WaterSector.DBS

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STI : 2,629.35HSI : 21,479.10SET: 681.91

Source: DBS Vickers * H-share market cap Note: Prices used as of 5 November 2009

STOCK COVERAGE

BloombergPrice Mkt Cap Target PriceCodeLCY

US$m

LCY

Rating

Beijing Ent Water 371 HK HK$2.07 926 HK$2.47 BUYChina EverbrightIntl257 HK HK$3.46 1,621 HK$4.26 BUYTianjin Cap.Environ*1065 HK HK$2.28 98 HK$2.86 BUYAsia Environment AENV SP S$0.295 90.5 S$0.47 BUYEpure InternationalLtdEPUR SP S$0.565 522 S$0.71 BUYHyflux HYF SP S$3.03 1,144 S$3.50 BUYHyflux Water Trust HYFT SP S$0.665 143 S$0.65 HOLDThai Tap Water TTW TB Bt4.20 502 Bt5.93 BUY

DBS Group Research . Equity 10 November 2009

Regional Industry Focus

Water Sector

Tap on to stronger growth

•

The future of water is upbeat; expect continuouscontract flow plus tariff adjustments, particularly inChina

•

Players are stronger than ever with easing credit andstrengthened balance sheets; many are ready to gearup again for growth

•

We prefer China Everbright International, BeijingEnterprises Water, Epure and Hyflux for low debtratio, large exposure to China and increasingexposure to BOT projectsMulti-pronged drivers in sight.

As the push for governmentspending on water infrastructure and services accelerates, getready for an expected flood of contracts, positive reforms andtariff hikes. Particularly in China - where tariffs have risen asmuch as 20% in the last six months - we can expect theannouncement of steeper targets and bigger investments forthe upcoming 12th Five Year Plan (due in 2011) to createmore opportunities for the water companies and drive upsentiment for the sector.

And with stronger funding, players are much betterpositioned

.

After several fund raising activities, balancesheets of HK companies have strengthened, with net debt-to-equity ratios easing to a healthier 30-50% range. Moreover,thanks to looser credit in China, water companies have moreaccess to bank lending now. Among SGX-listed companies,several are ready to raise capital through divesting completedprojects into business trusts. Hence, with their funding all linedup, water counters are well positioned to capitalize on thisbigger wave of expansion for the industry.

Go for more exposure to China and recurrent BOTincome, to beat near term challenges

.

Near term, we seeglobal earnings risks from rising building material costs (steel,cement etc) and interest rate hikes. However, we believe BOToperators and/or those with bigger exposure in China (wheregovernment is still actively driving infrastructure development)are less susceptible to these risks. We prefer China EverbrightInternational, Beijing Enterprises Water, Epure and Hyflux.

Regional Industry Focus

Water Sector

Page 2

Table of Contents

Investment Summary 3Sector Performance 4Valuation 5What to pick 6Global water stocks valuation 9Where do the differences lie? 10Fundamental performance 14Who has the resources for growth? 16Opportunity for growth 22Going global 27MENA is flushed with opportunities 27India is another hot-spot but slow 32Regional water stocks: PE and PBPerformance 36Water indicators for China 40Stock profiles 41Beijing Enterprises Water 42China Everbright Int’l 44China Water Affairs 46Tianjin Capital 48Asia Environment 50Epure International 52Hyflux 54Hyflux Water 56Thai Tap Water 58Disclaimer 62

MICA (P) 043/10/2009

Patricia Yeung +(852) 2863 8908patricia_yeung@hk.dbsvickers.comAi Teng Tan +65 6398 7967AiTeng@dbsvickers.comVichitr Kuladejkhuna, CFA +66 0 26577826vichitrk@th.dbsvickers.comSuvro Sarkar +65 6398 7973suvro@dbsvickers.com

“

Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd (“DBSVR”), are to contact DBSVR at +65 6398 7954 in respect of any matters arising from or in connection with this report.”

Regional Industry Focus

Water Sector

Page 3

Investment Summary

Regulatory push will drive demand in China.

