Cashing in on environmental woes of China

ONE man's problem is another's business opportunity. Such is how China's worsening environmental crisis has become good news for a spectrum of environment-related companies in Singapore and abroad.

Businesses in pollution control, renewable energy and manufacture of environmental protection equipment are eager to lend a helping hand, lured in part by a breathtaking investment of over three trillion yuan (S$628 billion) by President Xi Jinping's administration to combat the country's infamous air and water pollution. This was announced last July as part of the country's 12th five-year plan (2011-2015).

The government's more stringent air and water discharge standards is another plus, as power plants, steel mills, chemical factories and other pollutive industries in China scamper to call on the expertise of environmental companies for help.

"We are at a blowout, it's time to explode. The demand totally outstrips the supply," Singapore-listed China Environment's executive chairman, Huang Min, said.

Too-rapid urbanisation and industrialisation have taken their toll on China's environment - a "sacrifice" not uncommon for developing economies. "China is paying an old debt," Mr Huang added.

The government is still gradually releasing details of its environmental plan.

So far, it has increased subsidies to power plants that install equipment to limit their emission of air pollutants, and vowed to punish those who are equipped to filter air contaminants but do not do so. Coal-based power plants contribute majorly to China's air pollution.

The 12th five-year plan has also earmarked 430 billion yuan (up 17 per cent from the 11th year) for newly added pipelines as well as wastewater and sludge treatment facilities.

This mainly supports the municipal wastewater sector. Insufficient funds and an underdeveloped piping network and sludge disposal systems have restricted the capacity of their treatment facilities.

"It is infrastructure budget. The money from the central government flows to the municipal governments. When they have the funds to spend on all these projects to build or upgrade their treatment plants, it means projects for us to bid and win," explained United Envirotech (UEL) executive director Chong Weng Chiew.

To take advantage of the regulatory wave, companies from Singapore have entered the Chinese market to offer what as a global hydrohub Singapore has long been good at - offering water management expertise.

Chinese state-owned enterprises (SOEs), public and private domestic companies and other foreign players have likewise jumped onto the bandwagon - with varying successes.

On Singapore's stock exchange, a handful of companies which provide environment-related services in China have seen their stock prices soar on rising revenues.

Industrial waste gas treatment firm China Environment, also the third largest player in China's air pollution control market, is now trading at six times what it was a year ago.

Stock prices of water treatment firms SIIC Environment and UEL have doubled over the past year, while the share price of Beijing-based HanKore Environment recently leapt on news of a reverse takeover by Chinese SOE China Everbright.

It is not just a short burst of energy that will soon enough dissipate. Environmental firms expect this positive run to last anywhere between one to two decades.

Five years is too short, the pollution too severe, and it is simply "political suicide" to stop supporting environmental protection measures, they say. In fact, some think new funding may be unveiled as early as the upcoming National People's Congress's session in March.

UEL's Dr Chong said: "This is only the beginning. I won't be surprised if they dedicate more to spend in the next five-year plan."

Funding also does not end with the building of treatment plants; maintaining their operations thereafter also requires funds, for instance to upgrade their technology and improve their productivity, he added.

Recent years have also seen private-equity (PE) firms, venture capital investors and hedge funds placing their bets on the sector. Last year, for instance, PE firms such as RRJ Capital, China Investment Corp and Shanghai Industrial Holdings poured US$1.2 billion into companies related to China's environmental industry, according to Asia Private Equity Review.

Given the thronging of investors in the sector, competition is unavoidable. The playing field is very fragmented with hundreds of players.

The major players continue to be state-owned or controlled enterprises whose influence can extend well beyond their cities of origin across entire regions. Competitive labour costs, vertical integration and stronger governmental support give them this advantage.

There are also foreign companies, mostly American and European, which partner Chinese firms to combine capital and expertise in bidding for projects - crucial, given that it is such a technology-driven industry.

Nasdaq-listed air pollution control firm Fuel Tech is one example. It earns one-fifth of its revenue from China. General Electric, Mitsubishi Rayon and Siemens rank among the major foreign water pollution control companies.

But working in such close proximity with locals also carries the risk of foreign companies exposing their technology to a people known to be exceptional "copycats" and emulators of foreign products and techniques.

Air cleaner company Utopia Aire set up office in Shanghai in 2002 but left four years later, citing as one of its reasons such "free tuition" that the locals were trying to obtain from it by making detailed enquiries of its technologies under the pretence of looking for a contractor, managing director Jeremy Chia told BT.

To prevent copying was also why UEL decided to acquire membrane maker Memstar to vertically integrate its processes, as well as manufacture its newest generation of fibres in Singapore - to protect its intellectual property and patent, for added precaution.

Cultural differences leading to the problems in expectations, practice and pace also pose a problem.

"It takes time to gain deeper understanding into the country's issues and develop suitable processes, methodologies and service delivery skills," said Tan Shao Yen, managing director of CPG Consultants.

The company entered Suzhou, China in 2001 and said it has been seeing growing demand for its expertise in green architectural and environmental infrastructural design of late.