State Council Target to increase MSW non-hazardous treatment-to-collection rate to 90%/70% in cities/counties by 2015

12th FYP for environmental service industry

16-Jun-2012 State Council Target to reach 15% CAGR for the growth of environmental service industry output during 2010-2015 to reach annual total industry output of CNY4,500bn Encourage the development of food waste disposal and utilize facilities, and recycle of solid waste

12th FYP for environmental protection standards

17-Feb-2013 Ministry of Environmental Protection

To implement stricter and more comprehensive environmental protection standards

Opinion on enhancing utility infrastructure

6-Sep-2013 State Council Accelerate the construction and upgrade of city infrastructure Re-emphasis the target to achieve full treatment in 36 major cities by 2015, and 90% in other cities

National new urbanization plan (2014-2020)

16-Mar-2014 State Council Target to reach urbanization rate of 65% in terms of regular residents Target to reach higher MSW treatment-to-collection rate in both urban and rural areas

Environmental protection law (new) 25-Apr-2014 The National People's Congress

Higher fines for pollution Stricter enforcement Government officials appraisal will include local environmental performance

Standard for pollution control of the municipal solid waste incineration

16-May-2014 Ministry of Environmental Protection

Implemented on 1st July 2014, this new standard holds tighter emission standards

Major state-encouraged low-carbon technology

5-Sep-2014 National Development and Reform Commission

A total of 34 low-carbon technologies are listed to facilitate the environmental protection during 2015-2020 WTE is included in the list

26bn for WTE

Source: State Council, Ministry of Environmental Protection, Ministry of Industry and Information Technology, National Development and Reform Commission, The National People’s Congress


http://www.miit.gov.cn/n11293472/n11293832/n11293907/n11368223/14416612.html

http://www.miit.gov.cn/n11293472/n11293832/n11293907/n11368223/14416612.html

http://www.sdpc.gov.cn/zwfwzx/zfdj/jggg/dian/201204/t20120410_472399.html








http://www.mep.gov.cn/gkml/hbb/bwj/201302/t20130222_248380.htm

http://www.mep.gov.cn/gkml/hbb/bwj/201302/t20130222_248380.htm








http://www.sdpc.gov.cn/zcfb/zcfbgg/201409/t20140905_625023.html

http://www.sdpc.gov.cn/zcfb/zcfbgg/201409/t20140905_625023.html


- 25 -

Other underdeveloped waste treatment segments

Hazardous waste treatment

Hazardous waste is defined as waste that contains corrosive, toxic, flammable, reactive or infective compounds that are harmful to the environment and humans, and which need to be properly and carefully disposed of. The most common sources of hazardous waste are industrial and medical. China: types of hazardous waste

Source: Ministry of Environmental Protection

China: types of medical waste

Source: National Health and family Planning commission

In 2012, China was reported in the 2012 Environmental Yearbook (EY) to have produced almost 35m tonnes of industrial hazardous waste, with Shandong, being the province with the largest generation of hazardous waste, accounting for 24% of the national total, probably due to the concentration of the chemical industry in that province. In 2012, 76% of industrial hazardous waste was either treated or recycled. World: industrial hazardous waste generation amount (2008)

Source: United Nation, Basel Convention

China: provincial industrial hazardous waste generation (2012)


Contaminated sharps

Pathological Waste

Pharmaceutical wastes

Microbiological waste

Chemical waste

Medical Waste

0

5,000

10,000

15,000

20,000

Ger

man

y

Chi

na

Fra

nce

Uni

ted

Kin

gdom

Pol

and

Italy

Net

herla

nds

Kyr

gyzs

tan

Kor

ea

Spa

in

Ukr

aine

Sw

eden

Phi

lippi

nes

Cze

ch R

epub

lic

Aus

tral

ia

Mal

aysi

a

Irel

and

Den

mar

k

Slo

vaki

a

Sin

gapo

re

Gre

ece

Luxe

mbo

urg

(kilo tonnes)

0

1,500

3,000

4,500

6,000

7,500

9,000

Sha

ndon

gX

injia

ngQ

ingh

aiH

unan

Jian

gsu

Yun

nan

Gua

ngdo

ngS

ichu

ang

Zhe

jiang

Gua

ngxi

Liao

ning

Jilin

Inne

r M

ongo

liaH

ubei

Sha

ngha

iH

enan

Heb

eiC

hong

qing

Gui

zhou

Sha

anxi

Jian

gxi

Gan

suA

nhui

Hei

long

jiang

Sha

nxi

Bei

jing

Tia

njin

Fuj

ian

Nin

gxia

Hai

nan

Tib

et

(kilo tonnes)


- 26 -

Under-reported generation amount

According to our research, this reported production amount of 35m tonnes of industrial hazardous waste is not a precise reflection of the situation, mostly as it includes only key pollution sources. As defined by the Ministry of Environmental Protection (click here for the Chinese-language version), key national pollution generators are companies that generate industrial hazardous waste of more than 100tpa, provincial key pollution generators are those generate more than 10tpa, and city-level are those generate more than 1tpa. China: classification of industrial hazardous waste generators Classification Industrial hazardous waste generation

National key pollution generator Generation ≥ 100tpa

Provincial key pollutions generator 10tpa ≤ Generation < 100tpa

City-level key pollutions generator 1tpa ≤ Generation < 10tpa

Others Generation < 1tpa


To illustrate, city-level key pollution sources were not included in the reported annual hazardous generation amount until 2011; as a result the reported amount recorded a 116% YoY increment in 2011. China: industrial hazardous waste generation and disposal


Note: in year 2001-2010, national and provincial key pollution generators are included in the reported data; starting year 2011, national, provincial and city level key pollution generators are included in the reported data

The government carried out a Census on Pollution Sources (click here for the Chinese-language version) (Census) in 2010, in which it reported that annual industrial waste generation was 45.7m tonnes in 2007, 4.2x the amount reported in the EY of that year, due mainly to the mere inclusion of national and provincial key pollution sources in the EY, while not taking into account the comprehensive coverage as the Census. To follow, we summarise the differences in the key indicators reported in these 2 sets of statistics:

Comparison of 2007 hazardous waste statistics reported in the Environmental Yearbook and the Census on Pollution Sources EY Census Comparison

Centralized treatment

Centralized treatment capacity (tpd) 19,986 11,300 0.6x

Total number of centralized treatment facility 322 343 0.6x

Treated amount (kilo tonnes) 1,143 1,568 1.4x

By source: Industrial hazardous waste 1,143 1,174 1.0x

By source: Medical waste n.a. 394 n.a.

By treatment: Landfill 290 315 1.1x

By treatment: Incineration 782 504 0.6x

By treatment: Others 71 750 10.6x

Non-centralized treatment

Industrial hazardous waste generated (kilo tonnes) 10,790 45,737 4.2x

Utilized 6,500 16,448 2.5x

Treated 3,460 21,928 6.3x

Stock 1,540 8,124 5.3x

Discharged 1 39 39.4x

Treatment-to-collection rate 74.0% 71.2% -2.7pp

Source: Ministry of Environmental Protection, National Bureau of Statistics

Based on these 2 sets of data and taking note of the difference in the reported annual industrial hazardous waste generation in the EY for 2011 and 2010, we estimate the breakdown of the 45.7m tonnes in 2007 as shown in the pie chart below. China: estimated annual industrial hazardous waste generation (2007)

Source: Ministry of Environmental Protection, National Bureau of Statistics, Daiwa

Simulated on the above breakdown and based on the data provided in the EY, we estimate an actual annual industrial hazardous waste generation of 70mn tonnes in 2012, 2x the amount as reported in the EY. This under-reporting is likely the consequence of: 1) a lack of clear regulation and loose enforcement of proper HWT, and 2) the complex chemical or physical characteristics that hazardous waste from different industries , which possibly exposed the environment and its people to dangerous toxins/chemicals.

0%

15%

30%

45%

60%

75%

90%

0

10,000

20,000

30,000

40,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(kilo tonnes)

Utilised Treated Stock

Dumped Treatment rate (RHS)

National & Provincial key

pollution generator

10,790m tonnes23.6%

City-level key pollutions generator

11,209m tonnes24.5%

Others23,738m tonnes

51.9%

http://www.gov.cn/gongbao/content/2011/content_1933716.htm

http://www.gov.cn/gongbao/content/2011/content_1933716.htm

http://www.stats.gov.cn/tjsj/tjgb/qttjgb/qgqttjgb/201002/t20100211_30641.html

http://www.stats.gov.cn/tjsj/tjgb/qttjgb/qgqttjgb/201002/t20100211_30641.html


- 27 -

Also, according to our estimates, China has been generating more than 60m tonnes of industrial hazardous waste per year starting in 2010, already reaching the government’s 2015 forecast (according to the 12th FYP on the prevention of hazardous waste pollution (click here for the Chinese-language version),

on our estimates. We are concerned as to whether enough government attention and efforts have been exerted to address the issue, and whether the current as well as planned treatment facilities will be sufficient to treat hazardous waste.

China: estimated annual industrial hazardous waste generation

China: estimated annual industrial hazardous waste generation

Source: Ministry of Environmental Protection, National Bureau of Statistics, Daiwa estimate

Note: Reported referred to the volume reported in the Environmental Yearbook, which included companies with generation > 10tpa during 2001-2010, and included companies with generation > 1tpa starting 2011; Estimated unreported volume includes companies with generation < 10tpa during 2001-2010, and include companies with generation < 1tpa starting 2011

Source: Ministry of Environmental Protection, National Bureau of Statistics, Daiwa estimate

Note: We estimated the amount generated by companies with annual generation < 10tpa during 2001-2010 (which is the unreported amount), and estimated the amount generated by companies with annual generation < 1tpa starting 2011 (which is the unreported amount). Our estimated 2007 generation match the number reported in the Census.

China: industrial hazardous waste generation and disposal China: industrial hazardous waste generation and disposal

Source: Ministry of Environmental Protection Source: Ministry of Environmental Protection, Daiwa estimate

Untapped centralised treatment market

Most of the hazardous waste generated is treated in-house by the factories that produce such waste, and as such, there is no publicly available information on the treatment quality of these in-house processes. By 2012, there were 722 centralised hazardous waste treatment facilities throughout China with a total capacity of 60ktpd, among which 236 were designed to treat medical waste. During 2012, these centralized treatment facilities treated 3.4m tonnes of hazardous waste, including 0.5m tonnes of medical waste, and incurred an annual operating expense of CNY5.4bn.

In the long term, we believe third-party centralized treatment is the trend, as the government has also been gradually shifting its policy from “the one who pollutes should be the one who treats” to “the one who pollutes should be the one who pays for the treatment”, given the advantages of centralized treatment including: 1) professional operators are usually equipped with more advanced technology that can treat waste at higher standards, 2) centralized treatment can facilitate centralized government monitoring of the treatment quality, 3) centralized treatment can lead to economies of scale, and 4) as the country gradually moves factories to industrial parks outside downtown areas, to achieve better control of the industrial hazardous waste

0

20,000

40,000

60,000

80,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(kilo tonnes)

Reported volume Estimated unreported volume

0

20,000

40,000

60,000

80,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(kilo tonnes)

Produced by companies with generation < 1tpa

Produced by companies with generation > 1tpa & < 10tpa

Produced by companies with generation > 10tpa

0%

15%

30%

45%

60%

75%

90%

0

20,000

40,000

60,000

80,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(kilo tonnes)

Utilised Treated Stock

Dumped Treatment rate (RHS)

0%

15%

30%

45%

60%

75%

90%

0

20,000

40,000

60,000

80,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(kilo tonnes)

Utilised Treated

Stock Estimated dumped amount

Estimated treatment rate (RHS)

http://www.mep.gov.cn/gkml/hbb/bwj/201210/W020121023530238518112.pdf

http://www.mep.gov.cn/gkml/hbb/bwj/201210/W020121023530238518112.pdf


- 28 -

generated inside the area, the government is likely to establish centralized treatment facilities in or near the industrial parks. However, a healthy centralized treatment market relies on clear and supportive government policy which helps establish a value chain, all of which this industry currently lacks. Currently, Dongjiang Environmental (895 HK, not rated) is an early entrant among the listed companies in the hazardous waste management market. CEI is also exploring the market with 1 industrial solid waste landfill with a capacity of 40ktpd in operation in Suzhou, 1 hazardous waste landfill with capacity of 20ktpd in operation in Jiangsu, 3 projects under construction and 3 projects in the preparation stage due to commence operations in 2H14-2015.

CTE stands to benefit from the emerging HWT market, especially in Guangdong Province. The company announced on 21 October 2014 its intention to acquire at least an 80% stake in Guangzhou Lvyou, an industrial waste (including dangerous waste) treatment facility in the Nansha district of Guangzhou, Guangdong Province, for a consideration of no more than CNY800m. Given that there is a guaranteed profit offered by the seller of CNY100m for 2015 and CNY110m for 2016, the acquisition represents a 10x 2015E PER (assuming an 80% stake in the CNY100m guaranteed profit) (CTE is trading currently at 19x). Upon completion of the acquisition, which management expects to be end-2014, CTE would have 260ktpa of dangerous waste treatment capacity. CTE also has 1.27mtpa of industrial waste treatment capacity (in operation and under construction) in Qingyuan Lvyou and Longmen.

China: number of centralised hazardous waste treatment facilities (2006)


> 35

20 - 35

5 - 19

1 - 4

0

Shanghai

24

Guangdong

41

Hainan

2

Hubei

6

Hunan

4

Jiangxi

1 Fujian

7

Heilongjiang

5

Inner Mongolia

8

Henan

1

Shandong

11

Anhui

2

Guangxi

5

Guizhou

2

Beijing

5Tianjin

4

Jilin

5

Gansu

2

Qinghai

1

Xinjiang

3

Tibet

Ningxia

2

Zhejiang

22

Yunnan

Liaoning

20

Shanxi

7

Sichuan

8

Chongqing

4

Hebei

6

Shaanxi

2

Jiangsu

38


- 29 -

China: amount of centralised treated hazardous waste China: amount of centralised treated hazardous waste

Source: Ministry of Environmental Protection Source: Ministry of Environmental Protection

China: no. of centralised hazardous waste treatment facilities


Investment of CNY26.1bn during 2010-15

China plans to invest CNY26.1bn in hazardous waste management, utilization, treatment and related works according to the 12th FYP, in an attempt to increase the annual waste treatment and utilization amount by 75% compared with the 2010 level, or by a 12% CAGR during the period, and to achieve “100% hazardous-free disposal” in major cities. We would note that, CNY300m (including the CNY26.1bn) for the investigation of current hazardous waste generation, collection, transportation, storage, utilization, treatment and discharge status, would in our opinion mean that the current situation is not well controlled by the government and a lot needs to be done to construct ordinance, such as monitoring and legislation, without which we would not see an attractive investment opportunity in this sector.

China: breakdown of 12th FYP investment in the hazardous waste sector


China: detail breakdown of 12th FYP investment in the hazardous waste sector (medical waste included) (CNY bn) Investment %

Other hazardous waste utilization and treatment projects 9.020 34.56%

Heavy-metal related hazardous waste treatment projects 7.450 28.54%

Centralized hazardous waste utilization and treatment projects 5.400 20.69%

Evaluation and treatment of hazardous waste in stock 2.000 7.66%

Hazardous waste management, monitoring and related technical supports 1.565 6.00%

Investigation on hazardous waste 0.300 1.15%

Training, emergency planning and public education 0.285 1.09%

Hazardous waste collection exemplary projects 0.070 0.27%

Legislation of relevant regulations and standards 0.010 0.04%

Total 26.100 100.00%


We see the likelihood of a more mature hazardous waste treatment market emerging in the next 3-5 years should the government be able to reach its targets. In our opinion, current players in the sector, such as Dongjiang Environmental (895 HK, not rated), CEI and CTE, would enjoy a first mover advantage should these targets be met, and the industry starts to expand.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(kilo tonnes)

Industrial hazardous waste Medical waste Others

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(kilo tonnes)

Landfill Incineration Others

0

200

400

600

800

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(# of facilities)

Total centralized treatment facility Other centralized treatment facility

Medical waste centralized treatment facility

Collection, utilization and

treatment projects

35%

Heavy-metal related

treatment projects

29%

Centralized utilization and

treatment projects

21%

Others16%


- 30 -

Cement kiln waste co-processing

In our view, co-incineration of waste using cement kilns is an alternative to deal with excess capacity in the cement manufacturing industry, and an efficient way to properly treat MSW. The advantages for co-processing compared with WTE lie in: 1) the lower investment cost of CNY0.25-0.28m/tonne for co-incineration, compared with CNY0.3-0.4m/tonne for fluidized bed furnaces, and CNY0.4-0.5m/tonne for grate furnaces, 2) thorough incineration, as waste can stay for 7-10 seconds in a rotary kiln at a temperature of 900-1,100◦C, through which hazardous emissions such as dioxins can be greatly reduced, compared with 3 seconds at 850-900◦C for WTE plants. However, crucial disadvantages also exist, which we argue mean that cement kiln waste co-incineration is unlikely to become a mainstream waste treatment method, and as a result of which, we see limited market potential, even though market penetration is as low as 10%, according to Conch Venture (586 HK, not rated), a participant in this industry. Such disadvantages include: 1) a limited potential market size of only 200 units of co-incinerators, given 1,600 cement manufacturing kilns exist in China and only sizeable cement kilns using dry manufacturing processes can assembly a waste incinerator, 2) the capacity of co-incinerators is dependent on the size of the respective cement production line, therefore co-incinerators have small capacity at 200-400tpd, 3) although residual heat can be used to generate power, electricity generated cannot be dispatched at a preferential tariff through the grid (unlike WTE plants), but can only be consumed in-house, and 4) governments are less incentivized to promote co-incinerators as it creates a heavier financial burden on them, given the waste treatment fee is high at CNY150-170/tonne, almost double that for WTE. Cement kiln waste co-processing illustration (Conch Venture and Kawasaki’s technology)

Source: Company, Daiwa

Conch Venture’s cement kiln waste co-processing plant

Source: Company

Cement kiln waste co-processing facility

Source: Company

Although the National Development and Reform Commission issued a Notice to promote co-processing and utilization of municipal and industrial solid waste (click here for the Chinese-language version) in May 2014, no detailed target was given and no government investment plan has been disclosed. Given the pros and cons we discussed above, we remain cautious on this market segment.

MSW / HW

Metal

recycling

Pit CrusherGasification

furnace

Odor, Leachate

Circulation device

Rotary

kiln

CementResidual heat

power generation

http://www.sdpc.gov.cn/zcfb/zcfbtz/201405/t20140520_612251.html

http://www.sdpc.gov.cn/zcfb/zcfbtz/201405/t20140520_612251.html


- 31 -

Valuation Since 2012, CEI’s shares have been rerated from a PEG of 0.4x (based on a 2-year forward EPS CAGR) to 0.9x, as investors have been accumulating environmental stocks. The appeal of environmental stocks has been underlined by their strong 28-30% 2-year forward EPS CAGRs, driven by government policies aimed at cleaning up waste, alongside a period of strong industry growth with low penetration similar to that experienced by China’s gas sector in the early 2000s. CEI has been the most favoured solid waste treatment operator by investors, likely because it is currently the only WTE operator with a strong track record of project execution and a meaningful market cap. We expect emerging WTE and HWT operators, such as Dynagreen and CTE, to be rerated further. In our view, these 3 stocks (CEI, CTE and Dynagreen) could see their PEGs rerated from 0.4-0.5x currently to 0.9x if they prove capable of expanding their WTE or HWT capacities as fast as CEI has done over the past few years. China WTE and HWT operators: 2-year average PEG since 2012

Min PEG (average)

0.38

Max PEG (average)

0.81

Source: Companies, Daiwa forecasts

China WWT operators: 2-year forward EPS CAGR

2014-16E EPS CAGR 2015E PER 2014-16E PEG

CEI 26% 21.2x 0.9x

CTE 41% 18.8x 0.5x

Dynagreen 42% 18.4x 0.4x


Note: multiples are based on share prices as of 12 November 2014

The average 1-year forward PER for the operators in the WTE sector has risen from 12x in early 2013 to 20x currently, stimulated primarily by a series of favourable government policies. With the sector trading currently at an average 1-year forward PER of 20x, it is regarded by the market as having relatively rich valuations. While share prices could seem vulnerable after their recent rally, we do not see any solid justification for a sector devaluation given the favourable outlook thanks to both market demand and policy support. China WTE and HWT operators: 1-year forward PER


0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

(PEG)

CTE CEI DynaGreen

(20%)

(10%)

0%

10%

20%

30%

40%

50%

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

CTE CEI DynaGreen WTE Avg

(2-year EPS CAGR)

5

10

15

20

25

30

35

Jan-

13

Feb

-13

Ma

r-13

Apr

-13

Ma

y-13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb

-14

Ma

r-14

Apr

-14

Ma

y-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

(x )

CEI Dynagreen CTE


- 32 -

China WTE and HWT operators: 1-year forward PBR


Peers: 2015E PBR (x) vs. 2015E ROE (%) Peers: 2015E PER (x) vs. 2013-16E EPS CAGR

Source: Company, Bloomberg, Daiwa forecasts

Source: Company, Bloomberg, Daiwa forecasts

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan-

13

Feb

-13

Ma

r-13

Apr

-13

Ma

y-13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb

-14

Ma

r-14

Apr

-14

Ma

y-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

(x )

CEI Dynagreen CTE

371 HK

257 HK 1330 HK

3989 HK

895 HK 000826 CH

1363 HK

0%

5%

10%

15%

20%

25%

30%

35%

1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5

(ROEx )

(PBRx )

257 HK

1330 HK

371 HK

895 HK

000826 CH

1363 HK

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

15.0 17.0 19.0 21.0 23.0 25.0

(2013-16E EPS CAGR)

(PERx )


- 33 -

Industry risks

Adverse changes in government initiatives and policies

The growth and performance of the WTE industry is affected by the availability of support and/or financial incentives granted by the government. The promotion of using environmentally sustainable methods for waste management and energy production has been leading to the strong demand for WTE facilities. A subsidised electricity tariff has contributed to the competitiveness of transforming waste into power. The industry depends on government initiatives, incentives and policies including a preferential tax rate, government funds and grants, central government plans, preferential power tariffs, etc, thus any decrease in or elimination of them may have a material adverse effect on the perspective of the WTE industry and the current WTE participants. However, we see little possibility of the government adversely changing its green policies and are expecting to see continuous booming growth for the WTE industry.

Negative public perception of WTE projects

Negative public perception, or severe public opposition to WTE projects has mainly arisen from concerns over the environmental impact of WTE projects on people’s health, and this the main risk that we see for the WTE operators. Such perception has adversely impacted the development of the WTE industry, considering that a number of WTE projects have been put on hold and/or stopped due to public protests. In May 2014, local residents protested strongly against a proposed WTE project in Hangzhou City, Zhejiang province, which resulted in a violent conflict with the police. In response to the protest, the project was suspended pending public consultation. Nevertheless, this draws our attention to the fact that CEI has been able to acquire a previously suspended project and successfully pushing forward with the necessary related work. It is expecting the project to commence in 1H15. We believe the reasons CEI has been able to acquire this project are: 1) public concerns have gradually eased as WTE technology becomes more mature and as the government enforces tighter emissions standards, and 2) as a leading player in the

WTE industry, CEI is more well-known and trusted by the public as a WTE project operator. We think CEI stands out as the industry leader among the WTE operators as it is less exposed to the risks associated with project delays due to negative public perceptions. The other operators, such as Dynagreen, in our view, face higher risks than CEI.

Credibility of local government

The business success of a WTE company depends on the local government giving it accurate information when it enters into a WTE concession rights agreement, as misleading information could lead to a misunderstanding about the project return and result in a worse-than-expected financial performance for the project. The smooth operation of any WTE project also depends on the adequate supply of MSW and timely payment of waste treatment fees by the local government, failure to do so could distort the earnings of a project. We believe projects located in wealthier regions, such as those along the eastern coast of China, have less exposure to such risk, while those in the rural areas have substantially higher exposure to this risk.

Market competition

Given the increasing demand for sustainable waste treatment in China and the preferential government policies that lead to a generally 10-15% IRR for WTE projects, new entrants could be attracted to this business. This would result in intensified market competition and could weaken the existing players’ ability to acquire projects or even force them to adjust their bids to remain competitive in the bidding process. Also, international competitors with more advanced technology may appear, such as those from Japan or Europe. Existing players that have established good working relationships and brand awareness with certain local officials are likely to be able to sustain their positioning in their respective regions.


- 34 -

Project execution

It is crucial for a WTE company to correctly evaluate any potential project and carry out the project in accordance with its initial schedule in terms of both construction period and capex. Delays in operation and cost overruns can distort a project’s return. It is also important to control and monitor the operation process for any potential failure or any emissions/discharge that do not meet the national standards, failure of which may result in environmental pollution, operating suspension and fines.

In this context, we believe the companies with longer track records and more project operation experience are likely to better execute new projects.

China: recent public protests against WTE projects

Source: Xinhua Net, Southern Weekly

2007 2010 2011 2013 20142008 2009 2012

Date: May 2009Location: Shenzhen, Guangdong

Project: Baigewu WTE plantInvestor: China Energy Conservation Investment Company & Shanghai Environmental

Status: Stagnated Reason: Public questioned validity of

environmental assessment

Date: Aug 2009Location: Beijing

Project: Asuwei WTE PlantInvestor: N/AStatus: In stagnation

Reason: severe public opposition

Date: Oct 2009Location: Wujiang, Jiangsu

Project: Pingwang WTE plant with CNY 300 million being investedInvestor: Wujiang Oasis Environmental

Thermal Power Limited CompanyStatus: Stagnated


Date: Oct 2009Location: Guangzhou, Guangdong

Project: Panyu WTE plantInvestor: Guangri Group & Maywide Technology Co., LtdStatus: Stagnated

Reason: survey suggested 91.7% of residents opposed the plan

Date: Dec 2008Location: Shenzhen, Guangdong

Project: Nanshan WTE Phase IIInvestor: Shenzhen Environmental Energy Limited

Status: Stagnated Reason: severe public opposition

Date: March 2010Location: Qingdao, Shandong

Project: Huangdao District WTE plantInvestor: DynagreenStatus: Stagnated


Date: Sep 2007Location: Nanjing, Jiangsu

Project: Jiangbei WTE plantInvestor: Shanghai EnvironmentalStatus: Stagnated


Date: June 2012Location: Qingyuan, Guangdong

Project: Huadu District WTE plantInvestor: Qingyuan Zhongtian New Energy Limited

Status: Stagnated and pending site relocationReason: severe public opposition

In Dec 2013, CEI successfully entered into concession right agreement with

Wujiang Government to build, operate and own Wujiang WTE plant. Public participation has been carried out

smoothly , and commercial operation is expected to commence in1H 2015.

