We remain bullish about the macro opportunities driven by the Chinese
government’s initiatives. Environmental protection remains a focus
and, coupled with the improving macro news flow, we expect
companies’ project win momentum to rebound strongly from 2Q09.
Tariff rate hikes, as expected, are taking place and recent channel
checks reveal that utility price liberalisation is a key factor attracting
cross-regional infrastructure investment.
■ Tariff prices are a key factor attracting investment. Our analysis shows
that from the current rate of 1.2% (the per-capita water/waste water
expenditure of urban households’ annual income), the national
combined tariff would have to grow by 191% to Rmb10.97/cu m (from
Rmb3.77/cu m) to reach the lower end of the World Bank’s affordable
threshold of 3%. Also, based on a sample wastewater project, the IRR
can improve by 220 bp to 12.2%, if tariff rates rise by 10%.
■ We reiterate our view that well-positioned companies with a good track
record and expertise across the environmental protection value chain
should benefit. Most importantly, those with good balance sheets
and/or access to credit lines are vital. Our top picks are Guangdong
Investment, China Everbright International and Hyflux.