China Environment Sector：Refining policy, higher demand and standards - recent conference and trip feedback

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 26 May 2014 Asia Pacific/China Equity Research Environmental Services (Environmental Protection CN (Asia)) China Environment Sector COMMENT Refining policy, higher demand and standards - recent conference and trip feedback Figure 1: Credit Suisse China Environment Conference Source: Credit Suisse ■ Credit Suisse China Environment conference and trip. Our recent China Environment conference and trip included 12 corporates and six industry experts/government entities/waste treatment companies, covering waste water, municipal solid waste, industrial waste, EPC and equipment, as well as government policy and regulators. ■ Refining regulations lead to higher demand and higher standards. We believe that 2014-15 would be a period where policy is moving into a refinement stage, with detailed regulatory and financial frameworks being worked out for both the waste generators and treatment suppliers. Our recent visits to waste treatment plants suggest continued growth in municipal waste treatment demand, and a surge in small industrial waste customers. At the same time, higher discharge/emission standards lead to higher capex and operating costs for waste treatment operators, although most incremental costs can be passed through, in our view. On a relative basis, the big operators should benefit on lower cost pressure, while competition remains modest at this stage, partly due to the 'local monopoly' nature of the sector. ■ Launch of the CS China environment basket and top picks. We remain positive on the secular uptrend of the sector. Investors can get exposure from the newly launched Credit Suisse China environment basket (Bloomberg ticker CSAPCHEN). Our top picks are BEW, CEI and Dongjiang. Research Analysts Trina Chen 852 2101 7031 trina.chen@credit-suisse.com Dave Dai, CFA 852 2101 7358 dave.dai@credit-suisse.com Owen Liang, CFA 852 2101 6093 owen.liang@credit-suisse.com Gary Xu 86 21 3856 0335 gary.xu@credit-suisse.com Frankie Zhu 852 2101 7426 frankie.zhu@credit-suisse.com Ran Ma 852 2101 6653 ran.ma@credit-suisse.com Contribution by Joy Zhang* *Industry section on pages 6-10 is contributed by Joy Zhang frank_wy_leung11@hkma.gov.hk First Last 05/26/14 02:04:53 PM Hong Kong Highpower 26 May 2014 China Environment Sector 2 Sector valuation summary Figure1: Valuation comparison—China environment peers (prices as of 23 May 2014) Company Ticker Rat- Target Share Trade Mktcap P/E(x) P/B(x) ROE(%) EV/EBITDA(x) ing price price ccy (US$mn) 13A 14E 15E 16E 13A 14E 15E 16E 13A 14E 15E 16E 13A 14E 15E 16E BJ Enterprises Water HK371 O 6.3 5.1 HKD 5,649 36.2 25.2 20.4 17.6 3.0 3.0 2.8 2.5 10% 12% 14% 15% 30.5 24.4 21.7 19.2 Tianjin Capital HK1065 O 5.5 4.2 HKD 771 17.1 15.4 12.1 10.3 1.2 1.2 1.1 1.0 7% 8% 9% 10% 8.6 7.0 6.0 5.0 China Water Affairs HK855 NR NR 2.7 HKD 484 n.a n.a n.a n.a. n.a n.a n.a n.a. n.a n.a n.a n.a. n.a n.a n.a n.a. China Water Industry HK1129 NR NR 1.3 HKD 185 n.a n.a n.a n.a. n.a n.a n.a n.a. n.a n.a n.a n.a. n.a n.a n.a n.a. Sound Global HK967 NR NR 6.9 HKD 1,311 14.3 11.3 9.0 9.0 2.1 1.8 1.5 1.2 16% 17% n.a n.a. 7.1 7.3 10.7 n.a. CT Env HK1363 NR NR 4.8 HKD 856 19.8 14.7 13.0 10.4 4.8 4.0 3.2 n.a. 28% 25% n.a n.a. 13.0 10.8 23.4 n.a. Interchina Holdings HK202 NR NR 0.4 HKD 278 n.a n.a n.a n.a. n.a n.a n.a n.a. n.a n.a n.a n.a. n.a n.a n.a n.a. Hankore BIOT:SP NR NR 1.1 SGD 441 n.a 20.5 18.1 14.7 n.a 1.5 1.4 1.3 n.a 7% 10% 8% n.a 18.7 11.0 9.8 Beijing Capital CH600008 NR NR 6.1 CNY 2,145 21.9 17.9 12.9 n.a. 2.0 2.0 1.7 n.a. 12% 14% n.a n.a. n.a n.a 17.7 n.a. Chengdu Xingrong CH000598 NR NR 4.6 CNY 2,203 16.0 14.2 n.a n.a. 1.1 n.a n.a n.a. n.a n.a 0% n.a. n.a n.a 15.8 n.a. HLJ Interchina CH600187 NR NR 4.8 CNY 1,123 23.7 17.6 n.a n.a. n.a n.a n.a n.a. n.a n.a n.a n.a. n.a n.a n.a. n.a. Waste Water Treatment 25.8 20.3 16.2 13.8 2.3 2.2 2.1 1.9 11% 12% 14% 14% 14.7 12.9 11.1 10.4 Dongjiang Environmental HK895 O 38.0 29.4 HKD 878 25.6 22.3 12.7 10.9 2.4 2.2 1.9 1.6 10% 10% 16% 16% 8.4 8.5 5.3 4.6 Dongjiang Env A-Share CH002672 NR NR 35.6 CNY 1,017 28.0 22.9 15.4 15.8 3.1 2.9 2.4 n.a. 13% 16% 0% n.a. 13.3 9.4 34.5 n.a. China Everbright Intl HK257 O 13.2 10.0 HKD 5,806 30.8 25.4 17.0 11.6 3.1 3.1 2.7 2.3 12% 13% 17% 21% 21.2 16.3 11.8 8.5 Beijin