Date: June 2007Location: Liulitun, Beijing

Project: WTE plantInvestor: N/AStatus: Abandoned


Date: May 2014Location: Hangzhou, Zhejiang

Project: Jiufeng WTE plantInvestor: Hangzhou Urban Construction Investment Group & Hangzhou Road and Bridge Co., Ltd

Status: project in stagnationReason: v iolent clash between police and v illagers

Date: Sep 2014Location: Huizhou, Guangdong

Project: Boluo Longtandi WTE plantStatus: uncertainReason: on-street demonstration and

protest by over 10,000 residents


- 35 -

Appendix I: Example of a WTE project WTE project demonstration (2-year construction and 28-year operation BOT project)

(CNYm) Construction Operation

PL (IFRIC 12) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 …… Year 25 Year 26 Year 27 Year 28 Year 29 Year 30

Construction revenue

274 274 - - - - - - - - …… - - - - - -

Operation revenue

- - 51 60 69 70 75 80 80 80 …… 87 87 88 88 88 89

Waste treatment fee

- - 4 7 10 10 11 13 13 14 …… 20 21 21 21 22 22

Sale of electricity

- - 47 53 60 60 63 67 67 67 …… 67 67 67 67 67 67

Finance income

- - 12 12 11 11 11 10 10 9 …… 3 3 2 2 1 1

Total revenue

274 274 63 72 81 81 85 90 90 90 …… 90 90 90 90 90 90

Construction cost

(225) (225) - - - - - - - - …… - - - - - -

Operation cost

- - (23) (27) (31) (31) (34) (36) (36) (36) …… (39) (39) (39) (40) (40) (40)

COGS

(225) (225) (23) (27) (31) (31) (34) (36) (36) (36) …… (39) (39) (39) (40) (40) (40)

Gross profit

49 49 40 45 50 49 52 54 54 54 …… 51 51 50 50 50 50

Amortization

- - (8) (8) (8) (8) (8) (8) (8) (8) …… (8) (8) (8) (8) (8) (8)

Interest expense

- - (13) (12) (10) (9) (7) (6) (5) (3) …… - - - - - -

PBT

49 49 19 25 32 33 37 40 41 43 …… 43 43 43 43 42 42

Income tax

(12) (12) (5) (6) (8) (8) (9) (10) (10) (11) …… (11) (11) (11) (11) (11) (11)

Net income 37 37 14 19 24 25 27 30 31 32 …… 32 32 32 32 32 32

Operation data Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 …… Year 25 Year 26 Year 27 Year 28 Year 29 Year 30

Waste treatment amount - wet (kilo tonnes) - - 327 373 420 420 443 467 467 467 …… 467 467 467 467 467 467

Waste treatment fee received (CNYm) - - 26 30 34 34 35 37 37 37 …… 37 37 37 37 37 37

(capacity utilization) (%) - - 70% 80% 90% 90% 95% 100% 100% 100% …… 100% 100% 100% 100% 100% 100%

On-grid electricity generated (GWh) - - 72 82 92 92 97 102 102 102 …… 102 102 102 102 102 102

(Self-use rate) (%) - - 20% 20% 20% 20% 20% 20% 20% 20% …… 20% 20% 20% 20% 20% 20%

(Per unit wet waste on-grid generation) (KWh/ton)

220 220 220 220 220 220 220 220 …… 220 220 220 220 220 220

On-grid electricity sales (CNYm) - - 47 53 60 60 63 67 67 67 …… 67 67 67 67 67 67

Assumption

Construction period (Years) 2

Operation period (Years) 28

Unit CAPEX (CNY/ton) 450,000

Designed capacity (tpd) 1,000

Guaranteed waste amount (%) 70%

Moisture rate (%) 25%

Waste treatment fee (CNY/ton) 80

On-grid tariff (CNY/KWh) 0.65

Average Annual power generation (GWh) 128

Debt to capital (%) 55%

Finance cost (%) 5.5%

Payment period (Years) 10

Operating days per year (Days) 350

Tax rate (%) 25%

Under IFRIC12

Construction revenue margin (%) 18%

Operating revenue margin (%) 55%

Imputed interest rate (%) 3.0%

Equity IRR (%) 12.2%


- 36 -

BS (IFRIC 12) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 …… Year 25 Year 26 Year 27 Year 28 Year 29 Year 30

Debt schedule

……

Beginning balance

- 124 248 223 198 173 149 124 99 74 …… - - - - - -

- Borrowing

124 124

……

- Repayment

- - (25) (25) (25) (25) (25) (25) (25) (25) …… - - - - - -

Ending balance

124 248 223 198 173 149 124 99 74 50 …… - - - - - -

Financial assets

Beginning balance

- 192 384 374 363 350 338 324 310 296 …… 85 70 56 42 28 14

Addition

192 192

……

Recognized operation revenue

- - 4 7 10 10 11 13 13 14 …… 20 21 21 21 22 22

Finance income

- - 12 12 11 11 11 10 10 9 …… 3 3 2 2 1 1

Cash receipt

- - (26) (30) (34) (34) (35) (37) (37) (37) …… (37) (37) (37) (37) (37) (37)

Change to financial asset

192 192 (10) (11) (13) (13) (13) (14) (14) (14) …… (14) (14) (14) (14) (14) (14)

Ending balance

192 384 374 363 350 338 324 310 296 282 …… 70 56 42 28 14 0

(recognizable cash revenue portion)

62% 62% 62% 62% 62% 62% 62% 62% …… 62% 62% 62% 62% 62% 62%

Intangible assets

Beginning balance

- 105 216 208 201 193 185 178 170 162 …… 46 39 31 23 15 8

Addition

101 101

……

Capitalized borrowing cost

3 10

……

Amortization

- - (8) (8) (8) (8) (8) (8) (8) (8) …… (8) (8) (8) (8) (8) (8)

Ending balance 105 216 208 201 193 185 178 170 162 154 …… 39 31 23 15 8 (0)

CF (IFRIC 12) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 24 Year 25 Year 26 Year 27 Year 28 Year 29 Year 30

Cash receipt

- - 73 83 94 94 99 104 104 104 …… 104 104 104 104 104 104

Construction cost

(225) (225) - - - - - - - - …… - - - - - -

Debt financing

124 124 - - - - - - - - …… - - - - - -

Debt repayment

- - (25) (25) (25) (25) (25) (25) (25) (25) …… - - - - - -

Operating cost

- - (23) (27) (31) (31) (34) (36) (36) (36) …… (39) (39) (39) (40) (40) (40)

Tax expenses

(12) (12) (5) (6) (8) (8) (9) (10) (10) (11) …… (11) (11) (11) (11) (11) (11)

Interest expenses

- - (13) (12) (10) (9) (7) (6) (5) (3) …… - - - - - -

Net cash flow (114) (114) 7 13 19 20 24 27 28 29 …… 54 54 54 54 54 53

Source: Daiwa


- 37 -

Appendix II: 12th FYP targets for MSW treatment China: 12th FYP planned investment in MSW treatment

(CNYbn) New treatment

plant Plants under construction

Transfer facility

Upgrade or disable non-complying facility

Sorting facility

Food waste treatment facility

Monitoring and regulating Total

Anhui 2.13 1.79 1.55 0.53 0.50 0.24 0.06 6.80

Beijing 8.62 0.16 - 2.00 3.00 0.73 0.15 14.66

Chongqing 3.42 0.19 1.86 0.50 0.50 0.34 0.06 6.87

Fujian 4.07 1.10 1.31 1.22 1.00 0.51 0.15 9.36

Gansu 1.98 0.17 0.69 0.27 0.50 0.17 0.03 3.81

Guangdong 15.98 4.23 2.10 2.30 1.00 1.32 0.21 27.14

Guangxi 2.64 0.60 0.48 0.47 0.50 0.34 0.06 5.09

Guizhou 2.98 1.44 0.92 0.56 0.50 0.22 0.04 6.66

Hainan 0.84 - 0.28 0.08 0.50 0.13 0.04 1.87

Hebei 4.04 0.85 1.76 0.29 0.50 0.67 0.10 8.21

Heilongjiang 4.04 0.66 2.27 1.06 0.50 0.18 0.05 8.76

Henan 4.12 1.98 1.25 0.64 0.50 0.57 0.07 9.13

Hubei 4.88 1.67 1.30 0.69 0.50 0.36 0.05 9.45

Hunan 4.85 2.81 0.83 0.75 0.50 0.17 0.07 9.98

Inner Mongolia 3.04 0.48 1.31 0.28 0.50 0.47 0.05 6.13

Jiangsu 8.88 1.20 1.57 0.68 0.50 0.44 0.16 13.43

Jiangxi 2.90 1.90 0.66 0.77 0.50 0.13 0.04 6.90

Jilin 2.48 1.27 1.25 1.15 0.50 0.24 0.07 6.96

Liaoning 5.38 2.28 2.06 0.83 1.00 0.76 0.06 12.37

Ningxia 0.38 - 0.29 0.24 0.50 0.07 0.02 1.50

Qinghai 0.89 - 0.20 0.19 0.50 0.11 0.02 1.91

Shaanxi 4.44 0.86 1.92 0.58 0.50 0.18 0.04 8.52

Shandong 12.63 2.16 2.91 0.69 1.00 0.32 0.17 19.88

Shanghai 9.08 0.38 1.21 0.90 0.50 0.09 0.12 12.28

Shanxi 3.49 0.33 0.93 0.66 0.50 0.40 0.06 6.37

Sichuan 3.79 0.98 1.26 0.48 0.50 0.46 0.04 7.51

Tianjin 2.04 0.75 0.46 0.23 0.50 0.22 0.05 4.25

Tibet 0.63 0.11 0.10 - 0.50 0.01 0.03 1.38

Xinjiang 3.11 0.62 0.62 0.47 0.50 0.24 0.02 5.58

Yunnan 4.46 0.87 1.01 1.14 0.50 0.23 0.06 8.27

Zhejiang 5.84 2.62 0.50 0.45 1.00 0.58 0.25 11.24

Military 0.45 0.04 0.24 - 0.50 - - 1.23

Total 138.50 34.50 35.10 21.10 21.00 10.90 2.50 263.60



- 38 -

China: 12th FYP non-hazardous MSW treatment capacity target in cities and counties

2010 2015 Target

Treatment capacity Proportion Treatment capacity Proportion

(tpd) (%) (tpd) (%)

Landfill Incineration Others Landfill Incineration Others Landfill Incineration Others Landfill Incineration Others

Anhui 7,851 1,750 - 82% 18% 0% 19,286 5,650 - 77% 23% 0%

Beijing 12,080 2,200 2,400 72% 13% 14% 8,746 12,900 7,250 30% 45% 25%

Chongqing 8,809 1,200 - 88% 12% 0% 8,901 11,000 - 45% 55% 0%

Fujian 12,074 7,285 - 62% 38% 0% 12,263 16,495 1,400 41% 55% 4%

Gansu 3,793 - - 100% 0% 0% 6,649 1,800 1,200 69% 19% 12%

Guangdong 22,373 11,743 - 66% 34% 0% 33,043 41,493 - 44% 56% 0%

Guangxi 9,438 1,240 400 85% 11% 4% 9,944 7,270 500 56% 41% 3%

Guizhou 5,897 - - 100% 0% 0% 19,430 - - 100% 0% 0%

Hainan 1,589 225 - 88% 12% 0% 1,014 1,825 - 36% 64% 0%

Hebei 15,249 2,450 1,100 81% 13% 6% 18,729 8,640 3,920 60% 28% 12%

Heilongjiang 10,403 500 600 90% 4% 5% 22,507 3,200 2,190 81% 11% 8%

Henan 27,076 2,400 560 90% 8% 2% 38,690 7,000 560 84% 15% 1%

Hubei 13,159 1,000 400 90% 7% 3% 18,898 7,200 1,130 69% 27% 4%

Hunan 13,593 - - 100% 0% 0% 25,862 7,900 870 75% 23% 3%

Inner Mongolia 10,394 - 1,247 89% 0% 11% 14,835 4,400 1,247 72% 22% 6%

Jiangsu 24,168 15,192 - 61% 39% 0% 26,598 31,242 1,000 45% 53% 2%

Jiangxi 6,241 - - 100% 0% 0% 12,080 4,000 3,503 62% 20% 18%

Jilin 4,801 2,040 - 70% 30% 0% 13,961 6,340 500 67% 31% 2%

Liaoning 19,053 - 600 97% 0% 3% 32,106 6,340 4,341 75% 15% 10%

Ningxia 2,905 - - 100% 0% 0% 3,025 800 - 79% 21% 0%

Qinghai 1,441 - - 100% 0% 0% 2,079 - - 100% 0% 0%

Shaanxi 13,359 500 860 91% 3% 6% 18,916 7,200 1,640 68% 26% 6%

Shandong 31,835 8,580 1,302 76% 21% 3% 38,283 31,280 5,552 51% 42% 7%

Shanghai 5,750 2,575 2,220 55% 24% 21% 9,400 19,475 4,520 28% 58% 14%

Shanxi 9,595 2,800 - 77% 23% 0% 11,239 7,030 1,305 57% 36% 7%

Sichuan 16,649 2,740 1,300 80% 13% 6% 27,041 5,240 1,300 80% 16% 4%

Tianjin 6,400 1,800 - 78% 22% 0% 7,500 6,900 1,500 47% 43% 10%

Tibet - - - n.a. n.a. n.a. 796 - - 100% 0% 0%

Xinjiang 6,295 - - 100% 0% 0% 10,560 1,000 - 91% 9% 0%

Yunnan 7,706 2,870 1,510 64% 24% 12% 16,521 6,450 4,405 60% 24% 16%

Zhejiang 22,062 18,535 755 53% 45% 2% 22,614 37,085 755 38% 61% 1%

Military - - - n.a. n.a. n.a. 2,232 - - 100% 0% 0%

Total 352,038 89,625 15,254 77% 20% 3% 513,748 307,155 50,588 59% 35% 6%



- 39 -

Appendix III: WTE industry statistics China: number of WTE plants in cities

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Anhui 1 1 1 1 1 1 1 3 4 4

Beijing 3 2 2 2 1 1 1 2 2 3

Chongqing 1

1 1 1 1 1 1 1 2

Fujian 1 1 2 6 4 5 5 6 8 12

Gansu - - - - - - - - - -

Guangdong 7 7 14 15 15 16 17 16 14 18

Guangxi

2 2 2 2 3 2 3 2 2

Guizhou 1 1 1 - - - - - - -

Hainan

1 1 1 1 1 1 1 1 3

Hebei 2 1 2 2 2 2 1 4 4 4

Heilongjiang 4 2 4

2 2 2 2 2

Henan - 3 2 3 2 2 2 2 2 3

Hubei - - - - - - - 1 4 7

Hunan - - - - - - - - - 1

Inner Mongolia - - - - - - - - - -

Jiangsu 3 4 5 9 9 8 14 14 21 21

Jiangxi - - - - - - - - - -

Jilin

2 2 1 1 1 2 2 2 3

Liaoning 1 1 1 1 1 1 1 - - 1

Ningxia - - - - - - - - - -

Qinghai - - - - - - - - - -

Shaanxi - - 1 1 1 1 1 1 - -

Shandong 1 3 1 - 3 3 6 8 7 9

Shanghai 2 2 2 2 2 3 3 3 1 2

Shanxi 2 1 1 2 2 1 3 3 3 4

Sichuan 6 7 6 2 2 4 5 5 4 3

Tianjin - - 1 1 2 2 2 2 3 3

Tibet - - - - - - - - - -

Xinjiang 1 2 - - - - - - - -

Yunnan 1

1 - - - 2 3 3 5

Zhejiang 10 11 14 17 14 16 21 22 21 26

Total 47 54 67 69 66 74 93 104 109 138



- 40 -

China: WTE capacity in cities (tpd) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Anhui 20 600 600 600 600 600 1,050 1,750 2,550 2,550

Beijing 220 420 420 420 120 600 600 2,200 2,200 2,800

Chongqing 120 - 1,000 1,000 1,000 1,000 1,000 1,200 1,200 3,600

Fujian 440 410 1,020 1,980 3,050 4,950 3,850 5,550 6,700 9,550

Gansu - - - - - - - - - -

Guangdong 3,300 3,040 10,300 10,810 11,508 12,093 13,035 11,743 12,575 15,835

Guangxi 160 430 430 500 500 1,000 820 920 600 600

Guizhou 36 16 16 - - - - - - -

Hainan - 154 53 110 100 120 120 225 225 1,650

Hebei 460 450 1,250 1,200 1,200 1,200 400 2,450 2,589 2,850

Heilongjiang 590 210 510

500 500 500 500 500

Henan - 1,850 1,422 1,650 1,150 1,150 1,150 2,400 2,400 2,900

Hubei - - - - - - - 1,000 4,409 8,012

Hunan - - - - - - - - - 600

Inner Mongolia 7 18 18 - - - - - - -

Jiangsu 480 880 1,880 5,730 6,969 6,833 14,068 15,192 20,705 21,269

Jiangxi - - - - - - - - - -

Jilin

521 525 520 450 450 1,520 2,040 2,040 2,840

Liaoning 400 400 400 400 400 400 400 - - 1,537

Ningxia - - - - - - - - - -

Qinghai - - - - - - - - - -

Shaanxi - - 50 500 500 500 500 500 - -

Shandong 680 480 530 - 2,700 2,750 6,700 8,200 5,000 8,200

Shanghai 2,000 2,000 2,500 2,500 2,500 2,575 2,575 2,575 1,500 2,500

Shanxi 1,212 - - 1,041 - 600 2,100 2,600 2,600 3,620

Sichuan 875 875 1,050 300 200 800 2,000 2,340 1,800 611

Tianjin - - 1,200 1,200 1,800 1,800 1,800 1,800 3,300 3,300

Tibet - - - - - - - - - -

Xinjiang 5 8 5 - - - - - - -

Yunnan 38 38 71 - - - 1,300 2,870 2,960 4,960

Zhejiang 3,957 4,107 7,760 9,505 9,935 11,685 15,765 16,885 18,261 22,365

Total 15,000 16,907 33,010 39,966 44,682 51,606 71,253 84,940 94,114 122,649


China: WTE treatment volume in cities (m tonnes per annum) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Anhui 0.01 0.10 0.10 0.11 0.11 0.11 0.33 0.50 0.60 0.88

Beijing 0.08 0.07 0.07 0.10 0.01 0.16 0.69 0.89 0.94 0.95

Chongqing 0.04 - 0.26 0.43 0.54 0.36 0.42 0.37 0.63 0.95

Fujian 0.10 0.10 0.29 0.63 1.36 1.46 1.29 1.42 1.46 2.18

Gansu - - - - - - - - - -

Guangdong 1.26 0.94 1.75 2.70 3.90 4.06 4.11 3.66 3.26 4.95

Guangxi 0.00 0.12 0.11 0.18 0.19 0.26 0.13 0.11 0.10 0.08

Guizhou 0.01 0.01 0.01 - - - - - - -

Hainan - 0.00 0.01 0.04 0.05 0.03 0.04 0.05 0.06 0.62

Hebei 0.04 0.15 0.29 0.42 0.42 0.43 0.14 0.59 0.92 1.14

Heilongjiang 0.13 0.09 0.04 - - 0.09 0.16 0.17 0.09 0.09

Henan - 0.08 0.49 0.47 0.31 0.31 0.32 0.66 0.71 0.91

Hubei - - - - - - - 0.18 1.34 2.10

Hunan - - - - - - - - - 0.23

Inner Mongolia 0.00 0.00 0.00 - - - - - - -

Jiangsu 0.17 0.18 0.43 1.14 2.03 2.04 3.87 4.59 5.48 6.68

Jiangxi - - - - - - - - - -

Jilin - 0.19 0.16 0.15 0.16 0.16 0.35 0.50 0.45 0.56

Liaoning 0.15 0.15 0.15 0.15 0.15 0.15 0.15 - - 0.30

Ningxia - - - - - - - - - -

Qinghai - - - - - - - - - -

Shaanxi - - - 0.01 0.02 0.01 0.02 0.02 - -

Shandong 0.10 0.05 0.13 - 0.67 0.89 1.11 1.31 1.49 2.96

Shanghai 0.33 0.69 1.02 1.15 1.08 1.13 1.06 1.08 0.59 1.04

Shanxi - - - 0.46 0.18 0.20 0.33 0.52 0.54 1.05

Sichuan 0.24 0.25 0.30 0.06 0.12 0.26 0.72 0.81 0.71 0.17

Tianjin - - 0.29 0.40 0.41 0.49 0.51 0.58 0.69 0.82

Tibet - - - - - - - - - -

Xinjiang 0.01 0.00 - - - - - - - -

Yunnan 0.01 0.01 0.03 - - - 0.42 0.78 1.23 1.45

Zhejiang 1.01 1.29 1.98 2.80 2.66 3.11 4.05 4.38 4.68 5.74

Total 3.70 4.49 7.91 11.38 14.35 15.70 20.22 23.17 25.99 35.84



- 41 -

Appendix IV: HWT industry statistics China: centralised HWT in cities (2006)

Number of centralized treatment plants

Centralized treatment capacity (tpd)

Total Incineration Landfill Other

Anhui 2 20 20 - -

Beijing 5 320 307 - 13

Chongqing 4 20 20 - -

Fujian 7 131 53 78 -

Gansu 2 4 4 - -

Guangdong 41 2,241 394 420 1,427

Guangxi 5 43 43 - -

Guizhou 2 30 25 5 -

Hainan 2 7 7 - -

Hebei 6 33 28 5 -

Heilongjiang 5 29 16 13 -

Henan 1 2 2 - -

Hubei 6 74 56 18 -

Hunan 4 17 16 1 -

Inner Mongolia 8 30 30 - -

Jiangsu 38 667 578 89 -

Jiangxi 1 3 3 - -

Jilin 5 171 64 107 -

Liaoning 20 890 518 382 (10)

Ningxia 2 1 1 - -

Qinghai 1 3 3 - -

Shaanxi 2 30 25 5 -

Shandong 11 273 122 - 151

Shanghai 24 367 295 73 (1)

Shanxi 7 72 68 4 -

Sichuang 8 42 41 1 -

Tianjin 4 12,117 77 12,040 -

Xinjiang 3 54 44 10 -

Zhejiang 22 366 286 76 4

Total 248 18,052 3,144 13,314 1,594



- 42 -

China: industrial hazardous waste generation (2012) (kilo tonnes) Generated Utilized Treated Stock

Anhui 247 183 62 3

Beijing 134 45 89 -

Chongqing 490 372 118 0

Fujian 104 46 57 2

Gansu 291 130 114 101

Guangdong 1,302 670 628 4

Guangxi 788 555 229 76

Guizhou 339 139 4 196

Hainan 15 1 16 0

Hebei 492 270 219 3

Heilongjiang 213 42 170 1

Henan 501 423 78 4

Hubei 635 399 237 4

Hunan 2,675 2,077 417 214

Inner Mongolia 700 417 398 78

Jiangsu 2,086 1,100 976 28

Jiangxi 306 252 51 3

Jilin 712 670 42 0

Liaoning 732 495 305 4

Ningxia 56 37 8 12

Qinghai 4,043 613 1 3,475

Shaanxi 307 115 121 76

Shandong 8,203 7,611 661 63

Shanghai 550 303 246 1

Shanxi 185 133 51 2

Sichuang 1,104 631 466 9

Tianjin 115 40 75 -

Tibet - - - -

Xinjiang 4,442 1,024 94 3,325

Yunnan 2,080 974 531 765

Zhejiang 806 279 516 20

Total 34,652 20,046 6,982 8,469


China: hazardous waste industry matrix Centralized treatment facilities

(tpd) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Centralized treatment capacity 3,416 2,983 10,627 4,006 5,211 18,052 19,986 19,362 15,947 17,795 52,541 59,805

Incineration 1,694 2,180 8,624 2,261 3,290 3,144 8,663 13,909 11,443 13,147 n.a. n.a.

Landfilling 1,722 803 2,003 995 1,167 13,314 1,692 1,701 2,537 3,768 n.a. n.a.

Non-incineration - - - 750 754 1,594 9,631 3,752 1,967 880 n.a. n.a.

Number of centralized treatment facility 92 152 154 177 189 248 322 518 558 546 644 722

Medical waste treatment facility n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 260 236

Centralized treatment

(kilo tonnes) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Utilized 73 176 217 178 214 337 910 1,229 1,551 1,501 2,500 3,752

Treated 136 199 421 416 522 886 1,143 1,300 1,975 1,812 2,600 3,407

Industrial HW 136 199 421 416 522 886 1,143 1,300 1,975 1,812 1,934 2,232

Medical waste n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 498 503

Others n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 168 672

Landfill 37 46 90 142 199 353 290 166 338 421 1,215 1,105

Incineration 99 153 331 271 317 508 782 989 1,556 1,334 1,336 1,291

Others - 0 0 4 7 25 71 145 81 57 49 1,011

Annual operating expense (CNYm) 212 159 314 469 715 1,102 1,720 3,250 3,210 3,890 4,820 5,390

Reported by companies

(kilo tonnes) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Industrial hazardous waste generated 9,520 10,010 11,700 9,950 11,620 10,840 10,790 13,570 14,299 15,868 34,312 34,652

Utilized 4,420 3,920 4,270 4,030 4,960 5,660 6,500 8,190 8,310 9,770 17,731 20,046

Treated 2,290 2,422 3,754 2,752 3,390 2,890 3,460 3,890 4,280 5,130 9,165 6,982

Stock 3,071 3,828 4,230 3,433 3,373 2,670 1,540 1,960 2,190 1,660 8,237 8,469


Note; industrial hazardous waste generation includes only those reported by companies with annual generation > 10kg before 2011; in and after 2011, it includes those reported by companies with annual generation >1kg


- 43 -

China: industrial hazardous waste centralised treatment facilities (2007 Census)


China: medical waste centralized treatment facilities, 2007 Census


> 40

15 - 39

10 - 14

1 - 9

0

Shanghai

13

Guangdong

18

Hainan

1

Hubei

10

Hunan

6

Jiangxi

1 Fujian

1

Heilongjiang

1

Inner Mongolia

Henan

Shandong

9

Anhui

2

Guangxi

1

Guizhou

Beijing

1Tianjin

4

Jilin

2

Gansu

1

Qinghai

Xinjiang

Tibet

Ningxia

Zhejiang

14

Yunnan

1

Liaoning

19

Shanxi

Sichuan

3

Chongqing

Hebei

6

Shaanxi

2

Jiangsu

43

> 15

10 - 15

5 - 9

1 - 9

0

Shanghai

11

Guangdong

18

Hainan

2

Hubei

3

Hunan

7

Jiangxi

5 Fujian

6

Heilongjiang

8

Inner Mongolia

10

Henan

8

Shandong

16

Anhui

4

Guangxi

5

Guizhou

3

Beijing

4Tianjin

Jilin

3

Gansu

1

Qinghai

2

Xinjiang

7

Tibet

Ningxia

2

Zhejiang

10

Yunnan

2

Liaoning

9

Shanxi

12

Sichuan

13

Chongqing

3

Hebei

9

Shaanxi

6

Jiangsu

5


- 44 -

Appendix V: categorising hazardous waste China: list of hazardous waste Hazardous waste type Industry

HW01 Medical waste Medical industry

HW02 Pharmaceutical waste Chemical manufacturing

HW03 Drugs Not specified

HW04 Pesticide waste Pesticide manufacturing

HW05 Wood preservatives Specialized chemical manufacturing, etc.

HW06 Organic solvent Chemical materials manufacturing

HW07 Cyanide Metal surface treatment

HW08 Mineral oil Crude oil exploration, petroleum refining, dye and coating manufacturing, specialized chemical product manufacturing

HW09 Oil/water mixture & Hydrocarbon/water mixture Not specified

HW10 Polychlorinated biphenyls (PCBS) Not specified

HW11 Distillation residue Petroleum refining, coking, chemical materials manufacturing, non-ferrous metal smelting, etc.

HW12 Dye and coating materials Paper manufacturing, dye and coating manufacturing

HW13 Organic resin Chemical materials manufacturing

HW14 New chemical waste Not specified

HW15 Explosive waste Explosive and fireworks manufacturing

HW16 Photosensitive material waste Chemical manufacturing, printing, electronic manufacturing, film production, photography industry

HW17 Surface processing materials Metal surface treatment

HW18 Slag from incineration Environmental engineering

HW19 Metal carbonyl-containing compounds Not specified

HW20 Beryllium-containing waste Chemical materials manufacturing

HW21 Chromium-containing waste Printing, fur tanning, chemical materials manufacturing, metal surface treatment, electric equipment manufacturing, etc.

HW22 Copper-containing waste Printing, non-ferrous metal mining, glass making, etc.

HW23 Zinc-containing waste Battery making, metal surface treatment, etc.

HW24 Arsenic-containing waste Non-ferrous metal mining

HW25 Selenium-containing waste Chemical materials manufacturing

HW26 Cadmium-containing waste Battery making

HW27 Antimonial-containing waste Chemical materials manufacturing

HW28 Tellurium-containing waste Chemical materials manufacturing

HW29 Mercury-containing waste Chemical materials manufacturing

HW30 Thallium-containing waste Chemical materials manufacturing

HW31 Lead-containing waste Glass manufacturing, printing, steelmaking, battery manufacturing, etc.

HW32 Inorganic fluoride waste Not specified

HW33 Inorganic cyanide waste Precious metals mining and dressing, metal surface treatment, etc.

HW34 Wasted acid Petroleum refining, chemical materials manufacturing, etc.

HW35 Wasted alkali Petroleum refining, chemical materials manufacturing, paper manufacturing, etc.

HW36 Wasted asbestos Chemical materials manufacturing, car manufacturing, cement making, etc.

HW37 Organic phosphorus compounds Chemical materials manufacturing

HW38 Organic cyanogen compounds Chemical materials manufacturing

HW39 Phenol-containing waste Coking, chemical materials manufacturing

HW40 Ether-containing waste Chemical materials manufacturing

HW41 Halogenated organic solvent Chemical materials manufacturing, electric equipment manufacturing

HW42 Organic solvent Chemical materials manufacturing, electric equipment manufacturing, textile and leather tanning process

HW43 Chlorobenzene and furan-containing waste Not specified

HW44 Chlorobenzene and dioxins-containing waste Not specified

HW45 Organic halide-containing waste Chemical materials manufacturing

HW46 Nickel-containing waste Battery making, chemical materials manufacturing

HW47 Barium-containing waste Metal surface treatment and chemical materials manufacturing

HW48 Non-ferrous metal smelting waste Non-ferrous metal smelting and precious metal smelting

HW49 Other waste Not specified



■ What's new

CTE has proposed spending c.CNY800m on acquiring a hazardous waste treatment (HWT) asset in Nansha, Guangzhou. Given this, together with the CNY800m acquisition of an industrial WWT and sludge treatment facility in 2014, we now forecast a net profit CAGR of 52% (previously 47%) (or a 40% EPS CAGR, previously 35%) in 2013-16E. ■ What's the impact

Entering HWT market. CTE recently acquired industrial WWT, solid waste treatment, sludge and potentially a HWT facility in Guangdong. Notably, its intended acquisition target Guangzhou Lvyou HWT plant can allow CTE to enter a less-penetrated HWT market, and we forecast its HWT business to account for 19% of the 2015 gross profit. We raise our 2015-16E EPS by 11-14% to reflect the acquisitions.

Strong project pipeline. Based on CTE’s recent acquisition and green-field project announcements, we expect CTE’s consolidated WWT capacity to rise by 180% to 880ktpd in 2016 (vs. 315ktpd for 2013), with a 10-fold increase in its sludge treatment capacity to 1.3mtpa. By 1H15, CTE should also have a 450ktpa industrial solid-waste treatment facility being commissioned in Longmen County. Public placement unlikely. We forecast CTE’s net debt-to-equity ratio to climb to 114% in 2014 post acquisitions, exceeding its comfortable level of 100%. Based on the previous Qingyuan Lvyou deal, we expect CTE to place new shares with Guangzhou Lvyou’s former owner Mr. Gu as part of the consideration to lower its debt-financing needs. ■ What we recommend

We reaffirm our Buy (1) rating, and raise our DCF-based 6-month target price to HKD10.50 (from HKD9.60), after factoring in the Guangzhou Lvyou HWT facility, and the industrial solid waste treatment facility in Longmen. Our new target price implies a PEG of 0.6x on our 2013-16E EPS, which looks attractive compared to peers’ 0.6-1.0x on our forecasts. The main risk to our call would be greater-than-expected competition.

■ How we differ

Our 2015-16E EPS are 20-28% above the consensus as we fully factor in the recent acquisitions.

Utilities / China 1363 HK

14 November 2014

CT Environmental Group

Moving into HWT arena a potentially lucrative move

Acquisitions of hazardous waste, sludge and wastewater

treatment facilities should drive 3-year net profit CAGR of 52%

Pipeline of 455ktpd of new industrial WWT and 605ktpa of

sludge treatment would double capacity over next 3 years

CTE is driving consolidation of sludge, hazardous waste and

industrial wastewater treatment industry; reaffirm Buy (1)


Source: FactSet, Daiwa forecasts

Utilities / China

CT Environmental Group1363 HK

Target (HKD): 9.60 g 10.50

Upside: 34.4%

12 Nov price (HKD): 7.81

Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5

Forecast revisions (%)Year to 31 Dec 14E 15E 16E

Revenue change - 22.3 20.8

Net profit change - 13.7 11.2

Core EPS (FD) change - 13.7 11.2

50

124

198

271

345

2

4

5

7

9

Nov-13 Feb-14 May-14 Aug-14 Nov-14

Share price performance

CT Env Grp (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 2.13-8.27

Market cap (USDbn) 1.42

3m avg daily turnover (USDm) 4.64

Shares outstanding (m) 1,412

Major shareholder Mr. Tsui Cham To (61.0%)

Financial summary (HKD)Year to 31 Dec 14E 15E 16E

Revenue (m) 1,022 1,653 2,156

Operating profit (m) 552 878 1,125

Net profit (m) 395 600 798

Core EPS (fully-diluted) 0.280 0.416 0.553

EPS change (%) 40.2 48.7 33.1

Daiwa vs Cons. EPS (%) 6.8 19.5 28.1

PER (x) 27.9 18.8 14.1

Dividend yield (%) 0.7 1.1 1.4

DPS 0.056 0.083 0.111

PBR (x) 6.2 4.9 3.8

EV/EBITDA (x) 23.6 14.9 11.5

ROE (%) 27.3 29.9 31.1

Dennis Ip, CFA(852) 2848 4068

[email protected]

Cindy Li(852) 2773 8535

[email protected]



- 46 -

Growth outlook CTE: WWT, sludge treatment, industrial and hazardous waste treatment capacity and company net profit growth

We now forecast a robust net profit CAGR of 52% in 2013-16 (previously 47%). Our new forecast is driven by the recently announced proposed acquisition of the 260ktpa Guangzhou Lvyou HWT plant in Nansha, and we also incorporate a 450ktpa greenfield industrial solid waste treatment plant in Longmen. We expect the company’s consolidated WWT capacity to increase at a 44% CAGR over the period, and a 10-fold increase in its sludge treatment capacity, from 138ktpa at the end of 2013 to 1.3mtpa (same period), on the back of its recently acquired 555ktpa sludge treatment capacity in Qingyuan, and 500ktpa of green-field sludge treatment capacity in Longmen.

