China Water

China Water (Proxies: Hankore, SIIC, Utd Envirotech) : Credit Suisse has a sector initiation report, where the house believe China is starting a decade-long “green cycle” in environment. In the coming years, expect air pollution pressure to ease, while urbanisation, consumption upgrades, and catch-up in the waste collection and treatment rates will drive strong growth in waste water and solid waste treatment demand. With average treatment demand expanding at ~30% CAGR, the story does not stop in 2015. House estimate nearly two-thirds of the waste treatment market potential in China will be left untouched after completion of 2015E targets. Investment in the sector is not just defensive versus economic cycles, it is also exciting with sustainable earnings growth, along with emerging strong players as the sector develops. Overall, the house prefers waste water and municipal solid waste treatment. Preference is based on the consumption nature of the two markets, with demand growth at 10-24% CAGR in 2012-15E. See moderate upside in wastewater tariff and expect operational improvement as a result of rising collection and utilisation. View waste-to-energy as best positioned given its robust demand growth (>50% CAGR in incineration) and incentivising economics. Investors should be more selective in industrial waste plays—by track record, technical capability and local relationship. The house initiates coverage on Dongjiang (O), Beijing Enterprises Water (O), Tianjin Capital (O), Guodian Tech (N) and Yonker (N). Top picks are CEI and BEW, two large-cap core holdings for the sector. On the small caps side, like Tianjin Capital and Dongjiang.