China Environmental:Industry read-across from a major waste-to-energy operator;Buy CEI

Industry read-across on tariff, project opportunities and profitability。

    We had a meeting with management of China Jinjiang Environment (CJE SP,not rated), one of the largest waste-to-energy (WTE) players in China with totalcapacities of 53,494tpd. Key industry read-across includes: the WTE tariff isunlikely to be cut for three reasons, service diameter expansion is likely to leadto WTE plant expansions, and WTE plants can enjoy profitability enhancementby supplying heat. We maintain our Buy rating on China Everbright Intl (257HK)in light of its improving earnings quality from operations, decent growth profile,and undemanding valuation.。

    WTE tariff unlikely to be cut for three reasons。

    Management sees little risk for WTE tariff adjustment in the near term for severalreasons. First, their recent conversation with regulators shows that Departmentof Price of NDRC does not want to be held responsible for any potential miss ofChina's 13th FYP target for WTE (by allowing tariff cuts). Second, China decidedon the current tariff of RMB0.65/kWh in 2012and there has been little investmentcost decline for WTE after that - most of the investment cost decline due toswitching from imported equipment to domestic equipment actually took placebefore 2012. Third, there has been no industry-wide rise in unit power generationfrom wastes, as some of the recently-awarded projects in lower-tier cities actuallyinvolve wastes with low calorific value.。

    Service diameter expansion likely to result in Phase II&IIIs。

    Management reckons there are still plenty of new projects opportunities over thenext few years. Specifically, management sees lots of potential for Phase II&IIIexpansions of existing projects for two reasons. First, potential development ofRDF (refuse-derived fuel) in China should expand WTE plants' service diameterfrom 50km to over 100km. Second, it's becoming more and more difficult for siteselection for new projects. Management expects much fewer new projects afterthe 13th FYP period and expects the market to consolidate through M&A by then.。