Source: Company, Daiwa forecasts

Valuation CTE and China peers: PER comparison (2015E)

The stock is trading at 19x our revised 2015 EPS forecast, which is between the PERs of peers CEI (21x) and Dynagreen (18x), on our forecasts. We believe CTE merits a rerating, as we forecast it to generate a superior ROE of 30% for 2015 (peers: 10-15%). This is because most of CTE’s earnings are cash-based given that most of its industrial WWT projects are operated under a build-own-operate (BOO) model (other municipal WWT projects are operated under a BOT model, where non-cash-based construction revenue is recognised).

Source: Bloomberg forecasts for BEW and CEI, Daiwa forecasts for CTE Note: * denotes that we have striped out non-cash earnings from its BOT construction revenue in our 2015E PER calculation; share prices are as at 12 November 2014

Earnings revisions CTE: Bloomberg-consensus EPS forecast revisions (2014-15E)

Bloomberg-consensus 2014-15 EPS forecasts for CTE have risen by 17-22% since the company was listed on 25 September 2013. We believe the consensus forecasts have not yet factored in CTE’s recent acquisitions (exceeding CNY1,600m), namely the 60ktpd Shunde industrial WWT plant, the 70ktpd Zhongshan industrial WWT plant Phases 1 and 2, the 555ktpa sludge treatment facility in Qingyuan, the 260ktpa dangerous waste treatment facility in Nansha, and the stake increase from 49% to 95% in its 250ktpd Yinglong industrial WWT plant Phases 1 and 2.

Source: Bloomberg


Growth outlook

Valuation

Earnings revisions

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

300

600

900

1,200

1,500

2010 2011 2012 2013 2014E 2015E 2016E

Total wastewater treatment capacity, ktpd (LHS)Total sludge treatment capacity, ktpa (LHS)Total industrial and dangerous waste treatment capacity, ktpa (LHS)YoY net profit growth (RHS)

18.8x 19.5x 21.2x

30.3x

18.4x

32.4x

x

5x

10x

15x

20x

25x

30x

35x

CT

Environm

ental

CT

Environm

ental (*)

China E

verbrightInternational

China E

verbrightInternational (*)

Dynagreen

Environm

ental

Dynagreen

Environm

ental (*)

0.20

0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

0.38

Nov

-13

Dec

-13

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

(HKD)

2014E EPS 2015E EPS

Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5


- 47 -

Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Year-end WWT capacity (ktpd) n.a. 215 215 265 315 555 850 950

WWT plant utilization rate (%) n.a. 57 95 81 87 78 69 92

WWT services tariff (CNY/tonne) n.a. 4.1 3.8 3.6 3.4 3.2 3.7 3.6

Sludge capacity (tonne/day) n.a. n.a. n.a. n.a. 400 1,898 3,268 3,556

Total sludge treatment fee and

resales ASP (CNY/tonne)n.a. n.a. n.a. n.a. 230 700 700 700

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Wastewater treatment under BOT n.a. 153 130 40 60 182 271 198

Wastewater treatment under BOO n.a. 172 256 243 267 485 628 912

Other Revenue n.a. 37 76 101 156 355 754 1,046

Total Revenue n.a. 361 462 384 483 1,022 1,653 2,156

Other income n.a. 15 4 0 20 0 0 0

COGS n.a. (174) (195) (131) (179) (398) (661) (884)

SG&A n.a. (31) (40) (22) (42) (72) (114) (147)

Other op.expenses n.a. (2) (1) (3) (1) 0 0 0

Operating profit n.a. 169 230 227 282 552 878 1,125

Net-interest inc./(exp.) n.a. (18) (26) (37) (32) (80) (125) (123)

Assoc/forex/extraord./others n.a. 0 0 23 23 10 0 0

Pre-tax profit n.a. 151 204 213 272 482 753 1,003

Tax n.a. (25) (38) (36) (49) (86) (135) (180)

Min. int./pref. div./others n.a. (5) (1) (0) (0) (0) (19) (25)

Net profit (reported) n.a. 121 165 177 223 395 600 798

Net profit (adjusted) n.a. 121 165 177 223 395 600 798

EPS (reported)(HKD) n.a. 0.119 0.161 0.174 0.199 0.280 0.416 0.553

EPS (adjusted)(HKD) n.a. 0.119 0.161 0.174 0.199 0.280 0.416 0.553

EPS (adjusted fully-diluted)(HKD) n.a. 0.119 0.161 0.174 0.199 0.280 0.416 0.553

DPS (HKD) n.a. 0.000 0.000 0.000 0.037 0.056 0.083 0.111

EBIT n.a. 169 230 227 282 552 878 1,125

EBITDA n.a. 169 230 227 282 552 878 1,125

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax n.a. 151 204 213 272 482 753 1,003

Depreciation and amortisation n.a. 9 13 17 22 40 205 222

Tax paid n.a. (25) (38) (36) (49) (86) (135) (180)

Change in working capital n.a. (271) 256 (148) 19 (108) (189) (181)

Other operational CF items n.a. 146 (312) 233 (142) (10) 0 0

Cash flow from operations n.a. 10 123 279 122 317 633 863

Capex n.a. (14) (111) (61) (221) (548) (523) (604)

Net (acquisitions)/disposals n.a. (0) 0 0 (41) (1,914) 0 0

Other investing CF items n.a. (87) 103 (330) 55 0 0 0

Cash flow from investing n.a. (101) (8) (392) (207) (2,462) (523) (604)

Change in debt n.a. 99 658 328 56 1,684 9 0

Net share issues/(repurchases) n.a. 0 0 0 478 345 0 0

Dividends paid n.a. 0 0 0 0 (79) (120) (160)

Other financing CF items n.a. (57) (737) (256) (69) 0 0 0

Cash flow from financing n.a. 43 (79) 71 464 1,950 (111) (160)

Forex effect/others n.a. 0 0 0 0 0 0 0

Change in cash n.a. (48) 35 (41) 379 (195) 0 99

Free cash flow n.a. (4) 11 217 (99) (231) 111 259

Financial summary


- 48 -

Balance sheet (HKDm)

Key ratios (%)


Company profile

CT Environmental (CTE) provides integrated wastewater treatment services for industrial and municipal sewage. Its consolidated treatment capacity totalled 315ktpd in 2013. Unlike with its peer, Beijing Enterprises Water, CTE mainly pursues a build-operate-own (BOO) model, and its facilities currently serve the textile, dyeing and paper industries.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Cash & short-term investment n.a. 16 52 10 446 251 251 350

Inventory n.a. 0 1 1 1 2 3 4

Accounts receivable n.a. 390 148 264 281 438 782 1,119

Other current assets n.a. 13 21 21 22 22 22 22

Total current assets n.a. 419 222 296 750 712 1,058 1,495

Fixed assets n.a. 117 223 265 512 2,862 3,109 3,496

Goodwill & intangibles n.a. 9 9 9 50 47 44 41

Other non-current assets n.a. 170 430 571 580 784 812 792

Total assets n.a. 715 884 1,141 1,892 4,405 5,022 5,824

Short-term debt n.a. 18 68 82 52 82 82 82

Accounts payable n.a. 119 134 101 138 187 343 500

Other current liabilities n.a. 11 10 13 18 18 18 18

Total current liabilities n.a. 147 212 196 208 287 443 601

Long-term debt n.a. 302 417 517 501 2,185 2,194 2,194

Other non-current liabilities n.a. 12 32 36 55 164 118 99

Total liabilities n.a. 460 660 750 763 2,636 2,755 2,893

Share capital n.a. 0 0 0 138 144 144 144

Reserves/R.E./others n.a. 247 214 390 987 1,622 2,102 2,740

Shareholders' equity n.a. 247 215 390 1,126 1,766 2,246 2,884

Minority interests n.a. 8 9 1 3 3 22 46

Total equity & liabilities n.a. 715 884 1,141 1,892 4,405 5,022 5,824

EV n.a. 11,338 11,470 11,618 11,125 13,035 13,062 12,988

Net debt/(cash) n.a. 303 432 589 107 2,016 2,025 1,926

BVPS (HKD) n.a. 0.243 0.211 0.383 0.797 1.251 1.590 2.043

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) n.a. n.a. 27.9 (17.0) 25.9 111.5 61.8 30.4

EBITDA (YoY) n.a. n.a. 36.2 (1.2) 23.9 95.8 59.1 28.2

Operating profit (YoY) n.a. n.a. 36.2 (1.2) 23.9 95.8 59.1 28.2

Net profit (YoY) n.a. n.a. 36.1 7.7 25.6 77.4 51.8 33.1

Core EPS (fully-diluted) (YoY) n.a. n.a. 36.1 7.7 14.7 40.2 48.7 33.1

Gross-profit margin n.a. 51.7 57.7 65.8 63.0 61.0 60.0 59.0

EBITDA margin n.a. 46.7 49.8 59.2 58.3 54.0 53.1 52.2

Operating-profit margin n.a. 46.7 49.8 59.2 58.3 54.0 53.1 52.2

Net profit margin n.a. 33.4 35.6 46.2 46.1 38.7 36.3 37.0

ROAE n.a. 97.7 71.2 58.6 29.4 27.3 29.9 31.1

ROAA n.a. 33.8 20.6 17.5 14.7 12.5 12.7 14.7

ROCE n.a. 58.8 35.9 26.7 21.1 19.3 20.5 23.1

ROIC n.a. 25.3 30.7 23.1 20.8 18.0 17.8 20.2

Net debt to equity n.a. 122.4 201.6 150.8 9.5 114.1 90.2 66.8

Effective tax rate n.a. 16.5 18.9 16.9 18.1 17.9 17.9 17.9

Accounts receivable (days) n.a. 196.8 212.5 196.0 205.7 128.4 134.7 160.9

Current ratio (x) n.a. 2.8 1.0 1.5 3.6 2.5 2.4 2.5

Net interest cover (x) n.a. 9.6 8.7 6.1 8.7 6.9 7.0 9.2

Net dividend payout n.a. 0.0 0.0 0.0 18.6 20.0 20.0 20.0

Free cash flow yield n.a. n.a. 0.1 2.0 n.a. n.a. 1.0 2.3

Financial summary continued …


- 49 -

Moving into the HWT business

CTE is becoming a major consolidator in China’s industrial WWT, sludge treatment and HWT industries, a highly lucrative sub-segment in China’s water and solid waste sector, for which we see multi-year earnings growth.

2014: CNY1.6bn in acquisitions should enlarge its operating scale and business scope

In 2014 YTD, CTE has spent over CNY1.6bn on acquisitions to enlarge its consolidated WWT capacity from 315ktpd as at the end of 2013 to 505ktpd upon completion of all acquisitions, and its consolidated sludge treatment capacity from 138ktpa to c.700ktpa upon completion of the same. In October 2014, CTE also announced its intention to acquire 260ktpa in HWT capacity in Nansha. In 2014, CTE has added 820ktpa of industrial solid waste treatment capacity. We believe these acquisitions will be value-accretive for CTE, as they were acquired at valuations that we consider attractive, with 2 of them (the Qingyuan Lvyou sludge treatment facility and the Guangzhou Lvyou industrial waste and HWT facilities) bought at

more than a 40% discount to CTE’s 2014E PER of 28.2x, based on the guaranteed profit clause. For the Yinglong project, although the acquisition valuation appears fair, the acquisition includes the project’s phase 2 expansion, which is due to be commissioned in 2015, with no further capex to be incurred. As a result, the acquisition valuation for the Yinglong project does not include any earnings from phase 2, which we think inflated the target PER, making the deal seem less attractive. In 2014 YTD, CTE has expanded from having an industrial WWT with sludge treatment to form an integrated WWT business model. With the acquisition of Guangzhou Lvyou and the start of operations at the Longmen solid waste treatment plant, the company will be entering the industrial and hazardous solid waste treatment market as an integrated environmentally focused company, in our view. Upon the completion of its business expansion, we estimate CTE’s gross profit proportion to be 60:20:20 from its industrial WWT, sludge treatment, and industrial & hazardous solid waste treatment businesses for 2015-16. CTE: capacity expansion of its industrial WWT and sludge treatment facilities post its 3 major M&A transactions


CTE: major acquisitions in 2014

Date of confirmation* Location Asset Capacity

Stake acquired

Total consideration

(CNYm)

Consideration: cash

proportion (CNYm)

Target PER of project

CTE's PER at time

announced

Discount to CTE’s

PER

2-May-2014 Qingyuan, Guangdong Sludge treatment 555ktpa

100% 425 125 6.7x (2014E

guaranteed profit) 15.4x 56%

Industrial solid-waste treatment 820ktpa

19-May-2014 Yinglong plant - Zengcheng, Guangdong

Industrial WWT plant for textile industry 100ktpd

(Phase 1 in operation) 49% 294 196

15.3x (2013)

Note 1 14.9x -2%

23-Sep-2014 Shunde, Guangdong Industrial WWT plant for textile industry 60ktpd

(with upgrade in future) 100% 50 50 n.a. n.a. n.a.

23-Sep-2014 Zhongshan, Guangdong Industrial WWT plant for textile industry 40ktpd + 30ktpd 100% 70 70 n.a. n.a. n.a.

21-Oct-2014 (MOU)

Nansha, Guangzhou Industrial waste and hazardous waste 260ktpa over 80%

800 600 10.0x (2015E

guaranteed profit) 19.1x 48%

Total 1,639 1,041

Source: Company, Daiwa *Confirmation date indicates the date when the deal is closed. Note: Yinglong phase 2 (150ktpd) will be commissioned in 2015, and hence the earnings base could increase by 150% in the long term

0%

100%

200%

300%

400%

500%

0

200

400

600

800

Industrial WWT (ktpd) -LHS

Sludge treatment (ktpa) -LHS

Hazardous wastetreatment (ktpa) - RHS

Consolidated capacity before M&A

Consolidated capacity addition from M&A

Consolidated yoy capacity growth, YoY


- 50 -

Deal No.1: Qingyuan sludge and industrial solid-waste treatment plant

On 2 May 2014, CTE confirmed that it had acquired a sludge and industrial solid waste treatment facility in

Qingyuan (清遠綠由), in Guangdong Province, for a consideration of CNY125m in cash. The total consideration was CNY425m, given the targeted company had CNY300m in debt. As the seller offered a guaranteed net profit, at HKD80m for 2014, HKD100m for 2015 and HKD120m for 2016, the acquisition price amounts to about a 2014E PER of 6.7x. Thus, this acquisition looks value-accretive for CTE given that the stock is trading currently at a much higher 19x PER for 2014, based on our EPS forecast. CTE currently has about c.700ktpa in sludge treatment capacity, and we forecast its sludge treatment business to account for about 17% of CTE’s annual gross profit for 2016 (13% for 2015). The Qingyan plant should be one of the company’s key assets, helping CTE execute its strategy of vertically integrating its WWT business with its sludge treatment services. CTE: integrated industrial WWT and sludge treatment business model

Source: Company

The Qingyuan facility is engaged mainly in the treatment of municipal sludge, industrial sludge, and industrial solid waste, such as scrap ceramics, ceramic polished slag, metal smelting slag, fly ash and construction waste. Management expects the project to ultimately produce 165m pieces of green bricks per year. The ASP on such bricks is currently around CNY0.45/brick, which indicates HKD95m in annual revenue assuming full utilisation. The facility also has a sludge treatment capacity of 555ktpa and an industrial solid waste treatment capacity of 820ktpa. According to management, the sludge treatment tariff will range from CNY300-400/tonne, implying HKD240-295m in annual revenue assuming full utilisation. Assuming a gross-profit margin of 60%, the acquired assets could account for a maximum of HKD240m in terms of gross profit per year from sludge treatment and green bricks production alone, on our estimates.

The Qingyuan plant also has a facility to produce nutritional soil (fertilizer), bio-fuel and solid waste landfill. CTE: green bricks

Source: Company

The acquired Qingyuan facility only earned a net profit of CNY12m (or HKD15m) in 2013, due to the very low sludge treatment utilisation rate, at about 20%, without the sale of green bricks. According to CTE’s management, the Qingyuan facility’s seller has pledged to improve utilisation to achieve the guaranteed net profit of HKD80m in 2014, HKD100m in 2015 and HKD120m in 2016, with any shortfall to be made up by the Qingyuan facility owner, to a limit of CNY100m (or HKD126m). To ensure smooth daily operations, CTE has agreed to employment contracts of at least 3 years with the current staff of the Qingyuan facility. The seller has also guaranteed that any future M&A carried out by the facility would be executed at a more than 20% ROI, with any return shortfall compensated in cash at 10x the shortfall amount. According to management, the CNY400m debt currently incurred on Qingyan’s books carries a 7-12% annual interest rate. Therefore, CTE is in the process of refinancing part of the debt (60% of its total debt) at a lower interest rate. For a detailed note on our site visit to Qingyuan Lvyou, please see our report – CT Environmental: Top pick in China utilities space, published on 13 June 2014.

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/CT_Environmental_Group_140613.pdf#page=1

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/CT_Environmental_Group_140613.pdf#page=1


- 51 -

Deal No.2: stake increase in Yinglong WWT plant (BOO)

On 19 May 2014, CTE announced it had acquired an additional 49% stake in the Yinglong Industrial WWT plant, which effectively increased its shareholding from 46% to 95%. The total consideration for this was CNY294m (CNY196m cash portion and CNY98m debt portion), equivalent to a 15.3x 2013 PER (CTE’s end-2013 PER: 22x), and a 1.7x 2013 PBR (CTE’s 2013 PBR: 5.9x). The Yinglong Industrial WWT plant (current capacity of 100ktpd) mainly serves textile customers, with a treatment tariff of CNY4.1/tonne. CTE acquired a 46% stake in 2012 from a state-owned enterprise, and after assuming operations, increased the plant’s utilisation rate from 73% in 2012 to 95% in 2013. The Yinglong Phase 2 project (planned capacity of 150ktpd) is under construction currently and management expects it to be commissioned by 1H15. The phase 2 expansion capex was secured with CNY200m of project financing. By 1H15, Yinglong’s total capacity should reach 250ktpd, representing about 30% of CTE’s total capacity of 850ktpd (likely by then on our estimates). CTE: Yinglong WWT plant

Source: Company

Deals No.3 and 4: Shunde and Zhongshan Industrial WWT plants (TOT)

On 21 March 2014, CTE announced its intention to acquire a 60ktpd industrial WWT facility in an industrial base in Junan County, Shunde District, for a consideration of CNY115m, which on our estimates equates to a 10.5x PER for 2013. On 23 September 2014, CTE revised the deal structure for Shunde WWT to a TOT model instead of a BOO model, given that CTE believes it will take 2 years (similar to the Yinglong WWT) for the plant’s utilisation and

profitability to improve, and for the plant to be upgraded to collect a higher WWT tariff. To minimise the risk of the project posting a low return (Shunde: 53% EBIT, CTE: 58.5% in 2013) during the initial period, CTE will invest only CNY50m for a plant upgrade, compared with an estimated acquisition consideration of CNY115m (net book value). Despite incurring a lower acquisition cost consideration, CTE would still be entitled to 100% of the current unit dollar net profit of the WWT at CNY0.8/tonne (WWT fee: CNY1.5/tonne), and to 70% of any incremental tariff after the completion of the upgrade (which we estimate at CNY0.7/tonne). The former owner Ganghui Environmental (not listed) would be responsible for all the operating costs of the Shunde WWT plant. According to management, the Shunde project serves mainly low-end textile industrial WWT, with a chemical oxygen demand (COD) of c.600mg/litre, compared with CTE’s Xinzhou project, which treats textile industrial WWT with a COD of c.3,000mg/litre. We are confident that CTE can improve the utilisation of the Shunde project, which is currently c.70%, by leveraging its expertise in industrial WWT and wide clientele in Guangdong Province.

CTE announced on 23 September to acquire the 30kptd+40ktpd Zhongshan project, a 20-year TOT+BOT concession agreement, in which CTE will invest CNY70m on the Phase I upgrade and Phase II construction, should also be value-accretive for CTE. We expect a construction period of less than 12 months for the Zhongshan phase II for the (BOT) WWT capacity. The Zhongshan project is running at a WWT fee of CNY0.5/tonne or a WWT+sludge treatment fee of CNY1.5/tonne. After completing the upgrade, CTE would be entitled to 70% of any incremental tariff (which we estimate at CNY0.7/tonne). CTE would earn a gross margin of c.20% on its CNY120m capex for the Shunde upgrade and Phase 2 construction costs for the Zhongshan expansion. In the future, we expect CTE to only take on TOT+BOT projects in special circumstances, for example, for projects with initially low profitability.


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Deal No.5: Guangzhou hazardous and industrial waste treatment plant (Nansha)

On 21 October 2014, CTE announced its intention to acquire at least an 80% stake of Guangzhou Lvyou

(广州綠由), an industrial waste (including hazardous waste) treatment facility in the Nansha district of Guangzhou, Guangdong Province, for a consideration of no more than CNY800m. Given that the seller has offered a guaranteed profit of CNY100m (100% equity) in 2015 and CNY110m (100% equity) in 2016, the acquisition represents a 10x 2015E PER (CTE’s PER on the deal announcement date: 19x). Management expects the acquisition to be completed by the end of 2014. The Nansha facility, the largest HWT facility according to the Department of Environmental Protection of Guangdong Province, is engaged mainly in the recycling, disposal and utilisation of 26 major industrial waste materials (including hazardous waste), at a 260ktpa treatment capacity facility (which includes sludge and industrial waste for which the capacity is currently 900ktpa) for 2,000 clients in Guangzhou city and surrounding areas. It has an integrated treatment centre including sorting, WWT, sludge treatment and incineration facilities for major industrial waste products such as chemical packaging, waste oil residue and electronic waste. The current utilisation is around 60%, and management expects full utilisation within the next 3 years, with a better utilisation at the newly acquired facilities to treat electroplating waste and the mass treatment of food residue waste. According to management, the centre’s 9M14 unaudited revenue and net profit were CNY230m and CNY78m (annualised at CNY104m, exceeding the CNY90m profit guarantee in the MOU agreement) , respectively, mainly driven by the following businesses: 1) chemical barrel and packaging, 2) waste oil residue, 3) high-polluting industrial WWT, 4) industrial sludge treatment, 5) heavy metal sludge treatment, and 6) incineration. Most of the projects achieve a gross margin of 40-50%. We expect CTE to earn a net profit of c.CNY200m, assuming a 100% utilisation scenario. Guangzhou Lvyou: estimated annualised 2014 revenue

Business 2014E annualized

revenue (CNYm) Proportion

1 Chemical barrel and packaging treatment 26 9%

2 Waste oil residue and solvent treatment 48 16%

3 Highly polluting industrial WWT 50 17%

4 Industrial sludge treatment 55 18%

5 Heavy-metal sludge treatment 30 10%

6 Incineration 60 20%

7 Others 31 10%

Total 300 100%

Source: Company

Guangzhou Lvyou: unaudited 9M14 financial data (CNYm)

9M14 unaudited revenue 230.4

9M14 unaudited net profit 78.3

Annualised unaudited net profit for 2014 104.4

Guaranteed net profit for 2014 90.0

Source: Company

Apart from Guangzhou Lvyou, CTE also has 1.27mtpa in industrial waste treatment capacity (in operation and under construction) from the Qingyuan Lvyou and Longmen facilities. Guangzhou Lvyou: major HWT projects and annual treatment capacity

Project name Treatment coverage

Annual treatment

scale

1 Waste mineral oil treatment HW08, HW09 90,000 tonnes

2 Waste grease treatment Waste oil residue, pigwash, waste animal and plant oil generated by diet service industry (HY22)

5,000 tonnes

3 Waste organic solvent treatment HW41, HW42 15,000 tonnes

4 Waste filter mass treatment HW13 3,000 tonnes

5 Incineration of hazardous waste HW03, HW04, HW06, HW07, HW08, HW09, HW11, HW12, HW13, HW16, HW39, HW41

3,000 tonnes

6 Poultry excrement and light industry sludge compost

Light industry sludge (HY12, HY13, HY15, HY18)

66,000 tonnes

7 Waste packaging barrels comprehensive treatment

Thoroughly clean and conduct recycling treatment for waste packaging barrels that once contained chemical, various organic solvent

1,500,000 pieces

8

Emulsified mixture and cutting solution by 18,000m³/year, waste acid of 900 tonnes/year and waste alkali of 900 tonnes/year

HW06, HW08, HW09, HW12, HW16, HW32, HW33, HW21, HW24, HW34, HW35

19,800 tonnes

9 Waste water treatment

Mineral oil waste water 90,000m³

Waste water from emulsified mixture and cutting solution

18,000m³

Waste water with acid and alkali 10,500m³

Electroplating waste water 15,000m³

Chemical tank cleaning waste water 7,500m³

Barrel cleaning waste water 30,000m³

Domestic sewage 54,000m³

10 Heavy metal sludge comprehensive treatment

HW17, HW22, HW46 15,000 tonnes

11 Waste circuit board comprehensive treatment

Waste circuit board, waste copper clad plate (HY04)

9,000 tonnes

12 Pyrolysis and gasification incineration

HW03, HW04, HW06, HW07, HW08, HW09, HW11, HW12, HW13, HW16, HW39, HW41 & general industrial waste

36,000 tonnes

13 Waste battery treatment Waste dry cell (HY05) 2,500 tonnes

14 Waste plain tube treatment Waste plain tube, tube (HY10) 3,000,000

pieces

15 Waste liquid treatment Waste copper liquid (HW22), waste nickel liquid (HW46)

42,000 tonnes

16 Waste plastic wiredrawing production

Waste plastic (HY08) 1,200 tonnes

17 Sludge pre-treatment (filter pressing dehydration)

Light industry sludge (HY11, HY12, HY13, HY14, HY15, HY18)

150,000 tonnes

18 Dewatered sludge lightweight unburned environmental protection brick

Light industry sludge (HY11, HY12, HY13, HY14, HY15, HY18)

15,000,000 pieces

Source: Company


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Highlights of Guangzhou Lvyou industrial and HWT site visit

We forecast the Guangzhou Lvyou facility to account for CNY166m of CTE’s gross profit for 2015, which represents c.27% of our gross profit forecast for the company, based on the CNY100m guaranteed net profit offered by the former owner of Guangzhou Lvyou. To gauge further whether this guidance is feasible and to conduct our own due diligence, we visited the Guangzhou Lvyou HWT plant at the end of October 2014. CTE: gross profit proportion of business segments


Guangzhou Lvyou is comprised of 6 major plants: 1) chemical packaging barrel treatment, 2) waste oil residue treatment, 3) high-polluting industrial WWT, 4) industrial sludge treatment, 5) heavy-metal sludge treatment, and 6) incineration.

Guangzhou Lvyou: treatment tariffs for major hazardous waste Treatment tariff Comments

Incineration over CNY2,500/tonne Lowest recommend price (price will vary, depending on the quantity and quality of the waste)

Industrial sludge

CNY600/tonne

(HY02, 03, 06)

Heavy-metal content level below "organic fertilizer standard NY525-2011"

CNY1,000/tonne

(HY02, 03, 06)

Heavy-metal level over "organic fertiliser standard NY525-2011"

Heavy-metal sludge (HW17)

CNY1,200/tonne

Food residue (HY05)

CNY600/tonne

Highly-polluting WWT

COD<6000mg/litre, CNY1,000/tonne

6,000<COD<10,000mg/litre, CNY1,200/tonne

10,000<COD<18,000mg/litre, CNY1,200-1,500/ tonne

18,000<COD<30,000mg/litre, CNY1,500-2,000/tonne

Waste acid CNY1,200-3,500/tonne

Waste alkali

CNY1,200/tonne

Source: Company

Chemical packaging barrel treatment

The facility can currently treat 1.5m chemical waste packaging barrels per annum, and is ranked No.1 in Guangdong Province in terms of treatment volume. The major customers are mainly oil and chemical refinery plants such as Exxon Chemical (Panyu) and Eternal Chemical (Guangzhou). There are 3 major types of income – from cleaning, disposal and recycling. According to Guangzhou Lvyou’s management, the facility has a current utilisation of 30% and it expects to increase its utilisation rate by processing chemical packaging barrels outside of Guangzhou city. The average treatment and recycling tariff is around CNY60/barrel, with a gross margin of around 40-50%. The wastewater created by the cleaning process is treated by Guangzhou Lvyou own WWT facility. The chemical packaging barrel treatment plant accounts for about 10% of Guangzhou Lvyou’s annual revenue.

0%

20%

40%

60%

80%

100%

2012 2013 2014E 2015E 2016E

Hazardous waste treatment Industrial waste treatment

Sludge treatment Industrial waste water treatment and others


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Guangzhou Lvyou: cleaning zone in chemical packaging barrel treatment plant

Source: Daiwa

Guangzhou Lvyou: leak testing zone in chemical packaging barrel treatment plant

Source: Daiwa

Guangzhou Lvyou: recycling and painting zone in chemical packaging barrel treatment plant

Source: Daiwa

Waste oil residue and solvent treatment

The waste oil residue treatment facility can currently treat 9ktpa of waste mineral oil, 5ktpa of waste grease, and 15ktpa of waste organic solvent. The facility accounts for CNY48m in revenue (around 15% of Guangzhou Lvyou total) given its low utilisation rate, as approval for waste oil storage and treatment regulations for the autos industry in Guangdong is still pending, according to management. The plant has 2 sources of income: 1) treatment fees at CNY1,500/tonne, and 2) recycled oil product fees at CNY4,000/tonne. Its major customers are Guangzhou Honda Motor Co. Ltd, Guangzhou Toyota Motor Co. Ltd, and Dongfeng-Nissan.

