The newly-announced Water Pollution Control Plan and the unprecedented government focus on environmental protection reaffirm our positive view on the water industry. Large-cap SOE stocks have been traded strongly, we now see more upside for smaller SOE players. They have a higher growth rate, more potential to surprise and beat market expectations, and a more attractive valuation. We initiate coverage on SIIC Environment (SIIC) and China Everbright Water (CEW) with Buy and designate them as our sector top picks.

​Pollution control plan unveiled; over RMB1.9tr investment needed by 2020
The Water Pollution Control Plan released in April will lead to over RMB1.9tr of total investment in the water industry by 2020, as estimated by the Ministry of Environmental Protection. More detailed implementation plans and the 13th five-year plans will be announced by central and local governments in 2H15-
2016, unveiling tightening discharge rules, paving the way for water tariff hikes, and promoting the involvement of specialist operators.

Strong growth upholds premium valuation, leading SOEs to gain market share
New project wins should remain strong over the next few years, supporting premium valuations for the sector. Leading SOEs can gain market share in the currently scattered municipal water industry, leveraging on their better relationship with local governments and access to cheap financing. Management with a commercially-driven mindset, good employee incentive plans, and a wider footprint also help. BEWG, as the role model for the new SOE, has proven to be successful. We believe SIIC and CEW can emulate BEWG’s strong growth and emerge as leading SOE players in the sector.

Eoin Treacy's view

Here is a link to the full report.

Southern China is a tropical region with abundant rain as well as snowmelt run-off from the Himalayas. Northern China on the other hand is semi-arid and is constantly in need of additional water. Deforestation over the last number of decades has only exacerbated this problem. The breakneck pace of industrialisation has put additional pressure on the country’s water resources and the government is finally taking heed of the dire environmental warnings it has been presented with.

On my return from China in April I created a list of Chinese water companies in the Eoin’s Favourites section of the Chart Library.

China Everbright International has now unwound its overbought condition relative to the 200d-ay MA following its impressive breakout in March. It will need to find support above HK$12 if medium-term scope for additional upside is to remain a credible outcome. When compared to other companies in the sector this chart pattern has the most commonality and is probably indicative of the outlook for the sector.

Following an impressive breakout in 2013, Singapore listed China Everbright Water has been rangebound for 18 months. It has returned to test the S$1 level and a sustained move below S80¢ would be required to question potential for continued higher to lateral ranging.

SIIC is also listed in Singapore and continues to consolidate this year’s significant breakout. A sustained move below the trend mean would be required to question potential for additional upside.  

Guangdong Investment has been trending consistently higher for five years but volatility has increased over the last six months. The share will need to find support in the current area if medium-term scope for continued upside is to be given the benefit of the doubt.