In the face of increasingly severe environmental issues, from the Party's...The "Fifteenth Five-Year Plan" report first proposed strengthening environmental protection, and now, as the policy requirements for a beautiful China are being realized, environmental governance has been integrated into all aspects of social development. Particularly during the "Twelfth Five-Year Plan" period, environmental governance investments reached unprecedented scales, and the industry experienced a period of rapid development. After several years of rapid growth, environmental governance is now transitioning from specialized to comprehensive management, marking the industry's entry into a new phase of development.

PPP, mega mergers, corporate raiders, overseas investment... More and more environmental industry professionals are sensing the surging atmosphere of the capital era in the industry, as they encounter these "money-filled" terms.

In February 2016, the Beijing Capital Group Co., Ltd. (hereinafter referred to as Beijing Capital) made a headline-grabbing acquisition investment in Germany's EEW (a waste incineration company), exceeding 10 billion RMB. Behind this acquisition, the state-owned enterprise Beijing Capital showcased its astonishing financing capabilities, which were a key factor in the success of this merger battle: According to foreign media reports, to complete the acquisition, Beijing Capital secured a massive short-term loan of 2.5 billion euros from a domestic bank, with an interest rate of around 1%.

Amidst the expanding and overheated environmental industry market, where hot money abounds and participants surge, using a company's financial skills, specifically its investment and financing capabilities, as a criterion to differentiate between corporate levels is far more persuasive than merely asset size.In the EEW acquisition, a notable detail is that Tianying Environmental Protection, a private waste incineration power generation company, is one of the main bidders. However, after the revelation of Beijing Controlling's acquisition amount of 10.5 billion RMB (corresponding to a premium rate of 227%), one cannot help but feel a touch of melancholy: Tianying Environmental Protection, with an entire asset value of 4.5 billion RMB, may have only been playing the role of a warm-up act.

Indeed, amidst the capital wave, certain companies, thanks to their robust shareholder backgrounds and unique identities, have gained capital operation capabilities that most other environmental protection companies, including publicly listed ones, do not possess. The "Matthew effect" of the strong getting stronger seems to be increasingly pronounced in the environmental protection industry.

Pioneering a new path

There's no doubt that, compared to the downturn in some traditional industries, the environmental protection sector has surged in recent years, experiencing a boom in business opportunities. For two consecutive years, Premier Li Keqiang of the State Council has pointed out in his "Work Report" that the energy-saving and environmental protection industry should be cultivated as a major pillar industry for China's development.

Industry veteran Wang Hongchun points out that various central enterprises, state-owned enterprises, and listed companies are flocking in, racing to claim territories, engaging in fierce price wars. It seems like a return to decades ago, only this time the competition isn't about technology or products, but rather about capital costs and valuation in the capital market."Previously, state-owned enterprises, central enterprises, and listed companies were reluctant to engage in the environmental protection industry, making us akin to wild rabbits, highly active. Now that these tigers have arrived, they've quickly devoured us wild rabbits," Wang Hongchun stated. "Of course, tigers and rabbits can coexist, but we're only able to provide some complementary services for them. This competitive environment is unfair."

The Secretary-General of the Environmental Chamber of the National Federation of Industry and Commerce, Luo Jianhua, is concerned that the overheating of the industry may lead the environmental protection sector to repeat the mistakes of photovoltaic and wind energy in recent years. The entire industry is facing an imbalance between investment supply and demand, with overcapacity, ultimately leading to a long-term downturn in the sector.

In addition, after nearlyAfter 20 years of development, the peak of investment in environmental infrastructure construction has passed. The treatment rates for wastewater treatment, garbage incineration, and power plant desulfurization and denitrification have all reached about 90%. With a large influx of capital, there's a possibility of fierce price wars and a trend of low bidding in a limited market. The consequences could be a disruption of the entire environmental protection market, harm to industry development, and ultimately, an impact on the effectiveness of environmental governance.

The Frustration of an Environmental Protection Company

Boatian Environment's Chairman Zhao Lijun once asked his friends in the capital industry, "Why are so many funds trying to pour into environmental protection companies?" The answer was simple: under the current market conditions, environmental protection holds greater investment value. Driven by capital, the competition in the environmental protection industry is also becoming increasingly fierce. The overheating of the industry will bring about some new phenomena and models of its own development, of course, with both pros and cons.