Highly polluting industrial WWT treatment

The WWT plant is designed to treat highly polluting industrial WWT, such as mineral oil waste water, acid and alkali, electroplating waste water, chemical tank and barrel cleaning waste water and leachate. Once Guangzhou Lvyou receives the wastewater from its customers, it sorts the water by type and puts it into tanks. Treatments for industrial wastewater are varied: waste acid and alkali are neutralised in reaction tanks. Electroplating wastewater and leachate need to undergo electrochemical reaction treatments in order to absorb heavy metal ions and reduce pollutants. To save on chemical costs, the facility mixes acidic wastewater and alkali wastewater. During our site visit, we saw that the WWT plant can also treat highly polluting wastewater with a chemical oxygen demand (COD) level of more than 10,000mg/litre (leachate: 10,000mg/litre COD level, textile wastewater:


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3,000mg/litre COD level, municipal wastewater: 400mg/litre COD level), for which Guangzhou Lvyou can charge over CNY1,000/tonne. According to Guangzhou Lvyou, the WWT plant accounts for CNY50m (17% of the company total), with its fully utilised capacity of 225ktpa (or 620tpd), which represents an average WWT tariff of about CNY220/tonne (much higher than CTE’s Xinzhou industrial WWT plant tariff of CNY5.4/tonne or CTE’s Longmen Xilin municipal WWT plant at CNY0.9/tonne).

Industrial sludge treatment

Industrial sludge comes from the textile and dyeing, papermaking, food residue preparation and chemical industries. Unlike sewage sludge from municipal WWT, industrial sludge has more pollutants, which makes it difficult to treat and more harmful to the environment if it is not disposed of properly (in particular, its leachate’s COD level is significantly higher than that for sewage sludge). This facility can currently treat 66ktpa of industrial sludge (which contains 80% water). According to Guangzhou Lvyou, the average sludge treatment tariff is around CNY800/tonne, higher than that for municipal sludge, for which CTE charges CNY300-400/tonne. The current utilisation rate of the industrial sludge facility is 100%, and this facility accounts for CNY55m revenue (18% of Guangzhou Lvyou’s total) a year. Guangzhou Lvyou: treated industrial sludge

Source: Daiwa

Heavy-metal sludge treatment

Heavy-metal sludge comes from the electronics and electroplating industries. The sludge is first put into the furnace to stabilise the heavy-metal ions into a solid

state, then the agglomerate is transferred to a smelting furnace. The end products are raw copper or nickel ingots, which are sold at market. The by-products are used as rust-removing material. This facility can currently treat 15ktpa of heavy-metal sludge (which contains 80% water). According to Guangzhou Lvyou, the combined average sludge treatment tariff plus the resale of end products, such as nickel, copper, and rust-removing material, is CNY2,000/tonne. The current utilisation of the heavy-metal sludge facility is 100%, accounting for CNY30m in revenue (10% of Guangzhou Lvyou’s total) per annum. However, the gross margin is only 40% as treating heavy-metal sludge is a high-temperature treatment procedure inside an incinerator. Guangzhou Lvyou: treated heavy-metal sludge

Source: Daiwa

Guangzhou Lvyou: treated heavy-metal sludge (rust-removing material)

Source: Daiwa


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Guangzhou Lvyou: WWT for acidic wastewater and alkaline wastewater

Source: Daiwa

Guangzhou Lvyou: acidic wastewater tank

Source: Daiwa

Guangzhou Lvyou: alkaline wastewater tank

Source: Daiwa

Guangzhou Lvyou: highly polluted wastewater from chemical plant

Source: Daiwa

Guangzhou Lvyou: highly polluted wastewater with a COD level over 100,000

Source: Daiwa


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CTE and Guangzhou Lvyou: COD, tariff, and gross-profit margin by type of wastewater

Wastewater type Pre-treated

level (mg/litre)

Government required

discharge level (mg/litre)

CTE's WWT tariff

(CNY/tonne) Gross

margin

Municipal 400 40 0.9 60%

Pulp & paper industries 1,000 90 1 60%

Other industries, such as autos and food & beverage

1,000-3,000 90 2 65%

Textile and dyeing industries 3,000 90 4 75%

Leachate 10,000 90 60 n.a.

Chemical – fairly polluted 10,000-18,000 90 1,350 40%

Chemical - more polluted 18,000-30,000 90 1,750 40%

Source: Company

Incineration

The facility has 2 incinerators, one with capacity of 100tpd and the other of 15tpd. They are designed to burn hazardous waste such as waste paint residue, mineral oil residue, chemical distilling residue, resin, highly polluting solvents, and even poisons and drugs. These 2 incinerators have sophisticated exhaust treatment systems, guaranteeing that exhaust and dioxin emissions conform to the required regulatory standards. The average treatment fee is CNY2,800-3,000/tonne, accounting for CNY60m in annual revenue (20% of Gunagzhou Lvyou’s total). The utilisation is around 40%, and we see significant organic growth in the future.

Guangzhou Lvyou: 100tpd incinerator

Source: Daiwa

Guangzhou Lvyou: chimney of 100tpd incinerator

Source: Daiwa

Others: waste circuit board treatment

Guangzhou Lvyou is in the process of installing a 9ktpa waste electronic circuit board treatment facility. The process mainly removes mercury from waste circuit boards, which is then recycled or incinerated.

0

500

1,000

1,500

2,000

05,000

10,00015,00020,00025,00030,000

Municipal

Pulp &

paper

Autom

obile

Textile and dyeing

Leachate

Chem

ical - fairly polluted

Chem

ical - more polluted

(CNY/ton)(mg/)

COD level (LHS) WWT tariff (RHS)


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Guangzhou Lvyou: 100tpd incinerator flow chart

Source: Daiwa

Others: food residue treatment

Guangzhou Lvyou has built a 400tpd facility for the treatment of food residue and drainage oil. The company currently has permitted capacity of 5ktpd and it is the sole food residue treatment facility in Guangzhou. A technique called hydrolyzation is used to treat food residue, separating the oil and water, dissolving the salts and carbohydrates. The oil that comes from the food residue and drainage is processed by the oil-water separator and reactor. Finally, the bio-fuel or industrial grease is the end product. According to Guangzhou Lvyou, regulations for the treatment of food residue come from the Department of Environmental Protection of Guangdong Province. When the residue food disposal regulation is finally implemented (currently at the final approval stage), management expects to expand the facility from 5ktpa to 100ktpa, which could account for a maximum of CNY40m in revenue, assuming a CNY250/tonne treatment fee, 4% of the treated oil can be extracted as end-product, and CNY4,000/tonne in terms of resale ASP for the oil by-product.

Guangzhou Lvyou: food residue treatment facility

Source: Daiwa


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Guangzhou Lvyou: oil by-products

Source: Daiwa

Guangzhou Lvyou: residual oil

Source: Daiwa

Guangzhou Lvyou: industrial bio-fuel

Source: Daiwa

Update on WWT operations

Project pipeline

As at the end of October 2014 (ie, including its latest acquisitions), CTE operated 8 WWT plants, 3 water supply plants, and 3 sludge treatment plants. These facilities had total consolidated capacity of 555ktpa of industrial WWT, 230ktpa of industrial water supply capacity, and c.700ktpa of sludge treatment capacity. Based on CTE’s announced new capacity pipeline, we forecast its consolidated WWT capacity to reach 1,150ktpa by 2018, with an additional 80ktpa of industrial water supply capacity by then. There would be upside to our forecasts if CTE were to announce additional industrial WWT projects.

CTE: announced WWT project pipeline

(ktpd) Project model Location Industry Stake

Investment (CNYm) 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Total capacity

100 100 100 100 100 100 100 100 100

Consolidated capacity

20 20 20 20 20 20 20 20 20

Guangzhou Xinzhou I&II BOO Zengcheng, GD Textiles 100% 140.0 50 50 50 50 50 50 50 50 50

Longmen XilinI&II BOT Huizhou, GD Municipal 100% 17.4

50 50 50 50 50 50 50

Yonghe Haitao I BOT Zengcheng, GD Laundry and textiles 99% 59.6

50 50 50 50 50 50

Yonghe Haitao II BOT Zengcheng, GD Laundry and textiles 99% 65.4 45 45 45 45 45 45 45 45 45

Yonghe Haitao III BOO Zengcheng, GD Laundry and textiles 99% 158.6

55 55 55 55

Huaihua Tianyuan I BOT Huihua, Hunan Muni, pulp & paper, F&B 100% 64.2

50 50 50 50 50

Huaihua Tianyuan II BOT Huihua, Hunan Muni, pulp & paper, F&B 100% 54.0

50 50 50

Sichuan Gangyuan BOO Guangyuan, Sichuan Textiles 99% 200.0

50 50

Qingyuan Jingu I BOO Qingyuan, GD Industrial and muni n.a. 89.7

50 50 50 50

Qingyuan Jingu II BOO Qingyuan, GD Industrial and muni n.a.

100 100 100 100 100 100 100

Guangfozhao BOO Huaiji, GD Industrial n.a. 125.0

150 150 150 150

Yinglong I BOO Zengcheng, GD Textiles 95% 173.8

60 60 60 60 60

Yinglong II BOO Zengcheng, GD Textiles 95% 260.6

30 30 30 30 30

Shunde TOT Shunde, GD Textiles 100% 50.0

40 40 40 40

Zhongshan I TOT Zhongshan, GD Textiles 100% - 50 150 200

Zhongshan II BOT Zhongshan, GD Textiles 100% 70.0 50 100 150

Additional projects BOO - 50 50

-Guangdong 100 100 100 100 100 100 100 100 100

-Ex. Guangdong 20 20 20 20 20 20 20 20 20



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Utilisation

In 2013, almost all of CTE’s industrial WWT plants achieved utilisation rates of above 90%. According to management, CTE’s centralised industrial WWT plants typically achieve close to 100% utilisation because the company tends to roll out its capacity in phases. For

example, although the recently announced Guangfozhao industrial WWT plant will have a total capacity of 200ktpd, CTE intends to complete phase 1 (capacity of 50ktpd) by end-2015, and roll out the remaining capacity only after phase 1 has reached full utilisation.

CTE: utilisation of WWT plants

2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Guangzhou Xinzhou I&II 79% 94% 98% 100% 100% 100% 100% 100% 100%

Longmen Xilin I&II 92% 97% 98% 99% 100% 100% 100% 100% 100%

Yonghe Haitao I 26% 100% 100% 100% 100% 100% 100% 100% 100%

Yonghe Haitao II

48% 100% 100% 100% 100% 100% 100%

Yonghe Haitao III

30% 53% 75% 100% 100% 100%

Huaihua Tianyuan I 29% 89% 53% 90% 90% 100% 100% 100% 100%

Huaihua Tianyuan II

33% 100% 100% 100%

Sichuan Gangyuan

25% 75% 100% 100% 100%

Qingyuan Jingu I

100% 100% 100%

Qingyuan Jingu II

25% 100% 100%

Guangfozhao

50% 100% 100% 100%

Yinglong I

73% 94% 99% 100% 100% 100% 100%

Yinglong II

25% 80% 90% 100%

Shunde

53% 75% 100% 100% 100%

Zhongshan I 15% 75% 100% 100% 100%

Zhongshan II 0% 50% 75% 100%

Additional projects

50% 75% 100%


Tariffs

For centralised industrial WWT projects, the municipal government typically sets a recommended ceiling tariff, and CTE and the factories then negotiate a final tariff. As WWT tends to account for less than 5% of factories’ COGS, CTE can raise tariffs should its WWT costs

increase. CTE’s industrial WWT tariffs have remained broadly unchanged since 2010, with the exception of tariffs for its Xinzhou plant, which has a different mix of sewage than CTE’s other plants. We expect the WWT tariff to increase slightly over the next few years.

CTE: treatment fees/tariffs for its WWT plants

Unit: CNY/tonne Project model

Industry 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Average

4.1 3.8 3.6 3.4 3.2 3.7 3.6 3.5 3.5

Guangzhou Xinzhou I&II BOO

Textile 5.1 5.8 5.2 5.3 5.4 5.4 5.4 5.4 5.4

Longmen Xilin I&II BOT

Municipal 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9

Yonghe Haitao I BOT

Laundry and textiles 0.8 0.8 0.8 0.8 0.9 0.9 0.9 0.9 0.9

Yonghe Haitao II BOT

Laundry and textiles

0.8 0.8 0.9 0.9 0.9 0.9 0.9

Yonghe Haitao III BOO

Laundry and textiles

3.5 3.6 3.6 3.6 3.6 3.6

Huaihua Tianyuan I BOT

Muni, pulp & paper, F&B 0.9 0.9 1.0 1.3 1.5 1.5 1.5 1.5 1.5

Huaihua Tianyuan II BOT

Muni, pulp & paper, F&B

1.5 1.5 1.5 1.5

Sichuan Gangyuan BOO

Textile

3.0 3.0 3.0 3.0 3.0

Qingyuan Jingu I BOO

Industrial and muni

2.0 2.0 2.0 2.0

Qingyuan Jingu II BOO

Industrial and muni

2.0 2.0 2.0

Guangfozhao BOO

Industrial

2.0 2.2 2.3 2.4

Yinglong I BOO Textiles 4.0 4.0 4.1 4.1 4.1 4.1 4.1

Yinglong II BOO Textiles 4.0 4.0 4.1 4.1 4.1 4.1 4.1

Shunde TOT Textiles 1.5 2.2 2.2 2.2 2.2

Zhongshan I TOT

Textiles

1.5 2.2 2.2 2.2 2.2

Zhongshan II BOT

Textiles

2.2 2.2 2.2 2.2

Additional projects BOO

2.5 2.5 2.5



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Earnings drivers in 2015-16

We are raising our net profit (and EPS) forecast for CTE by 14% for 2015 and 11% for 2016, due primarily to the latest acquisitions, as we expect the deals to drive robust net profit growth for the company in 2015-16. For 2013-16, we now forecast a 52% net profit CAGR (previously a 47% CAGR for 2012-15E), and a 40% EPS CAGR (previously 35%), underpinned by a 44% increase in industrial WWT capacity and additional 605ktpa in sludge treatment capacity (2013: c.150ktpa). We assume that CTE’s gross margin will slip from 63% in 2013 to 59% in 2016, due to a lower gross margin (55%) for the HWT business. We highlight the following factors as key earnings growth drivers for the company over 2015-16E: 1. The newly commissioned Yinglong Phase 2

(150ktpd), Huaihua Tianyuan phase 2 (55ktpd), Qingyuan Jingu Phase 1 (50ktpd) and Guangfozhao (50ktpd) WWT, Zhongshan Phase 2 (40ktpd) WWT plants, the upgrade of the Shunde (60ktpd) WWT plant, Heyuan sludge treatment Phase 2 (105ktpa), the Longmen sludge facility (500ktpa) and a newly commissioned industrial solid waste (450ktpa) treatment plant.

2. The stake increase in the Yinglong WWT plant (phase 1: 100ktpd, phase 2: 150ktpd), the newly acquired Qingyuan Lvyou sludge and solid waste treatment plants and the Guangzhou Lvyou industrial and hazardous solid waste treatment plant.

3. Improving utilisation rates for the Huaihua Tianyuan Phase 1 WWT plant, Yonghe Haitao Phase 3 WWT plant, Shunde WWT plant, Xinzhou industrial water supply plant, Qingyuan Lvyou sludge and solid waste treatment plant, and the Guangzhou Lvyou industrial and hazardous solid waste treatment plant.

Cost structure

According to management, raw materials (chemicals) account for 45% of COGS for a typical BOO industrial WWT project, electricity accounts for 25%, and other expenses, such as labour and depreciation, make up the remainder. In the event of a hike in power tariffs or material costs, CTE could face delays in passing on costs, even though its agreements with customers include the provision to pass on costs after it receives government approval. CTE has maintained a gross profit margin of over 60% for its industrial WWT plants since it commenced operations.

Balance sheet stretched but manageable due to CNY2bn loan facility

After CTE’s IPO in September 2013, its net debt-to-equity ratio fell from 151% as at the end of 2012 to 9.5% as at the end of 2013. We forecast its end-2014 gearing to rise to 114%, on the company’s recent acquisitions of CNY1.6bn for a number of industrial WWT plants, sludge and industrial/hazardous solid waste treatment assets, as well as capex of about CNY550m that we forecast for the new industrial WWT projects in its pipeline. We believe CTE has exceeded its usual comfortable gearing level of 80-100%. Management believes it has the funds to cover all the capex needed for each project, and that this should be well supported by the CNY2bn loan facility granted by ICBC, at an interest rate of 6% per year. In addition, management said it prefers to issue new shares to its targeted companies as payment instead of cash. As such, we do not think the company will place new shares in the open market to raise funds. We forecast capex of about HKD520m in 2015 and HKD600m in 2016. CTE: capex, gearing, and cash flow before financing 2010 2011 2012 2013 2014E 2015E 2016E

Capex (HKD m) 14 111 61 221 548 523 604

Net debt-to-equity ratio 122.4% 201.6% 150.8% 9.5% 114.1% 90.2% 66.8%

Cash flow before debt financing (HKD m)

(108) (115) (156) 435 (1,879) (9) 99


Note: CTE raised HKD457m from its IPO in September 2013


- 62 -

Recommendation

Considering the predictable long-term cash flow associated with our WWT volume and sludge treatment volume forecasts for CTE in 2014-16, we value CTE using a DCF methodology. We assume a WACC of 8.3% and an unchanged terminal growth rate of 2%. Our DCF-based valuation yields a fair value of HKD10.50/share, representing our new 6-month target price (raised from HKD9.60). Our new target price is equivalent to a 2016E PER of 19x (using our revised 2016 EPS forecast), in line with the current 2016E PERs of peers Beijing Enterprises Water (BEW, 371 HK, HKD5.40, Outperform [2]) and China Everbright International (257 HK, HKD10.86, Outperform [2]). We believe CTE should trade on a par with BEW and CEI in terms of PER, as we think that industrial WWT (CTE’s business focus) has a better operating model than that for municipal WWT (BEW’s business focus). Compared with municipal WWT, industrial WWT has a higher gross margin and shorter cash-conversion cycle. Compared with BEW and CEI, CTE has a lower proportion of non-cash earnings given that most of CTE’s projects use the BOO model, instead of the BOT model, which books construction capex as revenue. In addition, CTE has expanded its high-return sludge-treatment operation business – a business on which BEW and CEI do not focus. Still, we do not think CTE warrants a PER premium to BEW and CEI at this point, given that it is a smaller company with a much shorter operating track record. Our DCF fair value for CTE incorporates only secured projects; further project additions or acquisitions could present additional upside to our estimated fair value. Our DCF fair value does not factor in the recently announced CNY150m sludge and solid waste project in Longmen, due to a lack of available details on the project and its schedule at present. We reaffirm our Buy (1) rating on CTE, increasing our 2013-16 EPS CAGR forecast to 40% from 35%.

CTE: DCF valuation (CNYm) 2014E 2015E 2016E 2017E 2018E

Year

0 1 2 3 4

EBIT (IFRIC 12)

284 552 878 1,125 1,309 1,488

BOT construction revenue

(16) (97) (138) - - -

BOT construction cost

12 77 110 - - -

Reinstatement of operation income (14) (20) (28) (29) (30) (31)

EBIT (non-IFRIC 12)

267 513 823 1,097 1,280 1,457

Share of JCE/associates

23 10 - - - -

Depreciation

22 40 213 230 256 273

Adjusted income tax

(32) (77) (125) (128) (128) (128)

Minority interest

(0) (0) (18) (25) (29) (33)

Change in working capital

19 (87) (172) (164) (125) (106)

Capex and acquisition

(262) (2,588) (523) (604) (491) -

FCF under IFRIC12

36 (2,084) 177 385 746 1,447

Terminal growth rate

2.0%

Sum PV cash flow (to 2018E)

2

PV of Terminal Value

(from 2019E)

17,114

Minus net debt on balance sheet

(2,016)

Equity value (CNY)

15,147

NPV/share (HKD) 10.50

Valuation assumptions

China risk-free rate

4.0%

Market risk premium

10.0%

Beta

0.80

Cost of equity

12.0%

Year n-1 debt/capitalisation

45.0%

Pre-tax cost of debt

5.0%

After-tax cost of debt

3.8%

WACC

8.3%

Source: Daiwa estimates and forecasts

CTE: DCF sensitivity to changes in WACC and terminal growth rate (HKD)

WACC

7.0% 8.0% 8.3% 10.0% 11.0%

3.0% 18.41 13.85 12.89 10.81 8.65

Terminal 2.5% 16.14 12.40 11.59 9.82 7.93

growth rate 2.0% 14.31 11.19 10.50 8.97 7.30

1.5% 12.82 10.17 9.57 8.23 6.75

1.0% 11.58 9.29 8.77 7.58 6.26

Source: Daiwa estimates

China Water Sector: peer comparison [pls update metrics]

Company Ticker Market

cap Main water PER

(x) PBR

(x) ROE

EPS CAGR

(%)

(USDm) business 2015E 2015E 2015E 2013-15E

CT Environmental 1363 HK 1,452 Industrial WWT

18.8 4.9 29.9 40%

Beijing Enterprises Water

371 HK 6,063 Municipal WWT

22.7 3.0 13.8 28%

Kangda International

6136 HK 1,072 Municipal WWT

16.2 2.0 13.2 31%

Sound Global 967 HK 1,695 Wastewater EPC

11.8 1.8 16.4 25.5

China Water Affairs

855 HK 784 Municipal water supply

10.6 n.a. n.a. n.a.

China Everbright International

257 HK 6,280 Waste-to-energy

21.2 3.0 14.7 24%

DynaGreen 1330 HK 728 Waste-to-energy

18.4 1.8 10.1 13%

Source: Bloomberg, Daiwa forecasts

Note: Company forecasts for Sound Global (967 HK) and China Water Affairs (855 HK) are extracted from Bloomberg; share prices are as at 12 November 2014.


- 63 -

Risks

In addition to fierce competition from existing major municipal WWT players, foreign enterprises, and potential new players, which we see as the main risk to our view, we see other risks for CTE.

Utilisation rates depend on economic cycle

Although the major industrial parks served by CTE in Guangdong are mature, the company’s utilisation rate was slightly affected by the 2008-09 global financial crisis – the 2010 utilisation rate for its Xinzhou industrial WWT plant dropped to 80% from about 100% for 2010. We believe the industrial WWT business is not as defensive as the municipal WWT business due to the lack of fixed off-take agreements. However, the utilisation rate for CTE’s industrial WWT business during the recent financial crises, from 2008-10, was comparable to that of BEW’s major municipal WWT plants, at 80%. In our sensitivity analysis, we estimate that every 5% fall in CTE’s industrial WWT utilisation rate would lead to a 2.5% drop in 2014E earnings and 1.3% drop in NAV.

Customer migration

Given that labour and operating costs have been increasing in Guangdong recently, some factories could move to inland provinces or even countries in Southeast Asia. The loss of any major customers could lead to the utilisation rate of an industrial WWT project falling sharply. However, CTE is diversifying its customer base to mitigate the risk of this happening. For example, the revenue contribution from the company’s largest customer declined from 22.9% of total revenue for 2011 to 10.6% for 4M13. The company’s geographic diversification strategy depends on the regulations and government support in each province.

Changes to regulations and discharge requirements

CTE might need to invest more in upgrading its facilities should the government tighten discharge standards. We believe this would not be a problem for the company, as the discharge level of its Xinzhou project is less than 50mg/litre of COD, which is much lower than the requirement for Guangdong of 90mg/litre (national: 100mg/litre).

Delays in passing on costs

According to management, the COGS for a typical BOO industrial WWT project breaks down as 45% for raw materials (chemicals), 25% for electricity, and 30% for other expenses, such as labour and depreciation. Should there be increases in power tariffs and material costs, there could be a delay in CTE passing on cost rises, as these have to be agreed by customers and approved by the government. In our sensitivity analysis, we estimate that every 5% drop in CTE’s unit-dollar profit for its industrial WWT business would lead to a 3.4% fall in 2014E earnings and a 3.1% decline in NAV.

Project execution risks

Management may not be able to complete its planned new industrial WWT capacity as scheduled, especially for new industries outside of CTE’s familiar segments, which are textiles and paper-making. In addition, solid-waste and sludge treatment projects require government treatment and resale-of-end-product permits, for which the approval process can take a long time. As such, unexpected project delays are possible. In our sensitivity analysis, we estimate that every 50tpd drop in CTE’s new sludge-treatment capacity would result in a 0.3% fall in 2014E earnings and a 0.3% decline in NAV.

Delays in Guangzhou Lvyou’s acquisition completion

According to CTE, KPMG started the financial due diligence work immediately after the Guangzhou Lvyou deal announcement on the 21 October 2014. CTE targets to complete the transaction by the end of 2014, and we think any delay would have a negative impact on CTE’s net profit for 2015. In our sensitivity analysis, we estimate that every 1 month delay in the completion of the Guangzhou Lvyou acquisition would represent a 1.1% decline in 2015E earnings.


- 64 -


■ Investment case

We initiate coverage of CEI, a leading waste-to-energy (WTE) investor and operator in China, with an Outperform (2) rating. We forecast a 28% net profit CAGR (a 24% EPS CAGR) for 2013-16E, driven mainly by the WTE business. Capacity growth driving earnings growth. We forecast a 31% net profit CAGR for CEI’s environmental energy business, backed by: 1) its pipeline of 7 WTE projects (waste-processing capacity: 4.8ktpd) under construction and 31 WTE (21.15ktpd) at the preparation or concession stages as of October 2014, 2) its ability to secure new projects (18 secured WTE projects with a capacity of 13.8ktpd YTD), and 3) its record of project execution, such that we expect CEI to operate 35 WTE plants with a

capacity of 28.75ktpd by end-2016, vs. 13 WTE plants with a capacity of 13.25ktpd at October 2014. Broad environmental exposure. We forecast CEI to see a 19% net profit CAGR for 2013-16E from its investments in the environmental water and renewable energy business segments. ■ Catalysts

We highlight the following as potential earnings catalysts:

WTE: if the company were to secure new WTE projects and complete projects faster than we expect, and lift its waste treatment fees.

WWT: the approved injection of CEI’s water assets into HanKore in exchange for a 79% interest in the merged company would increase CEI’s water capacity by 45% and support a 28% net profit enhancement for CEI’s environmental water business segment in 2015E (or 4% of CEI’s total net profit).

■ Valuation

Our DCF-based 6-month target price of HKD12.20 is equivalent to a 24x 2015E PER, which we believe is supported by CEI’s status as the only Hong Kong-listed large-cap China

WTE operator with a solid execution record and a decent project portfolio. ■ Risks

The main risks are: 1) a slowdown in securing new WTE projects, and 2) delays in project execution.

Utilities / China 257 HK

14 November 2014


Initiation: a bright outlook

CEI is a leading WTE investor and operator in China; we see it

as the best proxy for the China WTE industry

We forecast a 28% net profit CAGR for 2013-16E, driven by a

44% CAGR in end-of-year WTE capacity over the period

Premium valuation warranted given its large WTE exposure and

project portfolio, sound track record and large market cap


Industrials / China

China Everbright International257 HK

Target (HKD): 12.20

Upside: 12.3%


Buy

Outperform (initiation)

Hold

Underperform

Sell

1

2

3

4

5

90

109

128

146

165

7.0

8.3

9.5

10.8

12.0

Nov-13 Feb-14 May-14 Aug-14 Nov-14


Ch Everb (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder China Everbright Holdings (41.3%)

Financial summary (HKD)Year to 31 Dec 14E 15E 16E

Revenue (m) 6,896 10,330 9,563

Operating profit (m) 2,749 3,652 4,473

Net profit (m) 1,749 2,297 2,787


EPS change (%) 19.8 31.3 21.3

Daiwa vs Cons. EPS (%) (1.0) (1.3) 2.2

PER (x) 27.8 21.2 17.5


DPS 0.102 0.134 0.163

PBR (x) 3.3 3.0 2.6

EV/EBITDA (x) 18.7 15.4 12.9

ROE (%) 12.5 14.7 15.9

Dennis Ip, CFA(852) 2848 4068

[email protected]

Cindy Li(852) 2773 8535

[email protected]



- 66 -

Growth outlook CEI: adjusted recurring net profit from operating business

We believe CEI has a proven ability to secure and execute new projects, as evidenced by its 28% CAGR in WTE capacity for 2010-13. Based on currently secured projects, we expect that by end-2016 CEI will operate 35 WTE projects with a waste-processing capacity of 28.75ktpd, which would be equivalent to a CAGR of 44% in its WTE operating capacity for 2013-16E. The WTE business is the main driver of our forecast for CEI to deliver a net profit CAGR of 31% in 2013-16E for its environmental energy business segment, and a 28% net profit CAGR for the company as a whole over the same period.


Valuation CEI vs. peers: market cap and 1-year forward PER, PBR

CEI is currently trading at a 1-year-forward PER of 22x, a 12% premium to the 1-year forward PER of newly listed peer Dynagreen (based on our EPS forecasts). We contend that CEI warrants a premium valuation because it is the only Hong Kong-listed China environmental operator with large WTE business exposure, a decent project portfolio, a solid track record, a large market cap, and a well-organised IR function. Our target price for CEI implies a 24x 2015E PER, which marks a 20% premium to the implied 19x 2015E PER for our target price for Dynagreen.

Source: Bloomberg, Company, Daiwa forecasts

Earnings revisions CEI: consensus 2014-16 EPS forecast

The Bloomberg consensus has been gradually revising up its 2014-16 EPS forecasts for CEI, mainly to reflect revenue and earnings upside as the company secures more projects in the WTE field. CEI has secured 18 WTE projects with a capacity 13.8ktpd YTD, compared with 7 projects with a capacity of 3.3ktpd in 2013. Our 2014-16E EPS forecasts are broadly in line with the consensus figures. The -1.0% to +2.2% variance can likely be explained by differences in our assumptions on the timing of WTE project construction and/or commencement.

