Industry Insights - Waste Water Treatment and Desalination in China

MelchersRaffel Ltd. Hong Kong Tel +852 2589 1563 Email [email protected]

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Industry Insights

Waste Water Treatment and Desalination in China

Hong Kong / Shanghai / Munich, September 2015

MelchersRaffel Ltd. Shun Tak Centre, Hong Kong Tel +852 2589 1563 Email [email protected]

© MelchersRaffel Ltd. All rights reserved. Proprietary and confidential. 1

www.melchersraffel.com150713_Selection of university for prevalence research in China

Content

0. Preliminary remarks and executive summary 2

1. Market prospect and structure of water sector in China 5

2. Waste water treatment in China 14

3. Desalination in China 43

4. Competition and M&A activities in water technology sector in China 51

5. Strategic options from MelchersRaffel view 58

About MelchersRaffel 61



www.melchersraffel.com

Preliminary Remarks

This paper intends to share the most recent trend and market development of water

technology sector in China and our main perspectives on the opportunities present

in this sector

The data shown in this paper is for reference only to understand the general trend

and competitive environment, whereas some of the numbers being best estimates.

Examples given here are selected for illustrative purpose and should not be

considered as an exhaustive list

MelchersRaffel can support your business objectives with

business development and strategy plans

acquisition of Asian targets and formation of joint ventures

hands-on implementation of action plans.

In the water sector we have considerable experience from the work with renowned

companies. Please do not hesitate to contact us for further information.

2




Executive summary – 1/2

3

▐ China is suffering from a water scarcity problem, mainly due to

■ Limited water resources available per capita (plus some water supply is not suitable for drinking)

■ Uneven distribution (esp. less in north China around Beijing)

■ Heavy pollution

▐ In 2015 the government has released Action Plan on Water Pollution and Treatment, in which more

concrete and stringent targets are set, focusing on the overall waste water treatment rate and the quality of

treatment discharge

▐ Government and professional investors have been investing into waste water treatment and desalination sectors

in order to address China’s water problems. Increasing investment in infrastructure could represent a large

business opportunity for foreign players with the right technology to play

▐ Waste water treatment (WWT) sector:

■ China’s share of waste water treated still lags behind that of the other developed countries

■ More waste water treatment plants and upgrade projects (to level-III advanced treatment) are expected to take place in

China, driven by the undersupply of water, accelerating urbanization, increasing industrialization and government policy support

■ Although China’s industrial sector being usually perceived as a price-oriented sector, foreign WWT equipment is still very much

preferred if the technological equipment of certain projects is high, as the industry insiders interviews revealed

■ Nevertheless, SOEs which manufacture and sell WWT equipment in China have a distinct advantage and larger share in the

sector, partly because of the good relationship with strong influencers in the market, i.e. the Chinese government

■ On the other hand, quite some local private-owned companies are actively improving their quality level and developing the

technological capability to provide better WWT solutions. Technological advantage of foreign WWT equipment companies is

diminishing.




Executive summary – 2/2

4

▐ Desalination sector:

■ Desalination technology is still quite new to China and currently the equipment is heavily relying on import. Similar to WWT

sector, some SOEs also play a strong role in the sector and actively develop their technology given the rich capital and

resources they have.

▐ For mid-sized companies, the understanding of the Chinese customers and access to them is of

utmost importance.

■ Big MNCs such as Veolia and Siemens have pursued M&A to acquire local client network in China

■ Chinese companies also regard M&A as a quick mean to expand further, especially geographically

▐ Key questions for mid-sized companies:

■ How is the relevant niche structured (main clients, volume, competition, distribution channel)?

■ What are the major trends in China in that relevant niche?

■ What is a realistic competitive advantage of a machine supply company from Europe (e.g. environmental

standards, safety, steady quality etc.)

■ How to develop the aftermarket service business to better serve the customers? what investment and return is expected?

■ Are there any potential acquisition targets in China (or in neighboring markets with access to the Chinese market)?

■ How are the options to be rated (acquisition, joint venture, greenfield investment etc.)? What is the most promising option?

■ What investment of capital and people resources will be necessary? What will be the payback period like? What are the key

measures for the implementation of the accelerated growth strategy?

▐ With a well structured and systematic approach, an accelerated and profitable growth in China is

realistic – MelchersRaffel can support you to realize the potential!




5

▐1. Market prospect and structure of water sector in China




China, some European countries and North Africa are considered to have

low water resources per capita compared to the rest of the world

Global internal renewable freshwater resources1 per capita distribution by geography

Cubic meters per capita per annum

6

1. Internal renewable freshwater resources refer to internal river flows and groundwater from rainfall in the country / region

Source: WorldBank, MelchersRaffel analysis




China’s water resources per capita are just 1/3 of global average and ~45%

of the population (>600mn people) have less water resources than German average

28,3

22,8

21,3

8,9

6,1

3,4

3,0

2,7

2,1

1,3

1,2

0,7

0,1

Brazil

Latin America & Caribbean

Australia

United States

World

Japan

Italy

Europe & Central Asia

China

Germany

India

Middle East & North Africa

Israel

7

3

2,8

1,8

1,4

1,0

0,9

0,6

0,4

0,3

0,2

0,1

0,1

0,1

Guangxi

Sichuan

Chongqing

Guangdong

Anhui

Gansu

Jiangsu

Shandong

Henan

Hebei

Tianjin

Beijing

Shanghai

47

81

30

106

60

26

79

97

94

73

15

21

24

Mn ppl

Internal renewable freshwater resources1 by key country and region, 2013

in thousand cubic meters per capita per annum

Country average

Regional average

In China, 12 Provinces have <1.3 m3 per capita water

resources (1.3 is German average)