When itcomes to the shortage of water resources, there is no doubtthat China is at the top of the global list. Thus, it is no surprisethat the Chinese government has increasingly acknowledgedsuch threats and launched increasing investments in supportivepolicies. We expect the announcement of steeperenvironmental targets and bigger investments in the watersector when the 12

th

5-year plan (2011-2015) is announcednext year.

We prefer companies with exposure in water sewageoperation

because of the lower operational risk. We believethe Chinese Government will push towards achieving over70% urban sewage treatment levels from the current expectedlevel of 67% in the 12

th

5-year plan. In fact, the number ofwater sewage plants is expected to double by 2010 withannual processing capacity reaching over 34bn tons. Webelieve the annual capacity will further increase to 42bn tonsby 2013. Assuming construction cost of RMB1,000-2,000 perton of capacity, market for the construction of new watersewage plants in the next five years, which both Hong Kongand Singapore listed water companies could tap into, couldamount to RMB10-21tr or RMB2.0-4.2tr per year.

Tariff hikes across China are turning more projectscommercially viable

.According to data from China WaterNet, average water tariff and wastewater tariff in 35 majorcities in China have been increasing at CAGR of 7.14% and13.91% respectively. In 1H2009, 19 out of 36 major citieswere in the process of water tariff hike application, an increaseof more than 20%. There will be more public hearings in othercities for tariff hikes. Such uptrend is expected to continue asthe Government seeks to change the market landscape andbetter incentivize the private sector to invest in water projects.

Middle East and North Africa (“MENA”) region is flushedwith opportunities

.

Besides capitalizing on the robust waterinfrastructure demand in the PRC, water companies inSingapore and China are increasingly venturing overseas inrecent years, with notable success. Many of the countries inthe MENA region are oil-rich and per capita income is high. Asa result, many MENA countries have some of the highestconsumption rates per capita in the world whereas availabilityis extremely scarce. Thus, the opportunities are enormous. Thetotal value of water and wastewater projects planned for theMiddle East and North Africa (MENA) region over the nextdecade tops US$120 billion.

India is another hot spot

.

India is fast approaching waterstress levels. No city in India has full-day water supply. But theGovernment is now waking up and has set aside a huge outlayfor water supply and wastewater treatment through variouschannels. In coastal areas, the drinking water scarcity is evenhigher and this creates an opportunity that water players herecan tap on to. It is estimated that INR 390b of desalinationinvestments will be required to meet the four-fold surge incoastal water needs by 2026. Two desalination projects havealready been awarded to international consortia and theplanning and tendering process for a few more are underway.

Players now have the financial flexibility to go for more.

The credit crisis had proved to be a temporary spanner in theworks for the water players, delaying expansion plans. Butnow, with their funding all lined up, water counters are wellpositioned to capitalize on this bigger wave of expansion forthe industry. After several fund raising activities, balance sheetsof HK companies have strengthened, with net debt-to-equityratios easing to a healthier 30-50% range. Moreover, thanks tolooser credit in China, water companies have more access tobank lending now.

Among SGX-listed companies, several are ready to raisecapital through divesting completed projects intobusiness trusts

. In Singapore, most EPC companies, whichhave undertaken BOT contracts in the past two years, are closeto completing construction for most of the projects won. Apartfrom Hyflux, which can continue to pump its completed assetsinto Hyflux Water Trust, Epure and Asia Environment areexpected to have a comparable portfolio (in terms of watercapacity processed) to Hyflux Water Trust when the latter listedon SGX with an initial portfolio of water assets with totaldesign capacity of 445,000 cu m/day.

In conclusion, we remain positive on the sector

althoughintermittent correction is possible and investors should takeadvantage of pullback to gain entry into the sector. Specifically,we prefer companies with low net debt-equity ratio (whichimplies more funding flexibility) and higher exposure to theChina market (to minimize the risk of a weak USD and highercommodity prices). We also favour those with bigger portion ofsales coming from BOT projects to those that are more EPCcentric because the latter would be subject to higher marginpressure under an inflationary environment.Our top picks in Hong Kong are

China Everbright International

and

Beijing Enterprises Water

. In Singapore, we like

EpureInternational

and

Hyflux

.