Source: Bloomberg


Growth outlook

Valuation

Earnings revisions

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

500

1,000

1,500

2,000

2,500

3,000

2009 2010 2011 2012 2013 2014E 2015E 2016E

(HKDm)

Environmental energy Environmental water

Alternative energy YoY (RHS)



Capital Environmental,

mkt cap USD354m


0.0

1.0

2.0

3.0

4.0

5.0

6.0

18.0 19.0 20.0 21.0 22.0 23.0

(PBR x)

(PERx)

0.20

0.30

0.40

0.50

0.60

0.70

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

(HKD)

2014E EPS 2015E EPS 2016E EPS

Buy

Outperform (initiation)

Hold

Underperform

Sell

1

2

3

4

5


- 67 -

Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Year-end WTE waste treatment

capacity (ktpd)4.15 4.55 8.15 8.15 9.65 14.55 17.25 28.75

Average household waste treatment

fee (CNY/ton)74 75 76 78 80 81 82 82

On-grid electricity generated - WTE

(GWh)365 445 553 825 1,052 1,212 1,679 2,768

Waste water treated (mn tonnes) 3,323 3,696 3,697 3,809 4,067 4,484 4,484 4,484

Average WWT tariff (CNY/ton) 1.26 1.25 1.30 1.34 1.41 1.45 1.48 1.50

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Environmental energy 604 1,816 2,161 1,742 3,616 5,001 8,125 7,436

Environmental water 1,036 857 805 1,267 1,284 1,168 1,047 942

Other Revenue 126 256 521 401 420 727 1,158 1,185

Total Revenue 1,766 2,929 3,487 3,410 5,320 6,896 10,330 9,563

Other income 67 65 58 97 144 283 225 300

COGS (991) (1,784) (2,048) (1,726) (2,944) (3,948) (6,189) (4,740)

SG&A (126) (146) (204) (226) (302) (369) (580) (495)

Other op.expenses (39) (41) (32) (72) (91) (114) (133) (155)

Operating profit 677 1,023 1,260 1,483 2,127 2,749 3,652 4,473

Net-interest inc./(exp.) (170) (178) (247) (313) (316) (379) (540) (696)

Assoc/forex/extraord./others 0 0 0 0 0 0 0 0

Pre-tax profit 507 846 1,014 1,171 1,812 2,370 3,112 3,776

Tax (99) (192) (290) (267) (447) (569) (747) (906)

Min. int./pref. div./others (37) (37) (28) (23) (40) (52) (69) (83)

Net profit (reported) 371 617 696 881 1,325 1,749 2,297 2,787

Net profit (adjusted) 366 613 696 881 1,325 1,749 2,297 2,787

EPS (reported)(HKD) 0.114 0.169 0.190 0.233 0.326 0.390 0.512 0.622

EPS (adjusted)(HKD) 0.112 0.168 0.190 0.233 0.326 0.390 0.512 0.622

EPS (adjusted fully-diluted)(HKD) 0.110 0.166 0.188 0.231 0.326 0.390 0.512 0.622

DPS (HKD) 0.023 0.025 0.045 0.064 0.090 0.102 0.134 0.163

EBIT 672 1,019 1,260 1,483 2,127 2,749 3,652 4,473

EBITDA 711 1,060 1,292 1,555 2,218 2,863 3,785 4,628

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax 507 846 1,014 1,171 1,812 2,370 3,112 3,776

Depreciation and amortisation 39 41 58 81 90 114 133 155

Tax paid (28) (36) (86) (143) (156) (284) (373) (453)

Change in working capital (1,055) (1,643) (832) (1,766) (2,424) (4,730) (6,644) (3,434)

Other operational CF items 163 217 375 367 315 379 540 696

Cash flow from operations (374) (575) 528 (290) (364) (2,151) (3,232) 740

Capex (13) (335) (946) (732) (302) (508) (571) (648)

Net (acquisitions)/disposals 0 2 0 649 (254) (28) 0 0

Other investing CF items 58 (179) 72 (980) (394) 0 0 0

Cash flow from investing 45 (513) (874) (1,063) (950) (536) (571) (648)

Change in debt 490 707 1,186 829 807 1,665 4,952 1,441

Net share issues/(repurchases) 1,456 7 8 1,179 3,662 0 0 0

Dividends paid (65) (82) (130) (246) (263) (448) (473) (654)

Other financing CF items (170) (178) (422) (304) (312) (379) (540) (696)

Cash flow from financing 1,711 455 642 1,458 3,894 838 3,939 90

Forex effect/others n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Change in cash 1,382 (633) 296 105 2,579 (1,849) 135 182

Free cash flow (388) (910) (419) (1,021) (666) (2,660) (3,803) 92

Financial summary


- 68 -

Balance sheet (HKDm)

Key ratios (%)


Company profile

CEI is a leading WTE investor and operator in China, with about a 7% market share in terms of operating WTE capacity as at end-2013. As at end-October 2014, CEI has 13 WTE plants in operation with a total designed household-waste-processing capacity of 13.25ktpd and a total designed power-generation capacity of 1,347GWh. It also has 7 WTE projects (waste-processing capacity: 4.8ktpd) under construction, and 31 WTE (21.15ktpd) at the preparation or concession stages as of October 2014.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Cash & short-term investment 2,024 1,432 1,900 2,797 5,815 3,965 4,101 4,283

Inventory 13 21 43 65 76 94 139 150

Accounts receivable 906 1,024 1,570 1,851 2,319 2,260 3,172 3,647

Other current assets 0 5 0 26 35 35 35 35

Total current assets 2,944 2,484 3,513 4,739 8,244 6,355 7,447 8,114

Fixed assets 144 385 846 1,423 1,374 1,469 1,614 1,843

Goodwill & intangibles 600 685 1,116 634 1,117 1,417 1,710 1,975

Other non-current assets 4,980 7,317 8,405 9,787 12,736 17,499 23,986 27,130

Total assets 8,667 10,870 13,880 16,583 23,471 26,740 34,757 39,062

Short-term debt 696 732 1,064 1,635 1,780 1,932 3,046 3,370

Accounts payable 481 853 1,423 1,191 1,734 1,699 2,499 2,695

Other current liabilities 10 29 52 58 58 58 58 58

Total current liabilities 1,188 1,615 2,539 2,884 3,572 3,690 5,604 6,124

Long-term debt 2,253 3,037 4,029 4,369 5,141 6,654 10,492 11,609

Other non-current liabilities 297 470 650 659 979 1,263 1,637 2,090

Total liabilities 3,738 5,122 7,218 7,913 9,692 11,607 17,733 19,822

Share capital 364 365 368 404 448 448 448 448

Reserves/R.E./others 4,209 4,973 5,822 7,946 12,926 14,227 16,051 18,183

Shareholders' equity 4,573 5,338 6,190 8,350 13,374 14,675 16,499 18,632

Minority interests 357 411 472 321 405 457 526 609

Total equity & liabilities 8,667 10,870 13,880 16,583 23,471 26,740 34,757 39,062

EV 49,974 51,441 52,358 52,222 49,950 53,489 58,374 59,716

Net debt/(cash) 925 2,337 3,193 3,208 1,107 4,621 9,438 10,696

BVPS (HKD) 1.257 1.461 1.684 2.068 2.983 3.273 3.680 4.155

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (5.2) 65.9 19.0 (2.2) 56.0 29.6 49.8 (7.4)

EBITDA (YoY) 10.3 49.1 21.9 20.3 42.7 29.1 32.2 22.3

Operating profit (YoY) 10.6 51.6 23.7 17.7 43.4 29.2 32.9 22.5

Net profit (YoY) 8.1 67.3 13.5 26.6 50.3 32.1 31.3 21.3

Core EPS (fully-diluted) (YoY) 4.2 50.4 13.5 22.9 40.8 19.8 31.3 21.3

Gross-profit margin 43.9 39.1 41.3 49.4 44.7 42.8 40.1 50.4

EBITDA margin 40.3 36.2 37.1 45.6 41.7 41.5 36.6 48.4

Operating-profit margin 38.1 34.8 36.1 43.5 40.0 39.9 35.4 46.8

Net profit margin 20.7 20.9 20.0 25.8 24.9 25.4 22.2 29.1

ROAE 9.9 12.4 12.1 12.1 12.2 12.5 14.7 15.9

ROAA 4.9 6.3 5.6 5.8 6.6 7.0 7.5 7.6

ROCE 28.1 33.3 29.1 26.6 30.8 33.8 35.6 34.7

ROIC 10.3 11.3 10.0 10.5 12.0 12.1 12.0 12.1

Net debt to equity 20.2 43.8 51.6 38.4 8.3 31.5 57.2 57.4

Effective tax rate 19.5 22.7 28.6 22.8 24.7 24.0 24.0 24.0

Accounts receivable (days) 164.0 120.3 135.8 183.1 143.0 121.2 96.0 130.1

Current ratio (x) 2.5 1.5 1.4 1.6 2.3 1.7 1.3 1.3

Net interest cover (x) 3.9 5.7 5.1 4.7 6.7 7.3 6.8 6.4

Net dividend payout 19.9 14.6 23.6 27.3 27.6 26.1 26.2 26.3

Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.2

Financial summary continued …


- 69 -

A bright outlook

The best proxy for the China WTE industry

Investment case

CEI is a leading WTE investor and operator in China, with about a 7% market share in terms of operating WTE capacity as at end-2013. Including new projects under construction and in preparation, CEI has a 9% share of the WTE market in China. As at end-October 2014, CEI had 13 WTE plants in operation with a total designed household-waste-processing capacity of 13.25ktpd and total designed power-generation capacity of 1,347GWh. CEI has a strong project pipeline, with 7 WTE projects (with total waste-processing capacity of 4.8ktpd) under construction and 31 WTE projects (capacity of 21.15ktpd) in preparation or concession stages (as of October 2014). This pipeline should support CEI’s capacity growth out to 2019 or 2020, in our view. CEI has a proven ability to secure new projects and a solid track record of project execution. We forecast this to underpin a net profit CAGR of 28% in 2013-16E for CEI, driven mainly by an end-of-year WTE operating capacity CAGR of 44% that we forecast during the same period. We expect CEI to operate 35 WTE plants in total by the end of 2016. Along with WTE capacity additions, we regard WTE tariff hikes as another earnings driver for the company. CEI has put through tariff hikes at some of its WTE plants in recent years, and we see scope for further tariff increases over our forecast period as stricter treatment and emission standards are set to be implemented by the China Government to protect the environment, and based on the CEI’s project-operation experience. As well as its strong WTE business, we like CEI for its broad exposure in China’s environmental industry, which we show in the map on the next page (and expand on later in this report). We forecast its investments in waste water treatment (WWT), solid waste treatment and other alternative energies to generate sound earnings growth (19% net profit CAGR

during 2013-16E), albeit more moderate than the growth we expect for its WTE activities. We also like CEI given it has a supportive parent group, China Everbright Group (CEG), which we believe has over the years helped CEI to gain access to more competitive financing and manage its business relationships with local governments in China. CEI is 41%-owned by its controlling shareholder, China Everbright Holdings (CEH), which in turn is parented by CEG – a state-owned-enterprise (SOE) under the State Council of the PRC. CEI: current shareholding structure

Source: Company, HKEx

Best proxy for China WTE industry

We expect CEI to be the major beneficiary of the strong growth we foresee for China’s WTE industry in the coming few years. We initiate coverage of CEI with an Outperform (2) rating and a DCF-based 6-month target price of HKD12.20, implying a 24x PER based on our 2015 EPS forecast. In the following table, we provide an illustrative breakdown of our EPS forecasts and implied target PERs for each of CEI’s business segments. CEI is the only Hong Kong-listed China environmental operator with large WTE exposure, a strong project portfolio, a solid track record and a large market cap. Thus, we argue that it deserves a premium valuation to its domestic peer group. Our target price implies a 2015E PER of 25x for CEI’s environmental energy business, backed by our forecast of a 31% net profit CAGR for this business for 2013-16E. CEI: target price breakdown

Business segment 2015E EPS % of EPS TP

Implied

2015E PER % of TP

Environmental energy 0.414 80% 10.20 24.6x 84%

Environmental water 0.066 13% 1.50 22.9x 12%

Renewable energy 0.033 6% 0.50 15.3x 4%

Total 0.512 100% 12.20 23.8x 100%


China Everbright Holdings

41.3%

J.P. Morgan Chase & Co.

5.0%

RRJ Capital

7.1%

Allianze SE

4.6%

Public

41.9%


(257 HK)


- 70 -

CEI: number of WTE plants and total waste-processing capacity (2009-16E)


CEI: business coverage in China (September 2014)

Source: Company

Note: numbers by the respective entries relate to the number of facilities CEI has in each area; PV = solar photovoltaic

5 6 9 9 10 15 20 35

4.2ktpd 4.6ktpd

8.2ktpd 8.2ktpd9.7ktpd

14.6ktpd17.3ktpd

28.8ktpd

0

5

10

15

20

25

30

0

5

10

15

20

25

30

35

2009 2010 2011 2012 2013 2014E 2015E 2016E

(ktpd)(# of plants)

Number of operating WTE plants at end of year (LHS)

Operating household waste processing capacity at end of year (RHS)

WTE

WWT

Solid Waste Treatment

Reusable Water

Alternative Energy

GuangdongGuangxi

Hunan

Hubei

Xinjiang

Qinghai

Ningxia

Jiangxi

Jiangsu

Shanghai

Hebei

Inner Mongolia

Shanxi

Tianjin

Shandong

Tibet

Sichuan

Yunnan

Guizhou

Henan

Heilongjiang

Jilin

Liaoning

Anhui

Zhejiang

Fujian

Gansu

Hainan

Taiwan

Hong Kong

Macau

Shaanxi

Beijing

Anhui

WTE: 4

Biomass: 4

PV: 1

Guangdong

WTE: 3

PV: 1

Hainan

WTE: 2

Sludge treatment: 2

Henan

WTE: 2

Hunan

WTE: 1

Jiangsu

WTE: 21

Solid waste: 8

WWT: 1

Reusable water: 1

Biomass: 5

PV: 5

MTE: 2

Shandong

WTE: 11

Solid waste: 2

WWT: 15

Reusable water: 3

Biomass: 2

Heat Pump: 2

Zhejiang

WTE: 4

Shanxi

Wind: 1


- 71 -

Large project portfolio and sound execution should underpin solid revenue and earnings growth

When determining the competitiveness of a WTE operator, one of the key skills we look at is the operator’s execution ability, which is measured primarily by the operator’s ability to secure, implement and operate WTE projects.

Robust project pipeline achieved through ability to secure projects

One of the features we like about CEI is its good momentum in securing new WTE projects. During the first 10 months of 2014, it has secured 18 new WTE projects with a combined waste-processing capacity of 13.8ktpd – which is more than its current operating capacity of 13.25ktpd. We expect phase 1 of most of these new projects to enter into the preparation stage in 2015, construction to start in 2016 and 2017, and for these projects to commence operations in 2018 and subsequent years. CEI: half-yearly trend in new WTE project capacity secured

Source: Company

Our analysis indicates that CEI has a robust project pipeline, which we believe should underpin both solid near-term revenue growth and long-term earnings growth for the company. As of October 2014, CEI has a total of 51 WTE projects with total capacity of 38.2ktpd on hand. Of these: 1) 7 projects (total capacity of 4.8ktpd) are under construction and are planned to commence operations in 4Q14-1H16, 2) 14 projects (capacity of 10.7ktpd) are in the preparation stage and we expect their construction to start in 2015 and 2016, and 3) 17 projects with capacity of 9.45ktpd are planned in concession agreement. The remaining 13 projects (capacity of 13.25kptd) are already operating. CEI: capacity breakdown of secured WTE projects (Oct-14)

Source: Company

2.0 1.4

0.6

1.8

-

2.0

4.0 4.6

2.0

1.3

7.7

6.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14

(ktpd)

13.25

38.20

4.80

10.70

9.45

0

5

10

15

20

25

30

35

40

Operating Under construction In preparation Concession Total

(ktpd)


- 72 -

CEI: secured projects YTD in 2014 Project Province Status Type Duration (years) Investment (CNYm) Capacity (tpd) Date project was secured

Ma'an Shan Anhui Preparation BOT 30 300 800 2 January 2014

Ma'an Shan II Anhui Concession BOT 30 150 400 2 January 2014

Yiyang Hunan Preparation BOT 30 372 800 28 January 2014

Changzhou Xinbei I Jiangsu Construction BOT 30 420 800 23 March 2014

Changzhou Xinbei II Jiangsu Concession BOT 25 350* 700 23 March 2014

Nanjing II Jiangsu Preparation BOT 30 987 2,000 31 March 2014

Dangshan I Anhui Preparation BOO 30 250 400 22 April 2014

Dangshan II Anhui Concession BOO 25 150* 300 22 April 2014

Nanjing Gaochun Jiangsu Preparation BOT 30 292 500 29 April 2014

Tengzhou I Shandong Preparation BOT 30 339 600 11 May 2014

Tengzhou II Shandong Concession BOT 25 200* 400 11 May 2014

Pei County I Jiangsu Preparation BOT 25 250 400 3 August 2014

Pei County II Jiangsu Concession BOT 25 250 400 3 August 2014

Xinzheng I Henan Preparation BOT 30 520 1,000 7 August 2014

Xinzheng II Henan Concession BOT 30 520 500 7 August 2014

Lingbi I Anhui Concession BOO 30 250 500 16 October 2014

Lingbi II Anhui Concession BOO 30 150* 300 16 October 2014

Yuhang, Hangzhou Zhejiang Concession BOT 30 1,800 3,000 19 October 2014

Total 7,550 13,800

Source: Company, Daiwa estimates (*)

Note: BOO =-build, own, operate, BOT = build operate transfer

We believe CEI’s success in securing new WTE projects can be attributed to the following factors:

Regional dominance. We believe CEI has an advantage in securing projects in those regions in China where it has a proven track record of cooperating with the local government along with established brand awareness. CEI is the dominant WTE operator in Jiangsu and Shandong provinces, with respective market shares in these provinces of 35-45% and 20-30% in terms of operating waste-processing capacity for 2013, based on our estimates.

Proven track record. Our analysis indicates that CEI is a competitive bidder for government WTE tenders outside the regions in which it is a dominant player, thanks to its track record of expertise in managing WTE projects. By way of illustration, all of the company’s WTE plants meet the Euro 2000 emission standard, with dioxin emissions able to reach 0.08ng TEQ/m3, which is 20% lower the maximum level under the Euro 2000 standard.

Another illustration of CEI’s track record is its Wujiang project, a WTE plant with designed capacity of 1.5ktpd and a planned investment of CNY890m, which is currently in preparation stage and which the company expects to commence operations in 2016. CEI secured this project in March 2012, to demolish an old WTE plant – which had been built in 2009 yet was shut down before trial operations began due to the local population’s stiff opposition to it – and re-build a plant in its place that conforms with a higher industry standard. According to our latest discussions with CEI, the project is going smoothly with the demolition of the old plant now mostly complete.

SOE background. We like CEI’s background of belonging to an SOE, given that the company operates in a capital-intensive industry with local authorities as its customers. Its SOE background has given the company access to competitive financing – its effective bank borrowing cost was 5% in 2013 – and also facilitates negotiations with local governments to obtain more preferential contract terms.

Sound project execution

Within China’s WTE industry, various projects have faced obstacles during the past few years, due to: 1) delays in obtaining government approvals, 2) changes in the selection of project location due to the original locations being evaluated as having an unsatisfactory environmental or meeting with opposition by local residents, and 3) over-optimistic estimates for local municipal solid waste (MSW) generation at the time when the local authority planned the project. Such obstacles constitute one of the major investment risks associated with an WTE operator; there have been cases where project delays have had a major adverse earnings impact on the operator involved, such as at Dynagreen, whose 1H14 net profit declined by 70% YoY as a result of drop in its WTE project construction revenue. We would highlight that since it entered into the WTE business in 2007, CEI has not encountered major delays in its WTE projects. Most of the company’s WTE projects commenced operations 2.0-2.5 years after the company signed the concession right agreement for the projects with the relevant local government. Given this, for CEI’s new projects secured YTD in 2014, we expect phase I to commence operations in 2018 and onwards


- 73 -

and phase II to commence operations in 2019, 2020 and the subsequent years, depending on local demand for MSW treatment services. CEI has demonstrated sound execution ability for its WTE projects, which in our opinion is attributable to the following factors:

Focus on China’s affluent eastern and coastal regions. CEI has so far focused the development of its WTE business on Jiangsu, Shandong and

Zhejiang province. These 3 provinces account for 77%, 15% and 8%, respectively, of its WTE capacity that is in operation (as at October 2014). Going forward, while CEI has started to expand into central regions such as Anhui and Henan provinces, the affluent eastern and coastal regions are likely to remain the company’s primary areas of focus for its WTE business, in our opinion.

CEI: details of WTE projects in operation (October 2014)

Project Province Type Duration (years) Investment (CNYm) Capacity (tpd) Date project was secured Date operation commenced

Preparation and construction

period (years)

Suzhou I Jiangsu BOT 28 489 1,050 n.a. Jul-06 n.a

Yixing I Jiangsu BOT 28 238 500 n.a. Jun-07 n.a

Jiangyin I Jiangsu BOT 30 389 800 n.a. May-08 n.a

Changzhou Jiangsu BOT 25 412 800 Mar-07* Nov-08 1.7

Suzhou II Jiangsu BOT 28 450 1,000 Jul-07* Jun-09 1.9

Jinan Shandong BOT 25 901 2,000 Jan-09 Oct-11 2.8

Zhenjiang I Jiangsu BOT 30 413 1,000 Jul-09 Aug-11 2.1

Jiangyin II Jiangsu BOT 27 205 400 Aug-09 Oct-10 1.2

Suqian Jiangsu BOT 30 324 600 Nov-09 Dec-11 2.1

Suzhou III Jiangsu BOT 28 750 1,500 Dec-10 Jan-13 2.1

Nanjing I Jiangsu BOT 30 1,030 2,000 Dec-11 Jun-14 2.5

Pizhou I Jiangsu BOT 30 330 600 Mar-12 Jul-14 2.3

Ningbo Beilun Zhejiang BOT 30 560 1,000 May-12 May-14 2.0

Total 6,492 13,250 Average: 2.0-2.5 years

Source: Company

Note: * these dates refer to the project construction commencement dates

We believe this geographic positioning within China is one of the reasons for CEI’s track record of smooth project execution given: 1) local authorities in the eastern and coastal regions are more able to afford WTE projects, are generally more experienced at dealing with WTE projects, and are thus likely to adopt a more careful approach to the initial planning for WTE plants, 2) residents in these regions tend to be more familiar with WTE projects and are thus less likely to perceive them negatively, and 3) land values are typically higher in these regions, such that demand for WTE is more inelastic than in other regions in the country.

CEI: locations of its WTE capacity in China (October 2014)

Source: Company

CEI: breakdown of its WTE capacity by province (October 2014) (tpd) Operating Construction Preparation Concession Total

Anhui - - 1,200 1,500 2,700

Guangdong - 700 600 350 1,650

Hainan - 700 - 350 1,050

Henan - - 1,000 500 1,500

Hunan - - 800 - 800

Jiangsu 10,250 1,200 4,700 1,500 17,650

Shandong 2,000 2,200 1,200 1,900 7,300

Zhejiang 1,000 - 1,200 3,350 5,550

Total 13,250 4,800 10,700 9,450 38,200

Source: Company

Well-established brand awareness. Turning to CEI’s brand awareness, we believe the company’s Changzhou WTE project is an exemplary one nationally. According to The People’s Daily (30 June 2014), not only has this WTE plant been the subject of zero complaints since it commenced operation in 2008, but 100,000 people live within a 500m-1km radius of the plant – making it China’s first and only WTE plant so far to be located in a residential area. The same report went on to state that this WTE plant had a very limited impact on the local economy, as implied by the resilience of property prices in the vicinity; the price of new residential premises located at around 1km away from the plant is currently CNY5,000/m2 on average, which matches the level of prices in the local market.

11%

16%

15%

6%

4%

15%

4%

9%

5%

7%

77%

25%

44%

16%

15%

46%

11%

20%

8%

11%

35%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Operating

Construction

Preparation

Concession

Anhui Guangdong Hainan Henan

Hunan Jiangsu Shandong Zhejiang

http://js.people.com.cn/n/2014/0630/c360296-21538093.html


- 74 -

From this example, we think it is reasonable to believe that a WTE plant operated by CEI tend to have less local opposition compared with other operators’ WTE plants, and we believe CEI has experience of choosing appropriate plant locations in cooperation with local governments. Both factors can mitigate the risk of project delays for the company.

Focus on technology advancements. CEI has self-designed grate furnaces that are specially optimised to incinerate waste in China, and which also contributes to the high operating efficiency of its WTE plants, in our view. According to CEI, each of its self-designed grate furnaces is able to generate power from MSW at as high as 450KWh/tonne, compared with its imported furnaces at around 420KWh/tonne, and also consumes less electricity than an imported furnace. It is estimated that by using its self-designed grate furnace, CEI can realise extra annual revenue of CNY4m from electricity sales for a 500tpd WTE project. We compare the functionalities of CEI’s self-designed grate furnaces with the typical imported furnace.

CEI’s self-designed grate furnace compared with a typical imported grate furnace

CEI’s self-designed

grate furnace

Imported grate

furnace

Absolute

difference

Remarks

Electricity generation

(KWh/tonne)

450.6 421.2 +29.4 Per tonne of dry waste

Electricity consumption

(KWh/tonne)

57.3 76.0 -18.6 Per tonne of dry waste

Annual electricity

generation (GWh)

65.5 57.5 +8.0 Assume it operates 8,000 hours per year at full capacity

Annual electricity

sales (CNYm)

34.1 29.9 +4.2 Assume 20% in-house consumption of net electricity generated, and 80% on-grid distribution

Consumption of

calcium hydroxide

(Kg/tonne)

135.6 207.5 -71.9 Used to remove acid gases

Consumption of

ammonium hydroxide

(L/tonne)

1.9 2.4 -0.5 Used to reduce NOx in the furnace, neutralise agents (eg, Ca[OH]2) and adsorb materials eg, activated carbon)

Source: Company Note: CNY0.65/KWh on-grid tariff is only applicable for no more than 280KWh/tonne of wet waste electricity generation, if exceeded; the thermal tariff will be applied for the extra amount 450KWh/tonne of dry waste ~ 338KWh/tonne of wet waste (25% moisture) ~ on grid 270KWh/tonne of wet waste, assuming 20% in-house consumption

CEI: view of a self-designed grate furnace

Source: Company

In 2014, CEI started supplying WTE equipment – including incinerators, boilers, gas-purification systems, selective non-catalytic reduction (SNRC) systems and ash-solidification systems – to other WTE operators in China. We regard this as demonstrating recognition of CEI’s outstanding technology in the WTE industry, and believe that keeping at the forefront of technology can enable CEI to maintain its position as one of the country’s leading WTE players in the coming years.

CEI: recent equipment supply contract wins Date Counterparty Equipment Location

8-Oct-14 Jiangsu Yancheng Daji Group Leachate treatment Dafeng

8-Oct-14 Anhui Shengyun Group Leachate treatment Zhaoyuan

8-Oct-14 Jiangsu Changzhou environmental hygiene multi-waste treatment plant

Fly-ash system Changzhou

12-Oct-14 Sichuan Herrel Environmental Protection Industrial (Herrel Group)

Entire line of WTE equipment Guangxi province, Qinzhou

14-Oct-14 DP CleanTech Entire line of WTE equipment Ethiopia

Source: Company

Among its contracts secured to supply equipment to other operators, in October this year CEI entered into a cooperation agreement with DP CleanTech Co, one of the world’s leading energy-solutions providers with substantial experience in engineering and developing WTE projects and biomass projects. Through this, CEI has the opportunity to not only develop business jointly with DP CleanTech Co in overseas solid waste treatment markets, but also integrate its technology with DP CleanTech Co’s and further develop its own technology.


- 75 -

Large project portfolio provides good earnings visibility

As a WTE player, CEI operates in a capital-intensive industry where construction revenue is recognised during the construction period of a new WTE plant under a BOT contract. This leads to a natural mismatch between accounting revenue and cash revenue due to the application of the IFRIC 12 accounting standard. As such, we like an operator like CEI whose construction revenue is not the dominant contributor to its accounting revenue, as a lower construction revenue contribution entails less execution risk during the project execution period, and thus provides better earnings visibility. We forecast 62% of CEI’s total WTE business revenue to come from construction revenue in 2014E as a result of the company’s aggressive capacity expansion over 2014-16E, but expect this proportion to diminish to 51% of CEI’s revenue in 2016E, based on its currently secured projects. Compared with peer Dynagreen, whose construction revenue contributed 73% of its accounting revenue in 2013, we think CEI’s revenue is of better quality. CEI: total WTE business revenue breakdown by construction and operating revenue


Note: Finance income is essentially an allocation of operating revenue, which is recurring throughout the concession period

Whilst project delays are common in the WTE industry, we believe they would have less of an impact on the revenue and earnings of operators like CEI that have large project portfolios, given: 1) operating revenue accounts for significant proportion of their revenue, and 2) CEI has a sound project pipeline. According to our sensitivity analysis shown in the following tables, a ±1ktpd change in CEI’s additional WTE project capacity in 2015 compared with our forecast (and assuming construction is started in 2016 and the capacity becomes operational in 2H17) would have an impact of just ±0.7pp on our 2013-16E EPS CAGR, and only ±0.7% on our target price for the company.

CEI: sensitivity of target price, EPS CAGR, adjusted capex and net gearing to additional WTE project capacity

Additional

project capacity in 2015E

Target

price

(HKD)

2013-16E

EPS

CAGR

2016E

Adjusted capex

(HKDm)

2016E

net debt-to-equity

-4.0ktpd 11.86 21.3% 2,883 51.8%

-3.0ktpd 11.94 22.0% 3,316 53.2%

-2.0ktpd 12.03 22.7% 3,749 54.6%

-1.0ktpd 12.11 23.4% 4,182 56.0%

Base case 12.20 24.0% 4,615 57.4%

+1.0ktpd 12.29 24.7% 5,048 58.8%

+2.0ktpd 12.37 25.4% 5,481 60.2%

+3.0ktpd 12.46 26.0% 5,915 61.6%

+4.0ktpd 12.54 26.7% 6,348 62.9%


Note: we assume that additional project capacities in 2015E would start construction in 2016 and commence operations in 2H17

CEI: sensitivity of changes in target price, EPS CAGR, adjusted capex and net gearing to additional WTE project capacity

Additional

project in 2015

Target

price

2013-16E

EPS

CAGR

2016E

Adjusted capex

2016E

net debt-to-equity

-4.0ktpd -2.8% -2.8pp -37.5% -5.6pp

-3.0ktpd -2.1% -2.1pp -28.2% -4.2pp

-2.0ktpd -1.4% -1.4pp -18.8% -2.8pp

-1.0ktpd -0.7% -0.7pp -9.4% -1.4pp

Base case 0.0% 0.0pp 0.0% 0.0pp

+1.0ktpd 0.7% 0.7pp 9.4% 1.4pp

+2.0ktpd 1.4% 1.3pp 18.8% 2.8pp

+3.0ktpd 2.1% 2.0pp 28.2% 4.2pp

+4.0ktpd 2.8% 2.6pp 37.5% 5.5pp


Note: we assume that additional project capacities in 2015E would start construction in 2016 and commence operations in 2H17

WTE capacity expansion and tariff hikes as key growth drivers

The WTE industry has been the focus area of CEI’s business development focus since 2009, when it secured its first 4ktpd of WTE projects. In this vein, the company stopped developing actively its WWT business in 2010. We believe the solid waste treatment sector, especially the WTE business, will be the main earnings growth driver for CEI in the coming few years. As such, we forecast a 31% net profit CAGR for CEI’s environmental energy business segment over 2013-16E, which should drive a net profit CAGR of 28% for the company over this period.

