The consolidation of China’s water sector, which gained pace last year, will continue. This will be driven by the secular trend that has taken hold in the industry because of China’s resolve to address its environmental issues and surging water demand amid rapid urbanization and further industrialization.
More stringent government policies would continue to force out incompetent players, while higher investment returns through tariff hikes and better economies of scale would create bigger winners. Specifically, state-owned enterprises are better positioned to enjoy interest cost savings and spin off existing assets into a listed platform for further development (with fund-raising) and to unlock value.
Our picks: Sound Global (listed on HKSE) is the best bargain at 30% discount to peers, with promising earnings upgrades backed by a record high orderbook. The rising tide may have lifted United Envirotech but its advanced membrane technologies and growing portfolio keep it as an attractive acquisition target. SIIC Environment is a buy on dip for investors who can wait for the firm to evolve into a bigger and more comprehensive environmental play.
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