China courts Big Business to tackle water pollution

Foreign and domestic companies are being given a unique opportunity to cash-in on Beijing's big clean-up.

Chen Xiaoping is in no doubt what is to blame for the parlous state of China’s rivers, often thick with industrial waste that threatens the country’s water supply.

Sitting in his offices in Hong Kong, the chief executive of China Everbright International (CEI), one of China’s biggest water and waste management companies, tells FinanceAsia that the country’s growth story has made the rivers toxic.

“The excessive economic growth during the past 30 years is one of the many factors, thus  the environment is a historical debt to pay,” he said. “But it’s not too late.”

It is a sentiment shared by Beijing and, for that matter, domestic and foreign companies.

Domestic groups in particular are seeking cash, technology and expertise through the capital markets and M&A in an effort to seize the opportunities created by what is becoming a huge growth industry.

The data behind the opportunity are alarming.

According to a 2012 report by Ernst & Young, China’s water resources have fallen 12.7% since 2000, while sewage rose from 22.8 billion tons to 38 billion tons between 2001 and 2010.

China’s water in urban and rural areas is frequently affected by industrial and household pollution, water-borne diseases and water-contaminated accidents, according to a 2011 World Health Organisation report.

As a result, China in 2012 introduced stricter national standards on drinking water quality that come into effect in 2015, and it is working with the WHO to monitor the supply.  Pollution reduction was also a key feature of Premier Li Keqiang’s address to the National People’s Congress this month.

Beijing has begun to pump billions of renminbi into developing the industry; which means funding for technology, research and equipment to upgrade existing plants and build new ones.

In short, a big clean-up is under way.

China Water Risk, a non-profit organisation, expects this to begin with waste water, with provincial governments upgrading their standards to the new incoming national benchmarks. As a result, it expects treatment rates of industrial wastewater and sewage to rise.

CEI is one of a clutch of companies vying  to benefit from this push.

It joins Beijing Enterprises Water and Beijing Capital – all three listed in Hong Kong –  as the principal local players, while foreign groups are also circling, including Suez Environnement, Veolia Water and Siemens, which provide services and high-end technology.

Meanwhile, funds are flowing in from the International Finance Corp, the private equity arm of the World Bank, private equity firms such as KKR and infrastructure funds such as the Macquarie Everbright China Infrastructure Fund.

Chen, formerly in the financial services industry focused on currencies, says his career switch was driven by more than professional ambition. “Human beings only have one Earth. I feel it [has] more value contributing to our common homeland than doing a finance job,” he said.

Although the 60-year-old Chen and others extol the virtues of being in a business that appears worthy, the rewards are rich indeed.

The Ministry of Environmental Protection said in February it would spend Rmb2 trillion ($326 billion) to tackle water pollution in an effort to improve the quality of its water supply by 30% to 50%.

HSBC, in a February analyst report, says the market for waste-to-energy and wastewater treatment will grow strongly, while hazardous waste treatment will rise 20% over the next few years.

“China’s market is such a vast one. The country has just started its energy conservation and environmental protection. We hope more companies, either from the mainland or overseas, will pay attention to the topic and join the industry,” Chen said.

“We don’t fear competition; competition is not a bad thing.”

That might be because CEI is well positioned despite only entering the industry in 2003, due to its focus on waste-to-energy and hazardous waste treatment (HWT), on top of wastewater treatment.

According to the HSBC report, the hazardous waste generation business demands higher treatment fees than other areas and has higher entry barriers  due to the level of expertise needed. Therefore, the HWT market has “huge growth potential” for those  able to be involved.

Broadly, CEI has developed about 70 projects servicing 35 cities in China; in 2013 its operating profit rose 43% to HK$2.13 billion while total assets jumped 42% to HK$23.47 billion. And the company has access to cheap backing, from the government and abroad.

Chen (above) said CEI signed a Rmb10 billion (US$1.6 billion) loan agreement with China Development Bank for 2013-2018, agreed $300 million of loans with the Asian Development Bank, and  has  secured a $70 million loan from IFC. 

“We want to cooperate with the policy banks because they offer longer tenors (over 10 years) than commercial banks’ 5-7 years. We [also] gain a significantly lower financing cost by borrowing from them because the policy banks are not lending for the purpose of profit,” he said.

Furthermore, he says the company received Rmb 40 million to Rmb 50 million in government subsidies in the past two years.

“Previously, the amount we received was much less and it was more like a bonus than a subsidy,” he said, as if to illustrate Beijing’s newfound zeal in tackling the problem.

Meanwhile, RRJ Capital, run by former Goldman Sachs executive Richard Ong, in December paid HK$2.7 billion for a 7.85% stake in CEI, becoming its second-largest shareholder after its parent, China Everbright Holdings.

As such, Chen says the company will not need to increase its cash-on-hand, which increased 100% in 2013 to HK$5.8 billion, due in no small part to a share placement that raised HK$3.6 billion.

Expensive capital

For Chen, the matter is something of a personal passion, one he is keen to articulate.

“I take the improvement of the environment as one of my life goals. But environmental protection cannot be achieved by one person; it’s the responsibility for all the people,” he said.

Indeed. Beijing appears keen to attract as many people as it can.

The government is courting foreign groups to secure know-how and technology in an effort to fast-track the clean-up effort, and has placed no ceiling on foreign shareholdings in water treatment ventures. Meanwhile, they can hold up to 49% of a joint venture with a local utility in terms of distribution.

According to MarketWeb, an online analysis group, 15% of companies in the industry have foreign investors.

One of the leaders of this foreign push is Suez Environnement, the French water and waste management company, both on its own and through its joint venture with Hong Kong-based New World Services.

It operates in Beijing, Shanghai, Chongqing and southern China – including Hong Kong, Guangdong and Macau.

“China will have to think about water quality and desalination in the years to come, which creates opportunities for us,” Jean-Marc Boursier, the company’s chief financial officer, told FinanceAsia.

Apart from RRJ’s investment in CEI, KKR last year invested US$40 million in United Envirotech, a Chinese water treatment group listed in Singapore, after earlier buying US$113.8 million of the group’s convertible bonds.

“A lot of water treatment facilities in China do not meet regulatory requirements but the government is now taking it very seriously,” Lane Zhao, a director at KKR in Beijing, told FinanceAsia.

He said the firm is looking closely at the environmental protection industry in general and expects more private equity investments to happen in the sector in China; particularly as the market is being driven by government support, he said.

“We feel that Beijing really welcomes foreign investors into this sector, especially those with money and technology, to help create solutions,” said Zhao. “The country is facing  a lot of challenges – air pollution, water quality and food safety – and there are opportunities for investors with the funding, technology and capabilities to help improve the system.”

That said, foreign groups still have their work cut out, with domestic companies working on bringing foreign technology and know-how home by all means necessary.

Beijing Capital this month bought a New Zealand waste management business  for NZ$950 million (US$793 million) for precisely this reason.  In 2012, China Investment Corp, the country’s sovereign wealth fund, bought a 8.68% stake in Thames Water, the UK utility.

Additional reporting by Jing Song

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