We forecast a 44% CAGR in its WTE waste-processing capacity over 2013-16E

According to CEI and based on our research, all of the company’s WTE projects that currently under construction or in the preparation stages should commence operations during 4Q14-2016. Of this, we expect a substantial 14.2ktpd of its new WTE capacity to start operating in 2015-16, taking its total WTE capacity in operation to 28.8ktpd by the end of 2016

45%58% 61%

47%59% 62% 66%

51%

73%

48%37%

39%53%

41% 38% 34%49%

27%

0%

20%

40%

60%

80%

100%

2009

2010

2011

2012

2013

2014

E

2015

E

2016

E

Dyn

agre

en20

13

Construction revenue Operation revenue + finance income Others


- 76 -

(as the next chart shows), and representing a 44% CAGR in its operating WTE waste-processing capacity over 2013-16E. CEI: trend in WTE capacity in operation


We expect this capacity growth to drive earnings growth for the company mainly through the recognition of construction revenue for 2013-16E, and through the contribution of stable cash-based operating revenue and finance income beyond then. The mild 7.4% YoY revenue decline we forecast for CEI for 2016E reflects a drop we expect in its construction revenue, after 19 WTE plants that are currently under construction or in the preparation stage commence operations in 2015 and 2016, according to our forecasts. Still, we expect CEI to keep up its pace of securing and carrying out more WTE projects during 2015 and 2016, which should support its construction revenue in 2016 and beyond. Along with expansion of its WTE capacity, we forecast the company’s annual waste processed to increase at a 36% CAGR during 2013-16E, and its annual on-grid electricity generated to rise at a 38% CAGR for the same period. CEI: revenue from environmental energy business segment


We have observed that over 2007-13, the average per unit on-grid electricity generation capacity for CEI’s WTE business fluctuated in a range of 212-238KWh/tonne of wet waste. We think the reasons for this are: 1) annual fluctuations in the company’s in-house energy consumption, which is usually 20-25% of its total electricity generation, and thus can lead to fluctuations in the utilisation rate for its on-grid electricity generation, 2) fluctuations in the waste moisture rate, which can be affected by weather conditions and local cultural norms; we assume an average waste moisture rate of 25% based on our discussions with industry experts, and 3) differences in the designed per unit power-generation capacity, which may be the result of differences in the technology adopted by and sizes of its various WTE projects. We detail the key operating metrics for CEI’s WTE business in the following table. In the long term (ie, beyond 2016), we expect CEI’s on-grid power generation capacity to range 240-250KWh/tonne of wet waste. CEI: electricity-generation capacity by project

Project Status

Household waste-

processing

capacity (tpd)

Annual on-grid

power generation

capacity (GWh)

Per unit on-grid

generation - wet

(KWh/tonne)*

Suzhou I Operating 1,050 100 198

Yixing I Operating 500 44 183

Jiangyin I Operating 800 77 201

Changzhou Operating 800 77 201

Suzhou II Operating 1,000 100 208

Jinan Operating 2,000 190 198

Zhenjiang I Operating 1,000 100 208

Jiangyin II Operating 400 38 198

Suqian Operating 600 60 208

Suzhou III Operating 1,500 158 219

Nanjing I Operating 2,000 220 229

Pizhou I Operating 600 71 247

Ningbo Beilun Operating 1,000 112 234

Sanya I Construction 700 75 223

Boluo I Construction 700 91 272

Shouguang I Construction 600 80 278

Weifang I Construction 1,000 122 254

Rizhao I Construction 600 80 278

Zhenjiang II Construction 400 45 234

Changzhou Xinbei I Construction 800 90 234

Huidong Preparation 600 104 361

Yixing II Preparation 300 31 215

Wujiang Preparation 1,500 146 203

Ningbo Beilun II Preparation 500 56 233

Ninghai I Preparation 700 90 268

Heze I Preparation 600 80 278

Ma'an Shan Preparation 800 67 174

Yiyang Preparation 800 90 234

Nanjing II Preparation 2,000 227 236

Dangshan I Preparation 400 40 208

Nanjing Gaochun Preparation 500 54 225

Tengzhou I Preparation 600 80 278

Pei County I Preparation 400 60 313

Xinzheng I Preparation 1,000 113 235

Average

234

Source: Company

Note: We assume 360 operating days per year, and a 25% waste moisture rate; the waste-processing capacity is measured by the dry waste amount

4.2 4.6 8.2 8.2 9.7 14.6 17.3 28.8

398 436 786 786

944

1,502 1,841

3,168

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0

5

10

15

20

25

30

2009 2010 2011 2012 2013 2014E 2015E 2016E

(GWh pa)(ktpd)

Operating household waste processing capacity at end of year (LHS)

Operating electricity generation capacity at end of year (RHS)

-50%

0%

50%

100%

150%

200%

250%

0

2,000

4,000

6,000

8,000

10,000

2009 2010 2011 2012 2013 2014E 2015E 2016E

(HKDm)

Construction services Operation services

Finance income YoY


- 77 -

CEI: key operating metrics for WTE business Assumption Unit 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

EOY operating WTE plants (unit) 2 4 5 6 9 9 10 15 19 35

EOY operating household waste processing capacity (ktpd) 1.55 3.15 4.15 4.55 8.15 8.15 9.65 14.55 17.25 28.75

Average operating household waste processing capacity (ktpd) 1.30 2.08 3.65 4.22 5.22 8.15 9.53 11.43 15.29 24.63

Annual average operating household waste processing capacity (mtpa) 0.5 0.8 1.3 1.5 1.9 3.0 3.5 4.2 5.6 9.0

Annual average operating household waste processing capacity - wet (mtpa) 0.6 1.0 1.8 2.1 2.5 4.0 4.6 5.6 7.4 12.0

(average waste moisture rate)

25% 25% 25% 25% 25% 25% 25% 25% 25% 25%

Annual household waste proceeded - wet (m tonnes) 0.56 0.94 1.72 1.91 2.44 3.71 4.42 5.32 7.07 11.15

(Utilization rate)

88% 92% 97% 93% 96% 94% 95% 96% 95% 93%

EOY on-grid electricity generation capacity (GWh pa) 144 298 398 436 786 786 944 1,502 1,841 3,168

Average on-grid electricity generation capacity (GWh pa) 122 195 348 404 501 786 931 1,144 1,597 2,688

Annual on-grid electricity generated (GWh) 131 204 365 445 553 825 1,052 1,212 1,679 2,768

(Utilisation rate)

108% 104% 105% 110% 110% 105% 113% 106% 105% 103%

(Per unit on-grid generation - wet) (KWh/tonne) 235 218 212 233 226 222 238 228 237 248

Source: Company, Daiwa forecast

Note: we assume a 25% moisture rate for wet waste; EOY = end of year

We expect waste-treatment tariffs to trend up

In addition to WTE capacity additions, we regard increases in waste-treatment fees as a long-term earnings driver for CEI. Based on our research, some of the company’s WTE plants have put through tariff hikes over the past few years – for example, the waste-treatment tariff for its Changzhou WTE project has been raised by 13% since it started operations in 2008 to CNY90/tonne effective from 1 January 2014. We expect to see a continuous upward trend waste-treatment tariffs in the coming years as China implements stricter treatment and emission standards to protect the environment. Based on our sensitivity analysis of waste-treatment tariff hikes for CEI shown in the following tables, every 1% tariff hike from our central scenario for 2015E would lift our 2016 EPS forecast by 0.16% relative to our current forecast. CEI: sensitivity of EPS CAGR, EPS and target price to waste-treatment tariff 2015E Waste-treatment tariff 2013-16E 2015E EPS 2016E EPS Target price

(CNY/tonne) EPS CAGR (HKD) (HKD) (HKD)

-5% CNY77/tonne 23.7% 0.509 0.617 11.95

-4% CNY78/tonne 23.8% 0.510 0.618 12.00

-3% CNY78/tonne 23.8% 0.510 0.619 12.05

-2% CNY79/tonne 23.9% 0.511 0.620 12.10

-1% CNY80/tonne 24.0% 0.512 0.621 12.15

0% CNY81/tonne 24.0% 0.512 0.622 12.20

+1% CNY82/tonne 24.1% 0.513 0.623 12.25

+2% CNY82/tonne 24.2% 0.513 0.624 12.30

+3% CNY83/tonne 24.2% 0.514 0.625 12.35

+4% CNY84/tonne 24.3% 0.515 0.626 12.40

+5% CNY85/tonne 24.4% 0.515 0.626 12.45


CEI: sensitivity of changes in EPS CAGR, EPS and target price to waste-treatment tariff

2015E Waste-treatment tariff 2013-16E 2015E EPS 2016E EPS Target price

(CNY/tonne) EPS CAGR

(HKD)

-5% CNY77/tonne -0.33pp -0.6% -0.8% -2.1%

-4% CNY78/tonne -0.26pp -0.5% -0.6% -1.7%

-3% CNY78/tonne -0.20pp -0.3% -0.5% -1.2%

-2% CNY79/tonne -0.13pp -0.2% -0.3% -0.8%

-1% CNY80/tonne -0.07pp -0.1% -0.2% -0.4%

0% CNY81/tonne 0.00pp 0.0% 0.0% 0.0%

+1% CNY82/tonne 0.07pp 0.1% 0.2% 0.4%

+2% CNY82/tonne 0.13pp 0.2% 0.3% 0.8%

+3% CNY83/tonne 0.20pp 0.3% 0.5% 1.2%

+4% CNY84/tonne 0.26pp 0.5% 0.6% 1.7%

+5% CNY85/tonne 0.33pp 0.6% 0.8% 2.1%



- 78 -

Comprehensive exposure in the China environmental sector

CEI is our best proxy for China WTE industry not only for its fast-growing WTE business, but also for its broad exposure within China’s environmental industry, within which CEI also operates a WWT, hazardous waste treatment and alternative (ie, renewable) energy business, which we go on to discuss.

WWT business: value accretion approved M&A deal with HanKore

CEI has 21 WWT plants in operation with a total capacity of 1,835ktpd, and 1 WWT plant at the preparation stage with capacity of 75ktpd, as at October 2014. Over 90% of its WWT capacity is located in Shandong Province, and the remaining 4 projects with combined capacity of 190ktpd are located in Jiangsu Province. CEI has stopped developing actively its WWT business since 2010. We regard CEI’s deal with HanKore Environment Tech Group (HanKore, not rated), which has been approved by the relevant authorities, such as the Stock Exchange of Singapore, and will be completed within 2014 according to CEI, as a near-term earnings catalyst for CEI’s environmental water business. CEI proposes to sell its water assets to HanKore for a consideration of CNY5.8bn by subscribing to 1.9bn new shares of HanKore, following which CEI will own 79% of the merged company. This would increase CEI’s total attributable water – including WWT, water supply, and water reclamation – capacity by 45% to 2.75mtpd. We illustrate this proposed deal in the following chart.

Proposed water assets transaction between CEI and HanKore

Source: Company

HanKore: water projects’ contracted capacity (1H14) (ktpd) WWT Water reuse Water supply Total

Beijing 80 - - 80

Henan 150 100 200 450

Jiangsu 600 - - 600

Shaanxi 200 170 - 370

Shandong 40 30 - 70

Total 1,070 300 200 1,570

Source: HanKore

HanKore: operating water capacity Year Year-end operating capacity (ktpd)

2006 200.0

2007 237.5

2008 262.5

2009 377.5

2010 457.5

2011 477.5

2012 517.5

2013 560.0

2014 720.0

2015 865.0

2016-17 1,090.0

Post 2017 480.0

Source: HanKore

Pro

po

sed

tra

nsa

ctio

n

China Everbright Water

Holdings Limited

Consideration Shares of

1,940,269,305 @ SGD0.703/share

HanKore Environment Tech

Group Limited (HanKore SP)

China Everbright

International (257 HK)


Investment Limited

Worth of CNY5.8bn

China Everbright

International (257. HK)


Investment Limited

HanKore Environment

Tech Group (U9E. SG)


Investment Limited

HanKore’s original

assets

100%

79.21%

100% 100%

By end of 2013

21 WWT projects of 1.835mtpd

4 reusable water projects of 61.6ktpd

By end of 2013

11 WWT projects of 1.07mtpd

3 reusable water projects of 300ktpd

1 water supply project of 200ktpd

100%

Po

st-t

ran

sact

ion

str

uct

ure


- 79 -

HanKore: water projects (1H14) Project Type Capacity (ktpd) Phase I (ktpd) Phase I commencement Phase II (ktpd) Phase II commencement Phase III (ktpd) Concession period

Beijing Daxing WWT 80 40 Aug-10 40 Dec-15

2006-35

Jiangsu Yangzhou WWT 50 12.5 Sep-07 12.5 Dec-13 25 2004-29

Jiangsu Dapu WWT 100 100 Jan-06

2006-31

Jiangxu Xugou WWT 80 40 Dec-09 40

2006-31

Jiangsu Kunshan WWT 100 25 Jan-07 25 Sep-08 50 2004-29

Jiangsu Suzhou Wuzhong WWT 150 75 Jan-09 75 Jun-15

2006 -33

Nanjing Pukou WWT 80 40 Jan-10 40 Dec-14

2006- 31

Nanjing Liuhe WWT 40 20 Aug-11 20 Feb-14

2006-36

Shandong Binzhou WWT 40 40 Jan-12

2007-36

Shandong Binzhou Water reuse 30 30 Dec-15

2007-36

Shaanxi Xianyang WWT 200 100 Oct-06 100 Mar-14

2003-44

Shaanxi Xianyang Water reuse 170 30

2014-44

Henan Sanmenxia WWT 150 30 Dec-13

2014-44

Henan Sanmenxia Water reuse 100 30

2014-44

Henan Sanmenxia Water supply 200 50

2014-44

Source: HanKore

As wells as increasing CEI’s water capacity, which should help enhance its earnings, the proposed deal with HanKore should be value-accretive for CEI given the following considerations:

Phase II/III expansion: of the 1.57mtpd of HanKore’s water capacity, less than half is operational – according to the company, as at August 2014, only 755ktpd of the WWT projects were in operation. After the deal, HanKore could leverage on the financial resources of CEI to develop its projects further. CEI’s effective financing cost of 5% in 2013 is lower than HanKore’s 7.5-8.5%.

Upgrades: the majority, 80-90%, of HanKore’s WWT plants have yet to be upgraded to comply with Grade I-A discharge standards, and CEI plans to help it with the process in the next few years. Such upgrades could lead to a tariff hike.

Synergies: after the merger, CEI’s leading position in the water market in Shandong and Jiangsu provinces will be enhanced, while its presence in central China – Beijing, Shaanxi and Henan provinces – will be expanded. We see the likelihood of CEI expanding further its WTE business coverage into central China by leveraging on the local relationships that the water business brings along.

CEI: expanding geographic coverage for water business

Source: Company

Pursuant to the proposed deal, CEI’s water assets are valued at CNY5.8bn, which, according to our estimates, is equivalent to PERs of 25x for 2014E and 24x for 2015E. This high PER valuation is mainly attributable to the: 1) the high standard of CEI’s WWT equipment – most of CEI’s WWT plants have met Grade I-A discharge standards, and thus are running at higher WWT tariffs than HanKore’s, according to management, and 2) the mature operating status of most of its water assets, measured by their higher utilisation rate of 88% in 2013 compared with less than 70% for HanKore, according to the management. According to the Bloomberg-consensus forecasts for HanKore, we estimate CEI’s water segment will post 28% net profit enhancement for 2015 after the deal is completed, or 4% enhancement to CEI’s total 2015E net profit.

Beijing

Jiangsu

Shandong

HenanShaanxi

Overlapping geographical coverage

New geographical exposure for CEI


- 80 -

CEI: net profit from water segment (HKDm) FY14 FY15E FY16E

Jun-14 Jun-15 Jun-16

HanKore’s net profit (145) 179 200

FY15E

Dec-15

HanKore’s net profit after merger

(based on Bloomberg-consensus forecast)

498

CEI’s attributable net profit from water segment after merger (79.21%)

395

CEI’s current net profit from water segment

(Daiwa forecast)

309

Net profit enhancement

28%

Source: Bloomberg (for HanKore), Daiwa forecasts

Note: we derive HanKore’s FY15E (December year-end) net profit by extrapolating its FY15E (June year-end) and FY16E (June year-end) net profit based on consensus forecasts, and add CEI’s FY15E net profit from the water segment based on our forecast

Hazardous waste treatment

In Jiangsu and Shandong provinces, CEI also has 10 hazardous waste treatment projects, among which 3 landfills with designed storage capacity of 852,000m3 are in operation. According to CEI’s plan, it will start adding hazardous waste incineration capacity starting in 2015. On our estimates, the contribution of the solid waste treatment business will be limited over the next 3-5 years, accounting for just c.10% of the operating revenue for CEI’s environmental energy business segment. We believe WTE will ultimately be the growth driver for CEI’s environmental energy business, and for CEI itself. That said, we like CEI’s exposure to the solid waste treatment industry, which, as discussed in our sector part, is an untapped market with huge potential. The industry is at an early development phase mainly due to its unclear business model and value chain as a result of a lack of authority enforcement and regulatory guidance. We believe hazardous waste treatment could possibly gradually become a regulatory focus, at which time early movers such as CEI would benefit. CEI: solid waste treatment capacity Landfill designed storage capacity (m3)

Province Operating Construction Preparation Concession Total

Jiangsu 852,000 900,000 - - 1,752,000

Shandong - - 500,000 - 500,000

Total 852,000 900,000 500,000 - 2,252,000

Landfill average capacity (ktpa)


Jiangsu 60 50 - - 110

Shandong - - 20 - 20

Total 60 50 20 - 130

Non-Landfill capacity (ktpa)


Jiangsu - 30 20 - 50

Shandong - 90 - - 90

Total - 120 20 - 140

Source: Company

Alternative energy

CEI is also engaged in alternative energy projects, including solar, biomass, methane-to-energy (MTE), wind and heat pumps (equipped at WWT plant). The current power generation of these alternative projects is about 246.5GWh annually, and could grow to around 2,000GWh annually with the projects in hand, according to the company. CEI is starting to gain momentum in the biomass business segment this year, having secured 7 new projects. During our recent discussions with the company, management said it saw biomass as an untapped market with substantial potential riding on urbanisation – as agricultural-focused cities pay more attention to environmental sustainability, which in turn will drive demand for an economical way to treat straw. Alongside its cities-to-rural development focus, management believes it has established a well-managed collection-storage-transportation processing system, which is its core competitiveness in the biomass industry. CEI is also targeting to enter the agricultural equipment manufacturing industry, which it believes will create synergies with its biomass business. In our view, these new frontiers together present an interesting business landscape. That said, we expect limited revenue and earnings contributions from the alternative energy business segment in the near term, at 12% and 7%, respectively for 2016E.


- 81 -

Valuation

We have a DCF-based 6-month target price for CEI of HKD12.20. Within our DCF valuation, we assume a WACC of 7.2%, and a zero terminal growth given the nature of stable FCF under its BOT model. Our debt/capital proportion of 55% is derived at a comparable level to the proportion for another leading environmental operator with an SOE background, Beijing Enterprises Water Group (BEW) (371 HK, HKD5.40, Outperform, TP: HKD6.30). We believe CEI adopts a more conservative threshold for its net-debt-to-equity gearing ratio, compared with BEW. As both the company’s WTE and WWT businesses operate under a BOT business model with concession rights granted by local governments, and given that we expect a limited earnings contribution from its renewable energy segment (5% in 2015E), we adopt a corporate-level DCF for CEI’s business. We have adjusted the company’s FCF to exclude the impact of IFRIC 12 accounting standards. CEI: assumptions for WACC WACC Calculation

Equity Beta 0.75

Risk Free Rate 4.0%

Market Risk Premium 10.0%

Cost of Equity 11.5%

Cost of Debt 4.9%

Debt/Capital 55%

Tax 25%

WACC 7.2%

Equity Beta 0.75

Source: Daiwa estimates

The following table shows the sensitivity of our DCF-derived target price to changes in the WACC and terminal growth rate. For the WACC, a ±0.5% change

in our assumption would have an impact of -9%/+11% on our target price; for the terminal growth rate, a +0.5% change in our assumption would have an impact of +0.7% on our target price. CEI: sensitivity of our target price (HKD) to WACC and terminal growth rate assumptions

WACC

Ter

min

al g

row

th r

ate

5.7% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7%

0.0% 17.20 15.25 13.61 12.20 10.99 9.93 9.00

0.5% 18.05 15.90 14.11 12.60 11.31 10.19 9.21

1.0% 19.08 16.68 14.71 13.06 11.67 10.48 9.44

1.5% 20.36 17.62 15.42 13.61 12.10 10.81 9.71

2.0% 21.99 18.79 16.28 14.26 12.59 11.20 10.02

2.5% 24.13 20.28 17.35 15.05 13.19 11.66 10.37

3.0% 27.08 22.24 18.72 16.03 13.91 12.20 10.79


Our target price implies a 24x 2015E PER. In the table below we provide an illustrative breakdown for our target price, based on which we break down our target price using a SOTP approach. Given that CEI is the only Hong Kong-listed China environmental operator with large WTE exposure, a strong project portfolio, a solid track record and a large market cap, we argue that it deserves a premium valuation. Our target price implies a 25x 2015E PER for CEI’s environmental energy business, backed by our 31% net profit CAGR forecast for this segment for 2013-16E. CEI: target price breakdown by business segment

2015E EPS % of EPS TP

Implied

2015E PER % of TP

Environmental energy 0.414 80% 10.20 24.6x 84%

Environmental water 0.066 13% 1.50 22.9x 12%

Renewable energy 0.033 6% 0.50 15.3x 4%

Total 0.512 100% 12.20 23.8x 100%


CEI: adjusted FCF Non-IFRIC EBIT (HKDm) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E …… 2031E 2032E 2033E 2034E 2035E

EBIT (IFRIC) 2,749 3,652 4,473 5,094 5,536 5,942 6,169 6,299 6,311 6,317 …… 5,987 5,955 5,903 5,793 5,693

Construction revenue (4,289) (6,844) (4,838) (3,659) (3,648) (1,783) (1,165) - - - …… - - - - -

Construction cost 3,533 5,619 3,967 3,000 2,991 1,462 955 - - - …… - - - - -

Re-instatement of operational income 30 79 371 556 601 787 879 1,013 1,086 1,158 …… 1,645 1,732 1,808 1,847 1,895

Non-IFRIC EBIT 2,023 2,507 3,973 4,991 5,480 6,408 6,838 7,312 7,397 7,476 …… 7,632 7,687 7,711 7,640 7,589

FCF (HKDm) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E …… 2031E 2032E 2033E 2034E 2035E

Non-IFRIC EBIT 2,023 2,507 3,973 4,991 5,480 6,408 6,838 7,312 7,397 7,476 …… 7,632 7,687 7,711 7,640 7,589

Share of associates - - - - - - - - - - …… - - - - -

Depreciation/amortization 114 133 155 179 204 231 260 287 313 336 …… 452 465 478 490 502

Adjusted income tax (388) (453) (697) (883) (979) (1,157) (1,249) (1,342) (1,358) (1,373) …… (1,390) (1,390) (1,385) (1,365) (1,346)

Adjusted net change in working capital 6 (157) (290) (315) (192) (175) (154) (87) (32) 23 …… 64 51 43 56 63

Adjusted CAPEX

(include BOT construction cost) (4,069) (6,190) (4,615) (3,610) (3,662) (2,187) (1,677) (711) (655) (597) …… (343) (342) (339) (333) (327)

Adjusted FCF (2,314) (4,160) (1,474) 362 852 3,121 4,017 5,459 5,665 5,865 …… 6,416 6,471 6,507 6,488 6,481



- 82 -

CEI: 1-year forward PER CEI: 1-year forward PER band

Source: Company, Bloomberg, Daiwa forecasts Source: Company, Bloomberg, Daiwa forecasts

CEI: 1-year forward PBR CEI: 1-year forward PBR band

Source: Company, Bloomberg, Daiwa forecasts Source: Company, Bloomberg, Daiwa forecasts

4.0

9.0

14.0

19.0

24.0

29.0

34.0

39.0

Jan-

08

Jun-

08

Nov

-08

Apr

-09

Sep

-09

Feb

-10

Jul-1

0

Dec

-10

May

-11

Oct

-11

Mar

-12

Aug

-12

Jan-

13

Jun-

13

Nov

-13

Apr

-14

Sep

-14

(x)

24.6x Avg+1SD

18.7x Avg

30.5x Avg+2SD

12.7x Avg-1SD

6.8x Avg-2SD

0

2

4

6

8

10

12

14

16

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

May

-13

Sep

-13

Jan-

14

May

-14

Sep

-14

(HKD)

Price 10x PER 15x PER

20x PER 25x PER 30x PER

0

1

2

3

4

5

Jan-

08

Jun-

08

Nov

-08

Apr

-09

Sep

-09

Feb

-10

Jul-1

0

Dec

-10

May

-11

Oct

-11

Mar

-12

Aug

-12

Jan-

13

Jun-

13

Nov

-13

Apr

-14

Sep

-14

(x)

2.8x Avg+1SD

2.1x Avg

3.6x Avg+2SD

1.4x Avg-1SD

0.6x Avg-2SD

0

2

4

6

8

10

12

14

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

May

-13

Sep

-13

Jan-

14

May

-14

(HKD)

Price 1x PBR 1.625x PBR2.25x PBR 2.875x PBR 3.5x PBR


- 83 -

Investment risks

A slowdown in securing new projects

This constitutes the key risk to our investment view on CEI. Any adverse change in government initiatives and/or policies, increase in market competition or a worsened public perception of WTE projects would result in a slowdown in CEI securing new WTE projects. While we see a good project pipeline for CEI at present, well-paved into 2019/2020, if the company were to secure more new projects, this would not only have the potential to boost near-term earnings growth through the recognition of construction revenue, but would also be an essential factor for CEI to deliver long-term earnings growth. We have seen CEI’s strong ability in securing new projects, with 18 new WTE projects with a capacity of 13.8ktpd having been secured in 2014 YTD. While a reasonable slowdown in 2015, after a harvesting period in 2014, is possible, we are confident that CEI would maintain its leading position in the WTE industry. While any slowdown in securing new projects would likely have limited impact on our forecast for CEI given we have not built in any additional assumptions for CEI’s projects apart from its currently secured ones, this can affect the company’s long-term growth potential and its share price movements.

Delays in project execution

WTE project delays within China’s WTE industry have been fairly common over the past few years, and have been due to: 1) delays in government approvals being granted, 2) changes in project location selection due to an unsatisfactory environmental impact evaluation or opposition by local residents, and 3) over-optimistic estimates for local waste treatment demand. Project delays are one of the major investment risks associated with WTE operators, and there have been cases where project delays have led to severe near-term earnings fluctuations. Nevertheless, during its track record period, CEI has not incurred any severe project delays as far as we know. Most of CEI’s operating projects have commenced operations 2.0-2.5 years after the company has signed the concession rights agreement with the local governments. According to our estimate, a ±1ktpd project in 2015 (starting construction in early 2015 and commencing operation in mid-2016) would have an impact of ±0.6% on our 2015E EPS and ±0.8pp on our 2013-16E EPS CAGR, relative to our current forecasts.

Low utilisation for future projects

It is possible that the utilisation of waste treatment capacity for CEI’s future projects will be lower than that for its operating projects, as local waste treatment supply gradually matches demand. Our sensitivity analysis shows that a 1pp decrease in the 2015E waste treatment utilisation rate (as well as for all future years) would have an impact of -0.1% on our 2015E EPS, a -0.1pp impact on our 2013-16E net profit CAGR, and a -0.5% impact on our target price. CEI: sensitivity to 2015E WTE plant waste treatment capacity utilisation 2015E utilisation 2015E EPS 2013-16E EPS CAGR 2015E ROE Target price

90% 0.509 23.7% 14.7% 11.93

91% 0.510 23.7% 14.7% 11.97

92% 0.510 23.8% 14.7% 12.03

93% 0.511 23.9% 14.7% 12.09

94% 0.512 24.0% 14.7% 12.15

Base case, 95% 0.512 24.0% 14.7% 12.20

96% 0.513 24.1% 14.8% 12.25

97% 0.513 24.2% 14.8% 12.31

98% 0.514 24.2% 14.8% 12.36

99% 0.515 24.3% 14.8% 12.41

100% 0.515 24.4% 14.8% 12.46


CEI: sensitivity to 2015E WTE plant waste treatment capacity utilisation - impact 2015E utilisation 2015E EPS 2013-16E EPS CAGR 2015E ROE Target price

90% -0.6% -0.35pp -0.08pp -2.2%

91% -0.5% -0.29pp -0.07ppt -1.9%

92% -0.4% -0.22pp -0.05pp -1.4%

93% -0.3% -0.14pp -0.03pp -0.9%

94% -0.1% -0.07pp -0.02pp -0.5%

Base case, 95% 0.0% 0.00pp 0.00pp 0.0%

96% 0.1% 0.07pp 0.02pp 0.4%

97% 0.2% 0.14pp 0.03pp 0.9%

98% 0.4% 0.20pp 0.05pp 1.3%

99% 0.5% 0.27pp 0.07pp 1.7%

100% 0.6% 0.33pp 0.08pp 2.1%


Downside risk due to geographic mix

Some 85% of CEI’s currently operating WTE projects, or 77% of its operating WTE capacity, is located in Jiangsu Province, a relatively wealthy province in the coastal region. However, as CEI gains more WTE projects in Central China (such as Anhui), we see downside risk for the return on those projects because: 1) the financial strength of inland local governments is not as strong as for coastal regions, therefore it is possible they would offer a lower waste treatment tariff, and 2) the waste heat value may be lower in inland regions due to the lower level of organic components contained in the collected MSW in inland regions as a result of both slower economic development compared with coastal regions and cultural norms, as we discussed in the sector section.


- 84 -

However, we think CEI chooses its projects in Central China carefully, making sure they can generate the company’s internal IRR target of 10%. We therefore see limited downside risk in this regard.

Industrial accidents

Industrial accidents involving emission or discharge of pollutants exceeding the relevant standards due to issues such as plant malfunction, inferior equipment, operational errors can have a severe impact on companies like CEI. In the near term, large penalties could be required to be paid to the government, and compensation to affected residents, as well as maintenance costs may be needed to repair the plant. In the longer term, such accidents could lead to a deteriorating company image which in turn could adversely affect CEI’s growth potential, in the sense that it may not be able to secure new projects, may not have access to competitive financing for its projects, and may not be able to bargain for preferential contract terms with the government, etc. However, with CEI’s solid track record, cutting-edge technology and attentiveness to the environment, we think industrial accidents are a minor risk for the company.

