China environment protection firms enjoy sunny outlook

With stocks for Chinese listed environmental protection companies booming in recent months, the industry's future prospects look bright, analysts said.

Beijing Originwater Technology (BOW), a premier listed water treatment firm, witnessed its share price surging 74 percent from the start of this year to close at 59.15 yuan (9.7 U.S. dollars) Tuesday, beating the upswing of 31.9 percent posted by the benchmark Shanghai Composite Index in the period.

BOW's performance pointed to investors' confidence in strong growth momentum of listed domestic air pollution, water and solid waste treatment companies, as big cities like Beijing face environmental pressure due to population and city expansions, said Sun Xiwei, a senior analyst with CITIC Securities.

Investors' enthusiasm has fueled rocketing valuations for many energy saving and environmental protection-related firms, with the average share price of 173 companies in this sector surging 63.9 percent as of Tuesday from the beginning of this year, Sun said.

Aquatic ecosystems and air quality have been severely damaged in many regions after decades of fast economic growth, threatening public health and sustainable economic development.

China has responded by releasing of a list of policies beneficial to environmental protection firms in hopes of spurring industry growth.

A four to five trillion yuan joint-investment from the government and the private sector is expected to be rolled out to fulfil goals outlined in a national plan to tackle water pollution, said Zheng Binghui, deputy director of Chinese Research Academy of Environmental Sciences.

The State Council, China's cabinet, in mid-April unveiled a detailed action plan to fight water pollution, saying more than 70 percent of the water in the seven major river valleys, including the Yangtze and Yellow rivers, should be in good condition by 2020.

"Such an action plan calls for efforts to ramp up investment, and will inject strong growth impetus to companies focusing on water treatment equipment, damaged ecosystem recovery and environmental protection facility surveillance, with some sectors being newly emerging ones," said Zheng.

BOW raked in 19.5 million yuan net profits in the quarter through March, up 13.9 percent from a year earlier, attributing it to technology innovation, strong market demand and supportive industry policies. It projected huge water treatment business opportunities at several trillion yuan in the near term.

"China is at the crossroads of environmental protection and it brings unprecedented opportunities to companies. When environmental protection companies become more professional, the ecosystem recovery can become more professional thereafter," said Chang Jiwen, an expert with Development Research Center of the State Council, a government think tank.

However, environmental protection projects are time-consuming and highly reliant on investment, as a single water pollution plant might take hundreds of millions yuan to build. Against the backdrop of waning government tax revenues, effective ways have to be found to tap market resources in tackling the funding bottlenecks, experts said.

China's Ministry of Finance and the Ministry of Environmental Protection earlier this month jointly released the implementation opinions regulating the public-private-partnership (PPP) mode for water pollution prevention and control to encourage private investment in big projects.

The investment threshold for the private sector should be further lowered, while banks and other financial institutions should be encouraged to create innovative financial products to expand financing channels for companies, Chang suggested.

Professional companies' participation in those projects can not only reduce the government's financing burden, but also improve efficiency of environmental protection facilities with the shift of governments' role from a public service provider to a supervisor, analysts believed.