The good news is that the business model in the environmental protection industry has been innovated, with the industrial chain extending and expanding. For instance, what was once the wastewater treatment industry may now also be responsible for the operation of pipelines, gaining new competitive advantages through the integration of pipes and networks; the garbage power generation industry is now expected to incorporate waste collection and transportation into the system, objectively increasing the size of the entire industry's pie, demanding greater comprehensive capabilities from enterprises.

Additionally, from the traditionalThe shift from BOT (Build-Operate-Transfer) to PPP (Public-Private Partnership) models has also led to more proactive participation of all levels in environmental protection construction.

Industry issues still persist in large numbers. Zhao Lijun pointed out that environmental governance itself is part of the cost, and the willingness of the entities implementing it is not strong. This is why it doesn't logically make sense for a country to have a highly polluted industrial structure while the environmental industry designed to address pollution is also highly developed. Under this paradox, the industry will exhibit many unreasonable phenomena.

The Tax Administration Bureau, widely criticized by the environmental sector."The '78th Document' mandates the imposition of VAT on services for wastewater, garbage, sludge treatment, and recycled water, signaling the end of the VAT exemption in these areas. It's normal to structurally increase taxes on high-pollution industries and use tax incentives to promote the development of environmental protection and environmental improvement. However, this document does not align with the overall direction of promoting environmental protection. It is evident that this will reduce the profit levels across the entire industry." Zhao Lijun believes.

Additionally, for localities, the primary considerations in environmental protection investments are safety and costs, not the ultimate outcomes. Consequently, this discourages private enterprises genuinely focused on governance results and willing to invest from fairly participating in the market competition, thereby fostering low-quality, low-price ineffective competition.

Zhao Lijun is无奈.Choosing price over quality not only renders the enterprise unprofitable but also goes against the principles of 'supply-side reform.'

The water treatment field becomes a key focus direction.

According to reports from authoritative media, recently, several publicly listed companies in the environmental protection industry have been intensively researched by institutions. Among them, the water treatment field has become a key research direction.

Securities research reports suggest the system-based water environment management modelThe shift towards sponge cities, treating black and smelly water bodies, and river basin management will gradually replace the traditional point-source treatment approach of wastewater plants, propelling the future development of the water treatment industry.

Treasury DepartmentThe National PPP Comprehensive Information Platform Project Library released by the PPP Center on April 25th shows that as of the end of March 2016, the total investment in the project library reached 87802.47 billion yuan, an increase of 6480.47 billion yuan from the beginning of January. Among them, there were 647 new wastewater treatment projects with an additional investment of 155.7 billion yuan. Additionally, 18 secondary industries including wastewater treatment, sponge cities, pipelines (including underground comprehensive pipe galleries), and waste disposal (excluding waste power generation) have become the industries with the most projects and investment amounts in the PPP project library.

As early asIn October 2015, the General Office of the State Council issued the "Guiding Opinions on Advancing the Construction of Sponge Cities," requiring that the impact of urban development and construction on the ecological environment be minimized through sponge city construction, with 70% of rainfall absorbed and utilized on-site. By 2020, more than 20% of the urban built-up areas should meet the target requirements. By 2030, over 80% of the urban built-up areas should achieve the target. At the same time, actively promote public-private partnership (PPP), franchising, and other models to attract broad social capital participation in sponge city construction.

Ministry of Land and Resources monitoring data shows:In 2015, over 60% of the 5,118 groundwater monitoring sites across the country had poor or moderate water quality, indicating a less-than-ideal groundwater condition. As such, the development of sponge cities, which offer an integrated solution for sustainable urban water environments, presents a significant growth potential for the industry in the future.

Currently, the average pilot cities for sponge cities are approximately43% of the planned investment was distributed in 2016, with the second and third quarters expected to see a peak in orders and construction across the industry. It is projected that from 2015 to 2020, the investment scale will range between 1.8 and 2.5 trillion yuan, and the industry is anticipated to remain in a prosperous peak in the coming years.