Equity dilution risk

We expect CEI to roll out steadily its secured WTE projects in the next few years through to 2020, to increase its household waste processing capacity from 13.25ktpd by October 2014 to 28.75ktpd by end-2016. Due to the capital-intensive nature of WTE construction – on average, CNY450-550m is needed for the construction of a WTE plant with a capacity of 1ktpd – aggressive capacity expansion would lead to large capital requirements. Based on our estimates, CEI will incur CNY6.2bn/CNY4.6bn in capex (including BOT construction cost) in 2015/2016E, respectively. In order to support its business development, CEI’s net debt-to-equity level is likely to increase to 57% by 2016E, based on our forecasts, which is near the company’s threshold net debt-to-equity level of 60%, which we derive based on its historical equity financing activities.

CEI: net debt-to-equity level


As we expect CEI to continuously secure new projects to support its long-term growth, we would not be surprised if the company decided to raise capital via the equity market. According to our sensitivity analysis, for each additional 1ktpd of WTE project that is secured in 2015, starts construction in 2016 and commences operation in 2H17, there is a +1.4ppt impact on CEI’s 2016E net debt-to-equity ratio. CEI: sensitivity of 2016E net debt-to-equity ratio to additional WTE capacity expansion


Based on CEI’s current share price, it could raise HKD2.0bn through a share placement with potential dilution of 3.5% for its current share capital, which we estimate would have a limited impact on CEI’s EPS growth. Furthermore, we believe that any share placement would have a minimal negative impact on CEI’s share performance, as most investors are well aware that such near-term “pain” is for long-term “gain”. This was illustrated by CEI’s latest 2 post-placement share price performance, for which there was an impact of -3.3%/+3.5% on its share price on the day after it announced the share placement.

33%

58%

20%

44%

52%

38%

8%

31%

57% 57%

0%

20%

40%

60%

80%

0

3,000

6,000

9,000

12,000

15,000

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

(HKDm)

Net debt Net debt-to-equity Threshold net debt-to-equity level

2016E net debt-to-equity 57%

Threshold net debt-to-equity

60.0%

50%

53%

56%

59%

62%

65%

-4.0

ktpd

-3.0

ktpd

-2.0

ktpd

-1.0

ktpd

Bas

e ca

se

1.0k

tpd

2.0k

tpd

3.0k

tpd

4.0k

tpd


- 85 -

CEI: share price performance after equity placement

Source: Company, Bloomberg

)

Appendix: projects

CEI: WTE projects

Project Province Status

Capacity

(tpd)

Investment

(CNYm)

Project

secured date

Jiangyin I Jiangsu Operating 389 800 n.a.

Suzhou I Jiangsu Operating 489 1,050 n.a.

Yixing I Jiangsu Operating 238 500 n.a.

Changzhou Jiangsu Operating 412 800 1-Mar-07

Suzhou II Jiangsu Operating 450 1,000 1-Jul-07

Jinan Shandong Operating 901 2,000 11-Jan-09

Zhenjiang I Jiangsu Operating 413 1,000 28-Jul-09

Jiangyin II Jiangsu Operating 205 400 17-Aug-09

Suqian Jiangsu Operating 324 600 15-Nov-09

Suzhou III Jiangsu Operating 750 1,500 21-Dec-10

Nanjing I Jiangsu Operating 1,030 2,000 25-Dec-11

Pizhou I Jiangsu Operating 330 600 5-Mar-12

Ningbo Beilun Zhejiang Operating 560 1,000 3-May-12

Sanya I Hainan Construction 426 700 15-Jul-12

Boluo I Guangdong Construction 417 700 25-Jul-12

Shouguang I Shandong Construction 339 600 8-Aug-12

Weifang I Shandong Construction 586 1,000 23-Aug-12

Rizhao I Shandong Construction 355 600 26-May-13

Zhenjiang II Jiangsu Construction 200 400 1-Oct-13

Changzhou Xinbei I Jiangsu Construction 420 800 23-Mar-14

Huidong Guangdong Preparation 334 600 5-Jan-10

Yixing II Jiangsu Preparation 151 300 8-Sep-10

Wujiang Jiangsu Preparation 890 1,500 13-Mar-12

Ningbo Beilun II Zhejiang Preparation 190 500 3-May-12

Ninghai I Zhejiang Preparation 360 700 6-Feb-13

Heze I Shandong Preparation 350 600 15-Jul-13

Ma'an Shan Anhui Preparation 300 800 2-Jan-14

Yiyang Hunan Preparation 372 800 28-Jan-14

Nanjing II Jiangsu Preparation 987 2,000 31-Mar-14

Dangshan I Anhui Preparation 250 400 22-Apr-14

Nanjing Gaochun Jiangsu Preparation 292 500 29-Apr-14

Tengzhou I Shandong Preparation 339 600 11-May-14

Pei County I Jiangsu Preparation 250 400 3-Aug-14

Xinzheng I Henan Preparation 520 1,000 7-Aug-14

Pizhou II Jiangsu Concession 200* 400 5-Mar-12

Sanya II Hainan Concession 175* 350 15-Jul-12

Boluo II Guangdong Concession 175* 350 25-Jul-12

Shouguang II Shandong Concession 200* 400 8-Aug-12

Weifang II Shandong Concession 250* 500 23-Aug-12

Ninghai II Zhejiang Concession 175* 350 6-Feb-13

Rizhao II Shandong Concession 150* 300 26-May-13

Heze II Shandong Concession 150* 300 15-Jul-13

Ma'an Shan II Anhui Concession 150 400 2-Jan-14

Changzhou Xinbei II Jiangsu Concession 350* 700 23-Mar-14

Dangshan II Anhui Concession 150* 300 22-Apr-14

Tengzhou II Shandong Concession 200* 400 11-May-14

Pei County II Jiangsu Concession 250 400 3-Aug-14

Xinzheng II Henan Concession 520 500 7-Aug-14

Total 38,200 20,114

Operating 13,250 6,492

Construction 4,800 2,742

Preparation 10,700 5,585

Concession 9,450 5,295

Source: Company, Daiwa estimate (*)

0

2

4

6

8

10

12

14

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

(HKD)

Share price retracted by 3.3% after placing 350m shares (8.69% of share capital as enlarged) at HKD3.58/share (7.97% discount to closing price) on 28 Aug 2012

Share price rose by 3.5% after placing 430m shares (9.59% of share capital as enlarged) at HKD8.52/share (6.17% discount to closing price) on 10 Dec 2013


- 86 -

CEI: hazardous waste and solid waste treatment projects


Processing

capacity (ktpa)

Investment

(CNYm)

Designed

storage

capacity (m3)

Suzhou I Jiangsu Operating 20.00 78 142,000

Suzhou II Jiangsu Operating 20.00 40 370,000

Suqian I Jiangsu Operating 20.00 99 340,000

Binhai Jiangsu Construction 30.00 186 600,000

Lianyungang I Jiangsu Construction 20.00 109 300,000

Zibo Qilu IP Shandong Construction 90.00 400 -

Changzhou Jiangsu Construction 30.00 280 -

Shouguang Integrated Shandong Preparation 20.00 157 500,000

Lianyungang Medical Jiangsu Preparation 10.65 80 -

Xinyi Jiangsu Preparation 9.50 100 -

Sanya sludge Hainan Preparation 50 22 -

Sanya sludge II Hainan Concession 50 22 -

Total 370.5 1,433 2,252,000

Operating 60 217 852,000

Construction 170 835 900,000

Preparation 90.15 359 500,000

Concession 50 22 -

Source: Company

CEI: water projects


Capacity

(ktpd)

Investment

(CNYm)

# of plants

Qingdao Shandong Operating 300 356 2

Zibo Shandong Operating 250 354 2

Zibo High tech Shandong Operating 100 150 1

Zibo Zhoucun Shandong Operating 40 70 1

Boxing I Shandong Operating 30 20 1

Boxing II Shandong Operating 30 66 1

Boxing upgrade Shandong Upgrade 20 64 -

Jinan (plant 1 and plant 2) Shandong Operating 500 707 2

Jinan Licheng I (plant 3) Shandong Operating 100 138 1

Jinan Xike (plant 4) Shandong Operating 30 73 1

Ling County (plant 2) Shandong Operating 30 58 1

Ling County (plant 1) Shandong Operating 30 34 1

Ling County upgrade (plant 1) Shandong Upgrade - 14 -

Jiangyin Jiangsu Operating 190 530 4

Dezhou Nanyunhe I Shandong Operating 75 150 1

Jinan Licheng II (plant 3) Shandong Operating 100 195 1

Zhangqiu Shandong Operating 30 61 1

Dezhou Nanyunhe II Shandong Preparation 75 80 1

Zibo Reusable I Shandong Operating 5 44 2

Jinan Licheng Reusable Shandong Operating 42 31 2

Jiangyin Reusable Jiangsu Operating 10 73 1

Zibo Reusable II Shandong Preparation 5 15 1

Total 1,972 3,204

Operating 1,892 3,109

Construction - -

Preparation 80 95

Concession - -

Source: Company

CEI: solar and wind projects


Investment

(CNYm)

Annual power

generation (GWh)

Shenzhen Rooftop PV Guangdong Operating 28 1.48

Zhenjiang Ground PV Jiangsu Operating 73 4.059

Suqian Rooftop PV I Jiangsu Operating 53 2.205

Germany Groud PV German Operating 68 3.611

Changzhou Rooftop PV Jiangsu Operating 79 4.1125

Zhenjiang Rooftop PV Jiangsu Operating 236 11.68

Suqian Rooftop PV II Jiangsu Operating 142 6.198

Huaining Ground PV Anhui Operating 50 2.17

Ningwu Wing Power Shanxi Construction 848 230

Total 1,578 285.5155

Operating 730 35.5155

Construction 848 230

Source: Company

CEI: total investment for the projects Business (CNYm) Operating Construction Preparation Concession Total

WTE 6,492 2,742 5,585 5,295* 20,114

Hazardous waste 217 835 337 - 1,390

Sludge - - 22 22 44

WWT 2,961 - 80 - 3,041

Reusable Water 148 - 15 - 163

Biomass 632 170 2,301 410 3,513

PV 730 - - - 730

MTE 41 - - - 41

Wind - 848 - - 848

Heat Pump 151 - - - 151

Total 11,373 4,595 8,340 5,727 30,035



- 87 -

CEI: number of operating projects (September 2014) CEI: total number of projects (September 2014)

Source: Company Source: Company

CEI: total number of WTE projects (September 2014) CEI: total investment for the projects had and to-be incurred

Source: Company Source: Company

CEI: total number of projects (October 2014) Business WTE Solid Waste Sludge Treatment WWT Reusable Water Biomass PV MTE Wind Heat Pump Total

Anhui 6 - - - - 5 1 - - - 12

Guangdong 3 - - - - - 1 - - - 4

Hainan 2 - 2 - - - - - - - 4

Henan 2 - - - - - - - - - 2

Hunan 1 - - - - - - - - - 1

Jiangsu 21 8 - 1 1 6 5 2 - - 43

Shandong 11 2 - 15 3 2 - - - 2 35

Shanxi - - - - - - - - 1 - 1

Zhejiang 5 - - - - - - - - - 5

German - - - - - - 1 - - - 1

Total 51 10 2 16 4 13 8 2 1 2 109

Source: Company

WWT15

WTE13

PV8

SolidWaste3

ReusableWater3

MTE2

Biomass2

HeatPump2

WTE51

WWT16

Biomass13

SolidWaste10

PV8

ReusableWater4

MTE2

Sludge2

HeatPump2 Wind

1

Operating13

Construction7

Preparation14

Concession17

WTE65.3%

Biomass11.3% WWT

11.1%

SolidWaste5.1%

Wind3.1%

PV2.7%

ReusableWaterHeatPumpMTESludge

Other7.2%


- 88 -

Appendix: management profile

CEI: current management team Manager Age (years) Position Background

Mr. Shuangning TANG 59 Chairman Executive Director

Mr. Tang is the representative of the 12th National People’s Congress and the Vice-chairman of the Agriculture and Rural Affairs Committee of the 12th National People’s Congress. He is also the Chairman of China Everbright Group Limited, China Everbright Holdings Company Limited and China Everbright Bank Company Limited. Mr. Tang is also the Director of Everbright Securities Company Limited, Sun Life Everbright Life Insurance Company Limited and the Chairman of China Everbright Limited. He also serves as the Vice Chairman of China Society for Finance and Banking and the Consultant of China Society for Investment. Prior to joining the China Everbright Group, he was the Vice Chairman of the China Banking Regulatory Commission, the Director-General of the Banking Supervision Department I, the Director-General of the Currency, Gold and Silver Bureau and the Director-General of the Credit Management Division of the People’s Bank of China. He holds a Master’s Degree in Economics from China Northeast University of Finance & Economics. Mr. Tang has extensive knowledge and experience in banking and finance management. He joined the Board in July 2007.

Mr. Jun LIU 42 Vice-Chairman Executive Director

Mr. Liu is the Deputy General Manager of China Everbright Group Limited, the Vice-chairman of China Everbright Holdings Company Limited and the Director of Sun Life Everbright Life Insurance Company Limited. He is also the Deputy Chairman of China Everbright Limited. Mr. Liu is a member of the Eleventh Committee of the All-China Youth Federation, a standing member of the Fourth Committee of the Youth Federation of the Central Government, the Vice President of the Second Committee of All-China Financial Youth Federation and the Chairman of Financial Derivatives Professional Committee of National Association of Financial Market Institutional Investors. He holds a Master’s Degree in Business Administration from Northeastern State University of Oklahoma U.S.A. and a Doctorate’s Degree in Business Administration from the Hong Kong Polytechnic University. He holds the title of Senior Economist. He was formerly the Executive Vice President of China Everbright Bank Co., Limited. He joined the Board in August 2014.

Mr. Xiaoping CHEN 60 Chief Executive Officer Executive Director

Mr. Chen is also the Vice-chairman of China Everbright Holdings Company Limited and a Standing Director of China Environmental Culture Promotion Association. Prior to joining the Group, Mr. Chen had been a department head in the Bureau of Investigation & Supervision of The People’s Bank of China, the Assistant Governor of China Everbright Bank Company Limited and the President of the Bank’s Guangzhou Branch. He graduated from the Department of Finance of the Southwest University in Finance and Economics, the PRC, finished the MBA class of the Research Institute of Business Management of Sichuan University, the PRC and holds a Master’s Degree with a major in Money & Banking from the Department of Finance and Trade of the China Research Institute of Social Science. He holds the title of Senior Economist and Certified Public Accountant in the PRC. He was also engaged as a researcher at the China International Economic Development Research Centre. He has rich experience and extensive knowledge in banking, capital market and management. Mr. Chen joined the Board in August 2001.

Mr. Tianyi WANG 51 General Manager Executive Director

Prior to joining the Group, Mr. Wong was the President of Shandong Academy of Science. He was formerly the Deputy Mayor of Jinan City of Shandong Province. He had been the Vice President, Dean and Professor of Economic Management Faculty of Yantai University of Shandong Province. He is currently also a part-time professor and doctoral tutor of Shandong University. He is also a member of HKTDC Mainland Business Advisory Committee. He holds a Doctorate’s Degree in Economics, a Master’s Degree in Management and a Bachelor’s Degree in Electronics from Tsinghua University. He had pursued advanced studies at Harvard University and University of California in the United States. Mr. Wang joined the Board in February 2010.

Mr. Kamchung WONG 50 Chief Financial Officer Executive Director

Mr. Wong is the Chief Financial Officer of the Company. He holds a Master of Business Administration Degree, a Master of Management Degree in Information Technology Management from Macquarie University, Australia, and a Bachelor of Arts with Honours Degree in Accountancy from the City University of Hong Kong. He is a member of the Hong Kong Institute of Certified Public Accountants, a member of the Institute of Chartered Accountants of England and Wales, a fellow member of the Association of Chartered Certified Accountants of United Kingdom and a Certified General Accountant in Canada. He has extensive experience in accounting, finance and auditing areas. Mr. Wong joined the Board in December 2002.

Mr. Shuguang CAI 58 Deputy General Manager Executive Director

Mr. Cai is also the General Manager of Everbright Environmental Protection (China) Limited. Prior to joining the Group, he was formerly Deputy General Manager of Shenzhen Kingway Brewery Limited. He graduated from the Department of Computer Science from Shanghai Fudan University and holds a Master of Business Administration Degree from the University of Ballarat in Australia. He holds the title of senior engineer. Mr. Cai has rich experience and extensive knowledge in corporate management and project planning. Mr. Cai joined the Board in August 2010.

Source: Company


■ Investment case

We initiate coverage of Dynagreen, a pure WTE (waste-to-energy) operator in China, with a Hold (3) rating and 6-month target price of HKD5.60. We forecast a solid 29% net profit CAGR in 2013-16E, driven mainly by WTE capacity expansion from 5.25ktpd to 7.85ktpd during the period. Strong capacity growth likely ahead. As at October 2014, Dynagreen had 7 WTE projects with a capacity of 5.25ktpd in operation or under trial operation, 3 projects with a capacity of 2.1ktpd under construction, and 10 projects with a capacity of 10.05ktpd under development or at the preparation stage. We forecast the company to expand its WTE capacity from 5.25ktpd in 2013 to 12.25ktpd by 2017, laying a solid foundation for a strong 29% net profit CAGR in 2013-16E.

Strategically positioned in mid-tier cities. The company’s operations are located in coastal and southeast China to benefit from the strong demand for WTE, while at the same time avoiding the fierce competition in higher-tier cities. Strong SOE background. Dynagreen is 50%-owned by Beijing State-owned Asset Management, making it essentially an SOE under the Beijing Government. This, in our view, partially limits the investing risk associated with Dynagreen’s small cap status. ■ Catalysts

Key share-price catalysts include on-track execution of secured WTE projects, and steady progress in signing new WTE projects ■ Valuation

Our DCF-based 6-month target price of HKD5.60 implies an 19x 2015E PER, a 20% discount to the implied PER for our target price for peer CEI, given Dynagreen’s comparably smaller project portfolio, and shorter track record with weaker execution ability. ■ Risks

Major downside risks include: 1) a delay in project execution given Dynagreen’s weak track record (it takes the company 6 years on average

to complete a project from MOU), 2) lower plant utilisation and average waste treatment fees due to its mid-tier cities exposure, and 3) potential equity dilution risk in 2016E. The major upside risks to our call: better-than-expected ability to secure/execute WTE projects.

Industrials / China 1330 HK

14 November 2014

Dynagreen Environmental Protection Group

Initiation: waiting for better project execution

We forecast a net profit CAGR of 29% in 2013-16, driven by

WTE capacity expansion from 5.25ktpd to 7.85ktpd

Avoids fierce competition by being strategically positioned in

mid-tier cities

Risk of investing in this small-cap SOE appears limited;

initiating with a Hold (3) and target price of HKD5.60


Industrials / China

Dynagreen Environmental Protection Group1330 HK

Target (HKD): 5.60

Upside: 3.7%


Buy

Outperform

Hold (initiation)

Underperform

Sell

1

2

3

4

5

90

105

120

135

150

3.5

4.1

4.8

5.4

6.0

Jun-14 Sep-14


DEPG (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder BSAM (50.0%)

Financial summary (CNY)Year to 31 Dec 14E 15E 16E

Revenue (m) 869 1,528 2,043

Operating profit (m) 254 379 519

Net profit (m) 134 243 323


EPS change (%) (29.7) 53.3 32.9

Daiwa vs Cons. EPS (%) (0.9) (2.4) (3.5)

PER (x) 28.1 18.4 13.8


DPS 0.000 0.000 0.000

PBR (x) 1.9 1.8 1.6

EV/EBITDA (x) 17.1 13.9 12.4

ROE (%) 7.7 10.1 12.0

Dennis Ip, CFA(852) 2848 4068

[email protected]

Cindy Li(852) 2773 8535

[email protected]



- 90 -

Growth outlook Dynagreen: net profit forecasts by business segment

With its positive industry outlook and good market potential in under-penetrated mid-tier cities, we expect Dynagreen to gradually ramp up its WTE projects. In contrast to its historical project delays, we expect it to be able to carry out its secured projects within a reasonable timeframe going forward. As such, we look for the company to make a 29% net profit CAGR during 2013-16, driven mainly by WTE capacity expansion from 5.25ktpd to 7.85ktpd during the period.


Valuation

China solid waste sector peer comparison: market cap, 1-year forward PER and PBR

Dynagreen is trading currently at a 19x 1-year PER, at a 12% discount to China Everbright International (CEI). We argue that CEI is the only Hong Kong-listed China environmental operator with a large WTE exposure, decent project portfolio, solid track record, sizable market cap and well organized investor relationship management; thus it deserves a premium valuation. If Dynagreen is able to demonstrate capability in securing and executing projects, and gradually build up its track record, thus earning investor confidence, its valuation discount could narrow. Our target price of HKD5.60 implies a 19x 2015E PER, at a 20% discount to the implied 24x 2015E PER for our target price for CEI.

Source: Bloomberg, Daiwa forecast

Earnings revisions Dynagreen: consensus EPS forecasts

Due to its newly-listed status, Dynagreen is under-covered amongst brokers. The fluctuation in consensus forecasts (as shown in the chart at the right) is the result of differences among these few brokers. Our 2014-16 EPS forecasts are broadly in line with the consensus.

Source: Bloomberg


Growth outlook

Valuation

Earnings revisions

-20%

0%

20%

40%

60%

80%

100%

0

100

200

300

400

2011 2012 2013 2014E 2015E 2016E

(CNYm)

Project construction Project operating Technical consulting

Finance income (YoY)



Capital Environmental,

mkt cap USD354m


0.0

1.0

2.0

3.0

4.0

5.0

6.0

18.0 19.0 20.0 21.0 22.0 23.0

(PBR x)

(PERx)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14

(CNY)

2014E EPS 2015E EPS 2016E EPS

Buy

Outperform

Hold (initiation)

Underperform

Sell

1

2

3

4

5


- 91 -

Key assumptions

Profit and loss (CNYm)

Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Year-end operating WTE capacity

(ktpd) n.a. n.a. 1.65 1.65 5.25 5.25 5.95 7.85

Waste processing capacity utilization

rate (%)n.a. n.a. 0.88 0.92 1.05 0.85 0.87 0.88

Per unit on-grid generation of wet

waste (KWh/ton)n.a. n.a. 197 181 156 221 219 222

Average waste treatment fee

(CNY/ton) n.a. n.a. 73 71 71 70 71 73

Annual on-grid electricity sold (GWh) n.a. n.a. 125 127 299 451 473 639

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Project construction n.a. n.a. 313 773 715 475 1,086 1,431

Project operating and finance income n.a. n.a. 126 152 259 393 442 612

Other Revenue n.a. n.a. 3 7 1 0 0 0

Total Revenue n.a. n.a. 443 932 975 869 1,528 2,043

Other income n.a. n.a. 21 7 30 20 23 27

COGS n.a. n.a. (310) (699) (688) (566) (1,079) (1,426)

SG&A n.a. n.a. (11) (12) (20) (21) (32) (44)

Other op.expenses n.a. n.a. (21) (25) (38) (49) (61) (81)

Operating profit n.a. n.a. 122 203 260 254 379 519

Net-interest inc./(exp.) n.a. n.a. (22) (37) (74) (90) (79) (116)

Assoc/forex/extraord./others n.a. n.a. 0 0 0 0 0 0

Pre-tax profit n.a. n.a. 101 167 185 164 300 404

Tax n.a. n.a. (25) (20) (34) (30) (57) (81)

Min. int./pref. div./others n.a. n.a. 0 0 0 0 0 0

Net profit (reported) n.a. n.a. 76 146 151 134 243 323

Net profit (adjusted) n.a. n.a. 76 146 151 134 243 323

EPS (reported)(CNY) n.a. n.a. 0.118 0.219 0.216 0.152 0.232 0.309

EPS (adjusted)(CNY) n.a. n.a. 0.118 0.219 0.216 0.152 0.232 0.309

EPS (adjusted fully-diluted)(CNY) n.a. n.a. 0.118 0.219 0.216 0.152 0.232 0.309

DPS (CNY) n.a. n.a. 0.000 0.000 0.000 0.000 0.000 0.000

EBIT n.a. n.a. 122 203 260 254 379 519

EBITDA n.a. n.a. 141 226 295 300 436 595

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax n.a. n.a. 101 167 185 164 300 404

Depreciation and amortisation n.a. n.a. 20 24 37 48 59 79

Tax paid n.a. n.a. (16) (11) (22) (30) (57) (81)

Change in working capital n.a. n.a. (347) (692) (532) (623) (1,144) (1,606)

Other operational CF items n.a. n.a. 27 38 78 90 79 116

Cash flow from operations n.a. n.a. (215) (474) (254) (352) (763) (1,088)

Capex n.a. n.a. (2) (3) (4) (3) (6) (8)

Net (acquisitions)/disposals n.a. n.a. 3 (150) (131) 25 (108) (85)

Other investing CF items n.a. n.a. 3 (2) 2 0 0 0

Cash flow from investing n.a. n.a. 4 (155) (133) 21 (115) (93)

Change in debt n.a. n.a. 47 605 799 (230) 349 1,316

Net share issues/(repurchases) n.a. n.a. 253 0 0 945 0 0

Dividends paid n.a. n.a. (91) 0 (14) 0 0 0

Other financing CF items n.a. n.a. (19) (35) (78) (90) (79) (116)

Cash flow from financing n.a. n.a. 191 571 707 625 270 1,200

Forex effect/others n.a. n.a. (3) 0 (1) 0 0 0

Change in cash n.a. n.a. (23) (58) 319 294 (607) 19

Free cash flow n.a. n.a. (217) (476) (258) (355) (769) (1,096)


- 92 -

Balance sheet (CNYm)

Key ratios (%)


Company profile

Dynagreen Environmental Protection (Dynagreen) is one of the largest waste incineration companies in China in terms of contracted capacity. As a state-owned company, it engages in the investment, technical consulting, construction and operation of WTE plants, as well as the sale of equipment developed using its self-developed patented technology.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Cash & short-term investment n.a. n.a. 279 204 523 817 210 229

Inventory n.a. n.a. 2 3 6 5 9 12

Accounts receivable n.a. n.a. 248 286 210 214 377 504

Other current assets n.a. n.a. 7 8 10 16 29 51

Total current assets n.a. n.a. 536 501 749 1,052 625 795

Fixed assets n.a. n.a. 4 5 7 8 11 16

Goodwill & intangibles n.a. n.a. 563 965 1,346 1,545 2,077 2,768

Other non-current assets n.a. n.a. 445 942 1,249 1,479 2,203 3,137

Total assets n.a. n.a. 1,548 2,413 3,350 4,085 4,916 6,716

Short-term debt n.a. n.a. 28 287 410 222 274 472

Accounts payable n.a. n.a. 81 143 210 147 281 371

Other current liabilities n.a. n.a. 5 6 8 8 8 8

Total current liabilities n.a. n.a. 114 435 628 377 563 851

Long-term debt n.a. n.a. 278 624 1,299 1,258 1,554 2,673

Other non-current liabilities n.a. n.a. 106 157 212 160 265 336

Total liabilities n.a. n.a. 498 1,217 2,139 1,795 2,383 3,860

Share capital n.a. n.a. 690 700 700 1,045 1,045 1,045

Reserves/R.E./others n.a. n.a. 360 497 511 1,245 1,488 1,811

Shareholders' equity n.a. n.a. 1,050 1,197 1,211 2,290 2,533 2,856

Minority interests n.a. n.a. 0 0 0 0 0 0

Total equity & liabilities n.a. n.a. 1,548 2,413 3,350 4,085 4,916 6,716

EV n.a. n.a. 4,484 5,161 5,641 5,116 6,073 7,370

Net debt/(cash) n.a. n.a. 27 706 1,186 662 1,618 2,915

BVPS (CNY) n.a. n.a. 1.640 1.710 1.731 2.191 2.424 2.733

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) n.a. n.a. n.a. 110.5 4.6 (10.9) 75.9 33.7

EBITDA (YoY) n.a. n.a. n.a. 60.2 30.2 1.7 45.5 36.5

Operating profit (YoY) n.a. n.a. n.a. 66.0 27.8 (2.2) 49.2 37.0

Net profit (YoY) n.a. n.a. n.a. 93.2 3.1 (11.2) 81.3 32.9

Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. 84.6 (1.3) (29.7) 53.3 32.9

Gross-profit margin n.a. n.a. 30.1 25.0 29.4 34.9 29.4 30.2

EBITDA margin n.a. n.a. 31.9 24.3 30.2 34.5 28.5 29.1

Operating-profit margin n.a. n.a. 27.6 21.8 26.6 29.2 24.8 25.4

Net profit margin n.a. n.a. 17.1 15.7 15.5 15.4 15.9 15.8

ROAE n.a. n.a. 14.4 13.0 12.5 7.7 10.1 12.0

ROAA n.a. n.a. 9.8 7.4 5.2 3.6 5.4 5.6

ROCE n.a. n.a. 18.1 11.7 10.3 7.6 9.3 10.0

ROIC n.a. n.a. 8.5 12.0 9.8 7.7 8.6 8.4

Net debt to equity n.a. n.a. 2.5 59.0 97.9 28.9 63.9 102.1

Effective tax rate n.a. n.a. 24.8 12.1 18.6 18.5 19.0 20.0

Accounts receivable (days) n.a. n.a. 102.2 104.5 92.8 89.1 70.6 78.7

Current ratio (x) n.a. n.a. 4.7 1.2 1.2 2.8 1.1 0.9

Net interest cover (x) n.a. n.a. 5.7 5.5 3.5 2.8 4.8 4.5

Net dividend payout n.a. n.a. 0.0 0.0 0.0 0.0 0.0 0.0

Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.


- 93 -

Waiting for better project execution

We initiate coverage on Dynagreen with a Hold awaiting better project execution

Visible growth ahead

We expect Dynagreen to deliver strong growth in expanding its WTE capacity from 5.25ktpd by 2013 to 12.25ktpd by 2017E, after weak momentum in 2014 due to delays in project construction. This growth in capacity will form a solid foundation for Dynagreen to book visible revenue and net profit growth, with its revenue driven mainly by the recognition of construction revenue, and net profit driven by the contribution of operating revenue. As such, we forecast the company’s net profit to rise at a solid CAGR of 29% in 2013-16. Dynagreen: operating WTE capacity forecasts


Among the WTE projects with which Dynagreen has entered into concession agreements, 7 projects with a capacity of 5.25ktpd are in operation or undergoing trial operations, 3 with a capacity of 2.1ktpd are under construction, and 10 with a capacity of 10.05ktpd are under development or in the preparation stage. Taking into account Dynagreen’s general time frame from project signing to construction commencement of 3 years, and a construction period of 1.5-2.0 years, we expect phase I of its currently pocketed projects to commence operations before 2020.