About 45% of the Chinese population (> 600mn people) have

less water resources than a German on average)

Source: WorldBank, UN Water, China Infobank, MelchersRaffel analysis

1. Internal renewable freshwater resources refer to internal river flows and groundwater from rainfall in the country/region

German average = 1.3




Uneven distribution of water resources in China worsens the water scarcity

issue – the 13 affected provinces are concentrated in the Northern and Central China

China water resources per capita distribution by geography

Cubic meters per capita

8

Source: WorldBank; MelchersRaffel research

▐ About 2/3 of all cities are suffering

from water deficit problems

▐ The uneven distribution between the

South and North China have made

the situation even worse

▐ Avg. water resources in cubic meters

per capita in North China:

■ Beijing, Hebei province: 300

■ Tianjin: <160

▐ To solve the uneven distribution

issue, the Chinese government has

come up with the idea of “South-

North Water diversion project”

Overview of current situation

>1700

1000 – 1700

500 – 1000

<500




China has a high annual water consumption although China does not have

many freshwater resources

Water availability vs. water consumption by country

9

384

630

1630

640

910

454

400

631

180,0

Brazil

Australia

United States

Japan

Italy

China

Germany

India

Israel

28,3

21,3

8,9

3,4

3,0

2,1

1,3

1,2

0,1

Brazil

Australia

United States

Japan

Italy

China

Germany

India

Israel

Internal renewable freshwater resources by country

in thousand cubic meters per capita

Annual water consumption by country

in cubic meters per capita (2011)

Best estimate

Source: The Food and Agriculture Organization of the United Nations, Statista, World Bank, MelchersRaffel analysis




In the Water Diversion Project, 3 routes are planned to divert 44.8 billion

cubic meters/year of high-quality water from south to north

Map of “South-North Water Diversion Project” in China

10

▐ Context:

■ Idea originated from Mao

Zedong in 1952

■ Early in 1994, the Chinese

government has already

prepared the overall

project plan

▐ Rationale

■ Early estimates show that

it’s cheaper than

desalination

■ Local government is

incentivised to build the

infrastructure in order to

boost the local GDP, e.g.

this project is estimated to

boost the GDP at

Zhengzhou city by RMB

1.3bn per annum

Project overview

Water volume to

be transferred:

17bn m3

Water volume to

be transferred:

13bn m3Water

volume to be

transferred:

14.8bn m3

▐ Research data from US shows that if the water has to be transported >40km, then the costs are higher

than for desalination




Although some areas have natural water supply from rivers, the majority of

the water supply is non-drinkable (i.e. quality below Level III) in China

76%

94%

18%

6% 6%

2005 2013

11

24%

56%

57%

38%

19%

6%

2005 2013

34%

59%

41%

24%

25%

17%

2005 2013

17%

61%

51%

27%

32%

12%

2005 2013

Liao River Hai River Songhua River Yellow River

Source: Ministry of Environmental Protection of PRC; MelchersRaffel analysis

1. Measured by the amount of ammonia nitrogen, biochemical oxygen demand, permanganate index, petroleum, etc.

Water quality1 of major river basins in China, 2005 vs. 2013

Huai River Yangtze River Pearl River

30%

45%

30%

50%

40%

5%

2005 2013

22%

39%

24%

22%

54%

33%

2005 2013

76%

89%

13%

9%11%

2%

2005 2013

Level I – III (Drinkable)

Level IV, V

(Industrial/Agricultural

use)

Level V+ (Unfit for use)




Chinese government has strong influence on the water market in China,

hence the relationship to the Chinese companies/officials is very important

Structure of the water market in China

Customer

Water treatment plant

(WTP)

Distribution & collection

(pipe systems for

potable, grey and waste

water)

Waste water treatment plant

(WWTP)

Unified water charge – water scarcity

charge + tap water charge + waste water

charge + infrastructure charge

Raw

water

Potable

water

Waste

water

Sludge/

discharge

Government –

Municipal utility company

Government

(Bureau of Finance)Distribution

payments

WTP

payment

& financial

subsidy

WWTP

payment

&

financial

subsidy

Potable

water

waste

water

Level

III

Level

II

Level

IPrelim

Potable

water

Flow of money

Flow of water

Discharge

Chemical, photo-chemical, etc. Biological Physical

Significant role in handling payments and providing

subsidies

“Environmental industry is a policy-driven sector whereas the

customer payment period is relatively long, and overall the operating

environment is very challenging to WWTP companies. Industry

outsiders often have lots of misunderstanding about our industry.”

- Mr Zhao, Chairman of Poten Environment (Top industrial sweage

treatment player in China)

Source: MelchersRaffel research




Water sector in China has seen booming growth in attracting PE/VC

investments in recent years, implying a very positive prospect agreed by the investors

180

85

2212

118

292

310

2006 2007 2008 2009 2010 2011 2012

13

1. Estimated based on 2012H1 value (USD 155mn in the first half year of 2012)

1

PE/VC investment volume in China’s water sector, 2006 – 2012

Mn USD

Source: MelchersRaffel research

Inactive investment due

to Global financial crisis



www.melchersraffel.com150713_Selection of university for prevalence research in China

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