China SOEs "will benefit" as water industry consolidates (Amended)

Singapore

AS the China wastewater treatment industry consolidates, state-owned enterprises (SOEs) will benefit, said China Everbright Water chief executive Wang Tianyi, 52, on Monday.

"We hope to be in the top three," Mr Wang told the media in Mandarin after the company debuted on the Singapore Exchange (SGX) mainboard with a valuation of S$2.4 billion.

Everbright Water is 78 per cent owned by Hong Kong-listed China Everbright International, which is linked to China's state-owned Everbright Group. Everbright International recently completed a S$1.2 billion reverse takeover of SGX-listed water treatment firm HanKore Environment Tech.

The combined group owns 41 water treatment projects with a total capacity of 3.5 million tonnes of water a day. Some 32 projects revolve around treating municipal wastewater, which has lower margins compared to treating industrial wastewater, but also lower risk, said Mr Wang.

Looking ahead, he expects the capital-intensive environmental industry to undergo consolidation, with smaller players withdrawing as competition intensifies.

The wastewater treatment industry is highly fragmented. Everbright Water has a market share by treatment capacity of about 2 per cent. This puts it in an estimated No 5 spot, Mr Wang said.

Challenges that Everbright Water faces are stricter government regulations and ensuring that payment and contractual terms with local governments are fair, he said.

The problems, however, are not "life-threatening". SOEs like itself are in a good position because of their access to lower-cost funding as well as government support, he said.

China Everbright Water itself has a funding cost of about 5 per cent.

"The China government will control competition, and will ensure a reasonable rate of return," said Mr Wang, who holds a doctorate in engineering and was previously the president of the Shandong Academy of Science as well as deputy mayor of Shandong province's capital city, Jinan.

China Everbright Group is one of four very large SOEs that are directly supervised by the State Council, China's main administrative arm.

Mr Wang said that in the municipal wastewater treatment segment, international players that have entered the market might be forced to retreat in the coming years. They face difficulties in raising capital, and also have weaker pricing power in China, he said.

Given the long-term nature of the contracts, local governments will feel more comfortable working with SOEs. "Citizens will also feel more comfortable," he said.

The biggest cost for the business is electricity, Mr Wang said.

He said Everbright Water decided to list in Singapore because it likes the rule of law as well as the support for the water industry here.

Looking ahead, the company plans to familiarise itself with the Singapore market and industry, collaborate with research universities, and work with investors. It is also focused on integrating itself with HanKore. It will also explore fund-raising options, Mr Wang said.

Everbright Water said in an investor presentation released on SGX last week that it plans to expand into tap water supply, reusable water, seawater desalination and comprehensive water environmental treatment.

SOE-backed water treatment companies trade at 30 times earnings, compared to non-SOE-backed companies, which trade at 17 times, the presentation said.

In a report on Dec 5, Maybank Kim Eng analyst Wei Bin had a "buy" call on China Everbright Water with a price target of S$1.26, based on 30 times forecast earnings for the company's financial year ending June 30, 2016.

"We believe it will start acquiring aggressively . . . given sufficient targets in its pipeline and its much stronger financials after the deal," he said.

Rising water tariffs, strong government policy support and industry consolidation make bigger SOEs attractive investment opportunities, Mr Wei said in a sector report earlier this year.

SGX said in a statement on Monday that the listing of China Everbright Water brings the total number of environment companies listed on the exchange to 15, with a total market capitalisation of more than S$8.4 billion.

China Everbright Water closed at S$1.005, up five cents or 5.2 per cent.

Amendment: An earlier version of the article incorrectly stated that Everbright Water was listed under a direct listing framework set up between Singapore and the China Securities Regulatory Commission (CSRC) in November 2013 to cut down on red tape for China-incorporated companies to list in Singapore. Everbright Water is the first China-incorporated listing in Singapore since 2007, but the listing, via a reverse takeover, did not come through the direct listing framework route.