Dynagreen: secured WTE projects, October 2014

Source: Company

Dynagreen is strategically positioned in mid-tier cities in coastal and southeast regions in China to benefit from the strong demand for WTE, while at the same time avoiding the fierce competition seen in higher-tier cities. Going forward, such positioning should help it secure new WTE projects at reasonable IRRs of at least 10%, according to the company. Dynagreen: location of WTE projects (October 2014)

Source: Company

Another reason we like Dynagreen is its strong SOE background. The company is 50%-owned by Beijing State-owned Asset Management (BSAM), making it essentially an SOE under the Beijing municipal government. The National Council for Social Security Fund also holds a 3.3% equity interest in the company. The presence of government bodies as shareholders, in our view, partially limits the risk for investors associated with Dynagreen for being a small cap stock. Its Beijing SOE background should also facilitate the company having access to competitive financing, and could furnish it with higher bargaining power when negotiating concession agreements with local governments.

1.65ktpd 1.65ktpd

5.25ktpd 5.25ktpd5.95ktpd

7.85ktpd

12.25ktpd

0

5

10

15

20

0

2

4

6

8

10

12

14

2011 2012 2013 2014E 2015E 2016E 2017E

(# of plants)(ktpd)

Year end operating household waste processing capacity

Number of operating plants at end of year

1,650

3,600

2,100

5,500

4,550

17,400

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Operating Trial operation Construction Development Preparation Total

(tpd)

Tier 11,550tpd

9%

Tier 23,650tpd

21%

Tier 34,350tpd

25%

Tier 43,500tpd

20%

Below tier 44,350tpd

25%


- 94 -

Dynagreen: shareholders Shareholder No. of shares %

BSAM 482 46%

Beijing Venture Capital (subsidiary of BSAM) 20 2%

Jianghuai Fund 70 7%

Poly Fund 49 5%

Jingxiu Investment 21 2%

Unlisted shares 641 61%

BSAM (HK) 25 2%

NCSSF 35 3%

Public 345 33%

H shares 404 39%

Total issued shares 1,045 100%

Source: Company

Since listing on the HKEx on 19 June 2014, Dynagreen has had access to more financing channels. According to the company, its average finance cost is 6.5-7.0% per year as the company primarily conducts domestic borrowings (China’s benchmark lending rate is 6.55% currently), which is higher than CEI’s 4.9% in 2013. Although it is difficult for management to access offshore financing due to the company’s lack of BVI status in its corporate structure, it is working actively to lower Dynagreen’s financing costs, which we believe would improve its profitability.

Dynagreen: project map (October 2014)

Source: Company

Guangdong

Hubei

Hunan

Shandong

Guizhou

Tianjin

Zhejiang

Shanxi

Jiangsu

Projects in operation/trial operation

Projects under development

Jiangsu

Operating: 2,050tpd

Construction: 700tpd

Preparation: 1,550tpd

Guangdong


Shandong

Operating: 500tpd


Zhejiang

Operating: 1,700tpd

Preparation: 550tpd

Guizhou


Preparation: 350tpd

Hubei

Operating: 1,000tpd

Preparation: 700tpd

Tianjin


Preparation: 850tpd

Hunan

Preparation: 700tpd

Shanxi

Preparation: 600tpd


- 95 -

May take time for investor confidence to be restored; risks to our investment case

Due to its relatively small operating project portfolio, Dynagreen’s revenue depends largely on the recognition of construction revenue; therefore any 1 or 2 project delays would have a significant impact on its near-term financial performance. In 1H14, Dynagreen’s revenue declined by 45% YoY and its net profit dropped by 63% YoY, due to a contraction in the number of projects under construction. As a result, we forecast the company to record an 11% YoY drop in revenue and 11% YoY fall in net profit for 2014, although we expect its growth momentum to pick up in 2015 if its project construction and operation commence on schedule. That being said, we think concerns about Dynagreen’s project execution will continue to be a share-price overhang in the near term. And it may take time for Dynagreen to establish a good track record and restore investor confidence. Even though we expect a 29% net profit CAGR in 2013-16, we see limited upside risks to our Hold (3) call at the moment. The main upside risk would be a better-than-expected ability to secure new WTE projects, while a secondary upside risk would be stronger-than-expected project execution ability. Dynagreen: revenue breakdown


Dynagreen: revenue breakdown


Concerns over future project delays

Dynagreen does not have an excellent record in executing its secured WTE projects. During its track record period, the company has experienced various project delays due to inadequate capital, change in site selection or insufficient local supply of municipal solid waste. This would be the main risk to our call. For example, due to a change in site selection, its Wuhan projects commenced operation 8 years after the company had signed the concession agreement. Its Qingdao, Sheyang and Jintan projects, whose concession agreements were entered into in 2005, 2007 and 2008, respectively, are still in the preparation phase and are unlikely to commence construction in the next year, according to our discussions with management. We have assumed that the projects above will commence operation in 2017/2018, at a time when we expect to see a better overall market situation (ie, stronger demand for WTE, driven by both an increasing MSW volume being generated and expected improving public acceptance towards the use of WTE).

Dynagreen: recent project delays

Project Phase Province

Concession

agreement

entered

Capacity

(tpd)

Investment

(CNYm)

Waste treatment

fee (CNY/ton) Reasons for project delay

Construction

start

Operation

commencement

Wuhan WTE I Hubei 9-May-05 1,000 384 68 Change in site selection Nov-11 Oct-13

Qingdao WTE I Shandong 18-May-05 600 267 75 Change in site selection 2016E 2H17E

Haining WTE I Zhejiang 19-Apr-06 600 193 75 Inadequate capital Aug-08 Jun-10

Sheyang WTE I Jiangsu 11-Nov-07 600 280 70 Insufficient supply of MSW 2016E 2H17E

Jintan WTE I Jiangsu 24-Dec-08 600 290 75 Insufficient supply of MSW 2017E 2H18E


0

500

1,000

1,500

2,000

2,500

2011 2012 2013 2014E 2015E 2016E

(CNYm)

Project construction Project operating Technical consulting Finance income

71%83%

73%

55%

71% 70%

23%12%

21%

37%

22% 23%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014E 2015E 2016E

Project construction Project operating Technical consulting Finance income


- 96 -

As such, we are more concerned about the downside for Dynagreen’s WTE projects. We have conducted an analysis of the sensitivity of Dynagreen’s key metrics to changes in the capacity of the additional projects due to commence construction in 2015 and commence operation in 2017. Based on our analysis, a 500tpd decline in WTE capacity for the additional projects in 2015E would have a negative impact of HKD0.10 or 1.7% on our target price, 1.5pp on our 2013-16E net profit CAGR forecast and 4.8% on our 2015E EPS. Our base case assumes that the construction of 4,400tpd of WTE will commence in 2015 for operation in 2017. Dynagreen: sensitivity of TP and EPS to changes in capacity that will commence construction in 2015E (absolute value) Capacity of additional Target 2013-16E 2015E 2015E 2015E

projects due to commence

construction in 2015 Price (HKD) Net profit CAGR EPS (HKD) Gearing ROE

-3,000tpd 5.03 19% 0.16 40% 7.1%

-2,500tpd 5.12 21% 0.17 44% 7.7%

-2,000tpd 5.22 23% 0.19 48% 8.2%

-1,500tpd 5.31 24% 0.20 52% 8.7%

-1,000tpd 5.41 26% 0.21 56% 9.2%

-500tpd 5.50 27% 0.22 60% 9.6%

Base case, 0tpd 5.60 29% 0.23 64% 10.1%

500tpd 5.70 30% 0.24 68% 10.5%

1,000tpd 5.79 32% 0.25 72% 11.0%

1,500tpd 5.89 33% 0.27 75% 11.4%


Note: we assume that additional projects start construction in 2015E and commence operations in 2017E

Dynagreen: sensitivity of TP and EPS to changes in capacity that will commence construction in 2015E (% or pp change) Capacity of additional Target 2013-16E 2015E 2015E 2015E

projects due to commence

construction in 2015 Price Net profit CAGR EPS Gearing ROE

-3,000tpd -10.2% -9.8pp -30.4% -23.8ppt -3.0ppt

-2,500tpd -8.5% -7.9pp -24.7% -19.8ppt -2.4ppt

-2,000tpd -6.8% -6.0pp -19.0% -15.9ppt -1.8ppt

-1,500tpd -5.1% -4.5pp -14.3% -11.9ppt -1.4ppt

-1,000tpd -3.4% -2.9pp -9.5% -7.9ppt -0.9ppt

-500tpd -1.7% -1.5pp -4.8% -3.9ppt -0.5ppt

Base case, 0tpd 0.0% 0.0pp 0.0% 0.0ppt 0.0ppt

500tpd 1.7% 1.4pp 4.8% 3.9ppt 0.5ppt

1,000tpd 3.4% 2.8pp 9.5% 7.7ppt 0.9ppt

1,500tpd 5.1% 4.2pp 14.3% 11.5ppt 1.4ppt


Note: we assume that additional projects start construction in 2015E and commence operations in 2017E

We think it is possible that the market may have factored in a possible further delay for some of Dynagreen’s projects into its current share price. This translates into around 1,000tpd of capacity being delayed that is due to start in 2017E.

Dynagreen: sensitivity of our target price to additional projects commencing construction in 2015E


Risk associated with plant utilisation

As the Sheyang and Jintan projects have been delayed due to insufficient local MSW supply, it raises the question of whether these plants can reach full capacity utilisation rates when they are put into operation. In fact, insufficient demand is the intrinsic risk associated with being positioned in mid-tier cities as a result of lower per capita MSW generation due to social wealth (as we discuss in the sector section) and as a result of the low collection rate. According to our discussions with management, most of Dynagreen’s operating WTE plants are running at around a 90% utilisation rate, except for the Rushan projects which are barely clearing 60% due to insufficient waste supply (the guaranteed wet waste intake amount of 99ktpa represents about a 45% guaranteed utilisation rate). We conducted a sensitivity analysis of Dynagreen’s average WTE plant utilisation rate in 2015E. On our estimates, a ±1pp change in 2015E utilisation can have an impact of ±1.2% or ±HKD0.065 on our target price. Dynagreen: sensitivity of our target price to WTE plant utilisation in 2015E

Source: Daiwa forecast

Target price HKD5.60

Share price HKD5.40

4.9

5.0

5.1

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

-3,0

00tp

d

-2,5

00tp

d

-2,0

00tp

d

-1,5

00tp

d

-1,0

00tp

d

-500

tpd

Bas

e ca

se

500t

pd

1,00

0tpd

1,50

0tpd

(HKD)

Target price HKD 5.60

Share price HKD5.40

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

85% 86% 87% 88% 89% 90% 91%

(HKD)


- 97 -

Downside risk of waste treatment fees due to geographic coverage

In 2013, Dynagreen’s average waste treatment fee was CNY70/tonne, according to our estimates, CNY10/ton less than that of CEI’s, possibly as a result of Dynagreen’s capacity coverage in mid-tier cities compared with CEI’s high-tier cities. While we expect an upward revision of waste treatment fees on an industry-wide level going forward, in accordance with higher local government affordability and tighter treatment standards, it is possible that such a gap will remain. With its lack of a sufficient project operation track record, we have modelled in a modest waste treatment tariff hike for Dynagreen of 1% for each year in 2015-17, comparably at the same increment level as our assumptions for CEI. Moreover, as more of Dynagreen’s non-coastal WTE plants commence operation, it is likely that its blended average waste treatment tariff will be dragged down by single projects. For instance, the waste treatment fee for its Zhangqiu project (in Shandong Province) is only CNY51.5/tonne, and the commencement of the project in 2H16, based on the company’s schedule, could have a dilution effect on Dynagreen’s overall waste treatment fees. Dynagreen: WTE project locations

Source: Company

According to our sensitivity analysis, a ±3% change in 2015E average tariffs could affect Dynagreen’s 2013-16E net profit CAGR by ±0.1pp, its 2015E EPS by ±0.4%, and our target price by ±HKD0.05.

Dynagreen: sensitivity of target price and profitability to 2015E change in tariffs 2015E Target 2013-16E 2015E 2016E 2015E

Change in tariff Price Net profit CAGR EPS EPS Average tariff

-9% 5.46 28.5% 0.230 0.306 65

-6% 5.51 28.6% 0.231 0.307 67

-3% 5.55 28.7% 0.232 0.308 69

0% 5.60 28.8% 0.232 0.309 71

3% 5.65 29.0% 0.233 0.310 73

6% 5.69 29.1% 0.234 0.311 75

9% 5.74 29.2% 0.235 0.312 77


Dynagreen: sensitivity of target price and EPS to changes to the 2015E tariff (% or PP change) 2015E Target 2013-16E 2015E 2016E 2015E

Change in tariff Price Net profit CAGR EPS EPS Average tariff

-9% -2.4% -0.4ppt -1.1% -0.9% -9%

-6% -1.6% -0.3ppt -0.7% -0.6% -6%

-3% -0.8% -0.1ppt -0.4% -0.3% -3%

0% 0.0% 0.0ppt 0.0% 0.0% 0%

3% 0.8% 0.1ppt 0.4% 0.3% 3%

6% 1.7% 0.3ppt 0.7% 0.6% 6%

9% 2.5% 0.4ppt 1.1% 0.9% 9%


Equity dilution risk

We expect Dynagreen to quickly roll out its WTE projects in the next few years with access to enough capital after being listed, and to increase its household waste processing capacity from 5.25ktpd in 2013 to 13.75ktpd by end-2017. Due to the capital-intensive nature of WTE construction – on average, Dynagreen needs CNY400m for the construction of a WTE plant with capacity of 1ktpd – aggressive capacity expansion requires access to large amounts of capital. We estimate that Dynagreen will incur adjusted capex of CNY0.9bn in 2015 and CNY1.2bn in 2016 (including BOT construction cost). In order to support its business development, we expect Dynagreen’s net debt-to-equity level to increase to 102% by 2016, which we think might be near the company’s threshold net debt-to-equity level of 100%, such that we would not be surprised if it decided to raise capital via the equity market at that time. Given Dynagreen’s newly listed status, we see little possibility of the company undertaking any near-term equity financing activity. According to our sensitivity analysis, for each additional 500tpd of WTE projects that commence construction in 2015 and commence operation in 2017, this could have a +3.9ppt impact on Dynagreen’s 2015E net debt-to-equity ratio.

64%

28%

33%

22%

8%

22%

33%

14%

24%

16%

36%

31%

12%

33%

8%

28%

13%

33%

9%

8% 15%

11%

0% 20% 40% 60% 80% 100%

Operating

Trailoperation

Construction

Development

Preparation

Jiangsu Guangdong Shandong Zhejiang Guizhou

Hubei Tianjin Hunan Shanxi


- 98 -

Dynagreen: net debt-to-equity ratio


Dynagreen: sensitivity of 2015E net debt-to-equity to Dynagreen’s additional WTE project commence construction in 2015E (and operation in 2017E)


Valuation

We initiate coverage of Dynagreen with a Hold (3) rating and 6-month DCF-based target price of HKD5.60, which we derive by employing a WACC of 8.7% with a 0% terminal growth rate as BOT contracts tend to offer a stable FCF over the long term. Given the WTE business is operated under a BOT business model with concession rights being granted by local governments, we assume no terminal value for the WTE plant when the concession ends. We have adjusted Dynagreen’s FCF to exclude the impact of IFRIC 12 accounting standards.

The table below shows the sensitivity of Dynagreen’s DCF to changes in WACC and terminal growth rates. For WACC, a ±0.5% change in our assumption would have an impact of -12%/+14% on our target price; for terminal growth rate, a +0.5% change in our assumption would have an impact of +3.1% on our target price. WACC assumptions WACC Calculation

Risk free rate 4.0%

Equity risk premium 10.0%

Equity beta 0.90

Cost of equity 13.0%

D/A 50%

Pre-tax cost of debt 5.5%

Tax rate 20%

WACC 8.7%

Terminal growth rate 0%


CEI: sensitivity of our target price (HKD) to WACC and terminal growth rate assumptions for DCF calculation

WACC

Ter

min

al g

row

th r

ate

5 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.2%

0.0% 8.22 7.23 6.36 5.60 4.93 4.34 3.81

0.5% 8.56 7.49 6.57 5.77 5.07 4.45 3.91

1.0% 8.95 7.80 6.82 5.97 5.23 4.58 4.01

1.5% 9.40 8.15 7.10 6.19 5.41 4.73 4.13

2.0% 9.95 8.57 7.42 6.45 5.62 4.90 4.27

2.5% 10.61 9.07 7.81 6.75 5.85 5.08 4.42

3.0% 11.44 9.68 8.27 7.10 6.13 5.30 4.59


In our view, it is more reasonable to compare Dynagreen’s 2016E PER with its peers, as its business should be better developed by that time. As such, our target price implies a 19x 2015E PER, representing a 20% discount to the 24x 2015E PER we assign to our target price for CEI. We believe such a discount is justified given Dynagreen’s smaller project portfolio and pipeline, shorter track record with weaker execution ability, whereas Dynagreen and CEI have roughly the same 2013-16E net profit CAGRs (29% for Dynagreen and 28% for CEI).

3%

59%

98%

29%

64%

102%

0%

20%

40%

60%

80%

100%

120%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2011 2012 2013 2014E 2015E 2016E

(CNYm)

Net debt Net debt to equity (RHS) Threhold net debt-to-equity level

30%

40%

50%

60%

70%

80%

-3,0

00tp

d

-2,5

00tp

d

-2,0

00tp

d

-1,5

00tp

d

-1,0

00tp

d

-500

tpd

Bas

e ca

se

500t

pd

1,00

0tpd

1,50

0tpd


- 99 -

Dynagreen: adjusted FCF Non-IFRIC EBIT (HKDm) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E …… 2031E 2032E 2033E 2034E 2035E

EBIT (IFRIC) 254 379 519 693 715 742 789 830 864 875 885 860 …… 868 873 877 878 871

Construction revenue (475) (1,086) (1,431) (1,301) (564) (183) (249) (293) (282) (95) - - …… - - - - -

Construction cost 390 890 1,173 1,067 463 150 204 240 231 78 - - …… - - - - -

Re-instatement of operational income 8 (9) (15) 8 22 37 45 47 56 69 81 131 …… 162 170 179 188 192

Non-IFRIC EBIT 176 174 247 466 636 746 789 824 869 927 967 992 …… 1,030 1,043 1,056 1,065 1,063

FCF (HKDm) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E …… 2031E 2032E 2033E 2034E 2035E

Non-IFRIC EBIT 176 174 247 466 636 746 789 824 869 927 967 992 …… 1,030 1,043 1,056 1,065 1,063

Depreciation/amortization 48 59 79 98 106 108 108 108 109 108 106 119 …… 97 94 91 88 85

Adjusted income tax (15) (20) (29) (57) (82) (99) (107) (115) (123) (132) (139) (136) …… (153) (156) (158) (160) (160)

Adjusted net change in working capital 105 (419) (313) (98) 372 180 (73) (71) (37) 77 31 (8) …… 34 (5) (2) 2 15

Adjusted CAPEX

(include BOT construction cost)

(393) (897) (1,181) (1,076) (470) (156) (211) (247) (238) (84) (6) (6) ……

(6) (6) (6) (6) (6)

Adjusted FCF (79) (1,102) (1,197) (668) 562 779 505 500 580 896 958 960 …… 1,001 970 980 989 997


Dynagreen: 1-year forward PER


Dynagreen: 1-year forward PER band


Dynagreen: 1-year forward PBR


Dynagreen: 1-year forward PBR band


13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

21.0

22.0

Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14

(x)

19.3x Avg+1SD

17.6x Avg

20.9x Avg+2SD

16.0x Avg-1SD

14.4x Avg-2SD

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5


(HKD)

Price 20x PER 22x PER24x PER 26x PER 28x PER

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0


(x)

1.7x Avg+1SD

1.5x Avg

1.9x Avg+2SD

1.4x Avg-1SD

1.2x Avg-2SD

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5


(HKD)

Price 1.6x PBR 1.825x PBR

2.05x PBR 2.275x PBR 2.5x PBR


- 100 -

Appendix: WTE projects secured

Dynagreen: WTE projects, October 2014

Project Phase Province Status

Capacity Investment Waste

Project secured

Preparation Construction Construction Construction Operation

(tpd) (CNYm) Treatment Period commencement Period and preparation commencement

fee (CNY/ton) (years)

(years) period (years)

Anshun WTE I Guizhou Construction 700 302 70 21-Dec-11 2.4 14-Jun 1.3 3.7 15-Oct

Anshun WTE* II Guizhou Preparation 350 140 70 21-Dec-11 7.0 19-Jan 1.5 8.5 20-Jul

Changzhou WTE I Jiangsu Operating 600 266 75 20-Sep-05 0.3 6-Jan 2.0 2.3 8-Jan

Changzhou WTE II Jiangsu Operating 450 114 75 20-Sep-05 3.3 9-Jan 2.0 5.3 11-Jan

Haining WTE I Zhejiang Operating 600 193 75 19-Apr-06 2.3 8-Aug 1.8 4.1 10-Jun

Hongan WTE I Hubei Development 700 280 55 17-Dec-13 1.4 15-May 1.7 3.1 17-Jan

Huizhou WTE I Guangdong Development 1,200 480 91 23-Nov-12 2.3 15-Mar 1.0 3.3 16-Mar

Jintan WTE* I Jiangsu Development 600 290 75 24-Dec-08 8.0 17-Jan 1.5 9.5 18-Jul

Jixian WTE I Tianjin Construction 700 271 60 26-Mar-13 1.3 14-Jul 2.6 3.9 17-Feb

Jixian WTE* II Tianjin Preparation 350 140 60 26-Mar-13 7.8 21-Jan 1.5 9.3 22-Jul

Jurong WTE I Jiangsu Construction 700 248 62 4-Jul-12 1.9 14-Jun 2.6 4.5 17-Jan

Jurong WTE* II Jiangsu Preparation 350 140 62 4-Jul-12 8.5 21-Jan 1.5 10.0 22-Jul

Longhui WTE* I Hunan Preparation 700 280 65 8-Jul-14 2.5 17-Jan 1.5 4.0 18-Jul

Ninghe WTE I Tianjin Development 500 123 70 13-Sep-13 1.6 15-May 1.7 3.3 17-Jan

Pingyang WTE I Zhejiang Trial operation 600 226 65 30-Sep-09 1.1 10-Nov 2.4 3.5 13-Apr

Pingyang WTE* II Zhejiang Preparation 300 120 65 30-Sep-09 7.3 17-Jan 1.5 8.8 18-Jul

Pingyao WTE I Shanxi Development 600 269 65 20-Sep-12 3.1 15-Nov 1.5 4.6 17-May

Qingdao WTE* I Shandong Development 600 267 75 18-May-05 10.6 16-Jan 1.5 12.1 17-Jul

Qingdao WTE* II Shandong Preparation 400 178 75 18-May-05 14.6 20-Jan 1.5 16.1 21-Jul

Rushan WTE I Shandong Trial operation 500 232 52 29-Sep-10 1.4 12-Mar 1.3 2.7 13-Jul

Shantou WTE* I Guangdong Preparation 1,000 400 70 4-Sep-14 2.3 17-Jan 1.5 3.8 18-Jul

Shantou WTE* II Guangdong Preparation 500 200 70 4-Sep-14 7.3 22-Jan 1.5 8.8 23-Jul

Sheyang WTE* I Jiangsu Development 600 280 70 11-Nov-07 8.1 16-Jan 1.5 9.6 17-Jul

Taizhou WTE I Jiangsu Trial operation 1,000 422 80 16-Sep-09 2.6 12-May 1.3 3.9 13-Aug

Wuhan WTE I Hubei Trial operation 1,000 384 68 9-May-05 6.5 11-Nov 1.9 8.4 13-Oct

Yongjia WTE I Zhejiang Trial operation 500 211 60 23-Dec-09 0.9 10-Dec 2.4 3.3 13-May

Yongjia WTE* II Zhejiang Preparation 250 100 60 23-Dec-09 7.0 17-Jan 1.5 8.5 18-Jul

Zhangqiu WTE I Shandong Development 700 246 52 1-Feb-12 2.9 15-Jan 1.5 4.4 16-Jul

Zhangqiu WTE II Shandong Preparation 350 105 52 1-Feb-12 6.9 19-Jan 1.5 8.4 20-Jul

Total 17,400 6,907

Simple average CNY397m/1ktpd 67 4.6 1.7 6.3


Dynagreen: WTE capacity (October 2014) Dynagreen: WTE capacity composition

Source: Company

Source: Company

0

1,000

2,000

3,000

4,000

5,000

Jian

gsu

Gua

ngdo

ng

Sha

ndon

g

Zhe

jiang

Gui

zhou

Hub

ei

Tia

njin

Hun

an

Sha

nxi

(tpd)

Operating Construction Preparation New after IPO

39%

33%

18% 14%

59%

10%

23%

32%

6%

33%

15%

19%

8%

33%

10%

41%

7%

0% 20% 40% 60% 80% 100%

Operating

Construction

Preparation

New after IPO

Jiangsu Guangdong Shandong Zhejiang Guizhou

Hubei Tianjin Hunan Shanxi


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Appendix: shareholding structure and management profile

Dynagreen: shareholding structure

Source: Company

Dynagreen: management team

Name Age Position Responsibilities Appointment date

Date of joining

company Background

Mr. Jun ZHI

51 Chairman of the Board and Non-executive Director

Responsible for formulating the company's corporate and business strategies; and making major corporate and operation decisions of the company

11-Apr-12 11-Apr-12 Mr. Zhi is the Chairman of the Board and a non-executive Director of the company. He graduated from Beijing Economics College majoring in Finance and Accounting in August 1985. Since February 2011, Mr. Zhi has served as the president of Beijing State-Owned Assets Management Co., Ltd. He is currently a chairman of Beijing Science Park Development (Group) Co., Ltd. Prior to join the company, Mr. Zhi worked for Beijing Public Transport Company, Beijing Tramways, Beijing Public Transport Holdings, Ltd.

Mr. Yanbin GUO

63 Deputy Chairman of the Board and Non-executive Director

Assisting the Chairman of the Board in formulating the company's corporate and business strategies; and making major corporate and operational decisions of the company

11-Apr-12 11-Apr-12 Mr. Guo is the Deputy Chairman of the Board and a non-executive Director of the company. He graduated from the Party School of the Central Committee of C.P.C. (Communist Party of China) of Correspondence Learning majoring in Economics and Management in December 1995. Since February 2011, Mr. Guo has been the Chairman of the Board of Beijing State-Owned Assets Management Co., Ltd (HK). Mr. Guo was a deputy party secretary and a director of the Board of Beijing State-Owned Assets Management Co., Ltd. between June 2007 and December 2010. Prior to join the company, Mr. Guo worked in Beijing Tractor Company, the General Office of Beijing Municipal Government, and Beijing Institute of Architectural Design.

Mr. Dewei QIAO

47 Executive Director and General Manager

Responsible for the daily operation and management of the Group

11-Apr-12 Sep-05 Mr. Qiao is an executive Director and General Manager of the Company. Mr. Qiao graduated from Zhongnan University of Economics and Law with a Bachelor's degree in Economics in July 1988 and obtained his Master's degree in Law from Hubei University in June 1999. He further studied a project learning postgraduate course in Financial Management at Tsinghua University, and obtained his Master of Business Administration degree from Peking University in July 2013. Mr. Qiao also has indirect shareholding interest in the company through Shenzhen Jingxiu Investment Partnership (a limited partnership established by 37 individuals who were employees of the Company on April 18, 2011). Prior to join the Company, Mr. Qiao worked in Central Enterprises Management Department of the Bureau of Finance in Hubei Province, Finance Department at Wuhan International Trust and Investment Company, Wuhan State-Owned Assets Management Company.

Source: Company

Jingxiu Investment

3%

H shares

39%

Dynagreen Environmental Protection Group Co., Ltd. (1330.HK)

Unlisted shares

61%

BSAM (HK)6.1%

Public

85.3%

NASSF

8.5%

BSAM

75%

Beijing Venture Capital

3%

Jianghuai Fund

11%

Poly Fund

8%


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Daiwa’s Asia Pacific Research Directory HONG KONG Hiroaki KATO (852) 2532 4121 [email protected]

Regional Research Head

Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273

[email protected]

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 [email protected]

Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected]

Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected]

Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected]

Macro Economics (Regional)

Junjie TANG (852) 2773 8736 [email protected]

Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected]

Head of Hong Kong and China Property

Leon QI (852) 2532 4381 [email protected]

Banking (Hong Kong, China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 [email protected]

Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected]

Gaming and Leisure (Hong Kong/China)

Lynn CHENG (852) 2773 8822 [email protected]

IT/Electronics (Semiconductor) (Greater China)

Dennis IP (852) 2848 4068 [email protected]

Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected]

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Joey CHEN (852) 2848 4483 [email protected]

Steel (China)

Kelvin LAU (852) 2848 4467 [email protected]

Head of Transportation (Hong Kong/China); Transportation (Regional)

Brian LAM (852) 2532 4341 [email protected]

Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering (China)

Carrie YEUNG (852) 2773 8243 [email protected]

Transportation – Transportation Infrastructure (Hong Kong/China)

Jibo MA (852) 2848 4489 [email protected]

Head of Custom Products Group

Thomas HO (852) 2773 8716 [email protected]

Custom Products Group

PHILIPPINES

Bianca SOLEMA (63) 2 737 3023 [email protected]

Utilities and Energy

SOUTH KOREA Sung Yop CHUNG (82) 2 787 9157 [email protected]

Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected]

Capital Goods (Construction and Machinery)

Jun Yong BANG (82) 2 787 9168 [email protected]

Oil; Chemicals; Tyres

Thomas Y KWON (82) 2 787 9181 [email protected]

Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected]

Head of Regional IT/Electronics; Semiconductor/IC Design (Regional)

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected]

IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected]

IT/Technology Hardware (Handsets and Components)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected]

Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected]

Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected]

Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected]

Oil and Gas (ASEAN/China); Capital Goods (Singapore)

David LUM (65) 6329 2102 [email protected]

Property and REITs

Evon TAN (65) 6499 6546 [email protected]

Property and REITs

Jame OSMAN (65) 6321 3092 [email protected]

Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)


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If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.

In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.

In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

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For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.

Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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