THE recently announced work plan by the central government to conserve energy and to cut pollutant discharge is likely to offer long-term investment opportunities in related listed firms, analysts say.
The plan, issued by the State Council, China's Cabinet, reaffirmed state targets such as reducing energy use by a fifth in five years by 2010 and promising more preferential taxes, policies and spending in related industries.
The plan comes at a time when China is facing increasing environmental challenges, such as the contamination of Songhua River caused by a blast in a PetroChina Co plant in late 2005 to the most recent green algae due to industrial and agricultural waste in Taihu Lake in Wuxi, Jiangsu Province.
The plan is even more significant as China missed annual targets to reduce energy consumption per unit of gross domestic product by four percent and major pollutants discharge by two percent in 2006. The targets are part of a five-year plan ending in 2010 to cut energy intensity by 20 percent and discharges of major pollutants by 10 percent.
"The challenge is quite serious now in reaching these targets," the State Council said in a circular early this month, adding that last year's failure has made the five-year goal harder to be met. What's worse, growth in the industrial sector still accelerated in the first quarter from the same period a year earlier.
Related parties are still not fully aware of the situation, and more measures, policies, enforcement and coordination need to be taken, the circular said. It also pledged to consider the efforts made by regional government officials and company executives in improving energy efficiency and cutting pollutant discharges while assessing their work performance, rather than simply judging their contribution to GDP growth.
"I think the central government is now putting environmental issues at a very high position," said China Galaxy Securities analyst Xu Yaowen. "We expect that policies over emission control and a budget to be put in place."
Xu estimated at least 200 billion yuan (US$26.2 billion) will be needed between 2005 and 2010 in the waste water treatment sector amid an expansion in capacity as part of state efforts to reduce greenhouse gas emission.
The government would also beef up management and supervision in sewage treatment plants to boost utilization as well as increase charges for waste treatment services, Xu said.
Public infrastructure firms like Beijing Capital Co and Tianjin Capital Environmental Protection Co are recommended by analysts including Zhou Haiou at Guoyuan Securities as good buys with large growth potential.
The government has required the ratio of urban treated sewage to reach 90 percent in Beijing when the Olympics take place next year, 1.3 times the current level. This will benefit Beijing Capital, which dominates the sewage treatment industry in the capital, according to a note by investment consultancy Chongqing Dongjin.
Shanghai-listed Beijing Capital plans to nearly double its sewage treatment capacity to 15 million tons a day in 2010 from 7.9 million tons at the end of last year.
Auto component makers engaged in clean technology may also be beneficiaries, as China will adopt stricter auto emissions standards equivalent to Euro III from Euro II.
Shenzhen-listed Weifu High-Technology Co is set to enjoy better-than-expected growth from sales of its products, such as pumps for use in engines of Euro III standard and catalytic converter used to clean vehicle emissions.
"We like such stocks," said Zhou Fengwu, an analyst at Orient Securities. "But we should also know that the enforcement of emission standards may not be as expected and the auto demand growth may also be short of expectation under state macro control."
On the other hand, the government is working on new measures such as limiting power sales by inefficient and heavy-polluting power plants. This will hurt profitability of owners of certain dirty and inefficient plants, forcing them to close or upgrade facilities.
Five-Year Goals
Highlights of the five-year targets through 2010 in the General Work Plan for Energy Conservation and Pollutant Discharge Reduction issued by the State Council
- Energy consumption per 10,000 yuan of gross domestic product to be reduced from 1.22 tons of coal in 2005 to below one ton;
- Discharge of major pollutants to be cut by 10 percent;
- Water consumption per unit of industrial value added down 30 percent;
- The national ratio of urban sewage treatment to reach at least 70 percent;
- The ratio of comprehensive utilization of industrial solid wastes to reach 60 percent or more;
- Chemical oxygen demand to be cut by 1.38 million tons from 14.14 million tons in 2005;
- Sulfur dioxide emission to be reduced from 25.49 million tons in 2005 to 22.95 million tons.
Opportunities for Listed Water Firms
The government plan on energy conservation and pollutant discharge reduction would benefit related listed companies including water firms, analysts say. Shares of China's water firms, which have lagged the rise in the Shanghai Composite Index, started to outperform the benchmark recently.