18 March 2019
Water treatment is one of the fields that benefit from China’s environmental protection drive. Photo: China Everbright Intentional
Water treatment is one of the fields that benefit from China’s environmental protection drive. Photo: China Everbright Intentional

China equities: Environmental protection theme worth a bet

Air pollution in China typically gets worse in the winter months as residents in north China use coal for heating.

Chinese authorities issued a notice recently that require Beijing, Tianjin, Hebei and nearby regions to take measures to tackle air pollution.

Environmental protection remains one of the top priorities in China, and related companies stand to benefit.

In fact, north China has been haunted by air pollution for years. The government has been stepping up efforts in fighting air pollution, but many of the cities in the region are still struggling with heavy smog in the winter.

China has pledged to cut average concentrations of airborne particles known as PM2.5 by more than 15 percent year on year in 28 northern cities from October to March to meet key smog targets, according to a statement issued by the Ministry of Environmental Protection. Also, PM2.5 readings in Beijing, Tianjin and other major cities are required to fall by 25 percent, and the days of heavy pollution will be cut by 20 percent.

To this end, the authorities have unveiled several measures, including monitoring of air quality, shutting down steel mills and coal miners and promoting the use of clean energy.

Such policy emphasis bode well for companies involved in the environmental protection business. Indeed, these companies posted stable growth in the first half of this year.

Ninety mainland-listed companies in this field have reported average revenue growth of 21 percent in the first half, up 9 percentage points from the year before, according to Haitong Securities.

Of this number, companies focused on air quality posted average revenue growth of 14 percent, up 3 percentage points from the year before.

Water treatment companies reported that revenue rose by 17 percent year on year, up 6 percentage points from the year before. And waste treatment companies posted a staggering 26 percent revenue growth rate in the first half, up 3 percentage points from the previous year.

Underlying profit of these 90 firms gained 13 percent in the first half from a year earlier.

In fact, the environmental protection industry largely depends on government spending. These companies will have vast growth potential as long as local and central governments continue to support them. Companies with state support will have a stronger edge.

For example, China Everbright International (00257.HK) and Beijing Enterprises Water Group (00371.HK) reported their net profit increased 48.5 percent and 21.6 percent, respectively, in the first half from the previous year.

However, their share prices only rallied 18.9 percent and 23.9 percent year to date, lagging behind the 25 percent gain of the Hang Seng Index in the same period.

Meanwhile, several mainland-listed companies have reported profit growth of over 50 percent.

Among them are quite a few stocks that are eligible for the stock link program. These stocks include Beijing Sanju Environmental Protection and New Material Co. (300072.CN), Beijing Originwater Technology Co. (300070.CN), Beijing Orient Landscape & Environment (002310.CN), Beijing GeoEnviron Engineering & Technology (603588.CN), GEM Co. (002340.CN), Ningbo Ligong Environment And Energy Technology Co. (002322.CN) and Centre Testing International Group (300012.CN).

Despite the strong earnings growth, they, too, lag behind the Shanghai index.

Investors may want to consider buying into these environment protection plays which may eventually catch up with the broad market.

This article appeared in the Hong Kong Economic Journal on Sept. 8

Translation by Julie Zhu

[Chinese version 中文版]

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