In recent weeks, the Stock Sensei algorithm has identified a number of stocks operating within China’s fast growing waste to energy (WTE) sector which we believe investors have yet to fully recognize.
What is Waste to Energy (WTE)?
As the name suggests, WTE is the process of converting urban household waste into energy. The process is best explained with the following diagram (source: Canvest Environmental 2016 report, page 2).
Companies operating in the WTE industry generate revenues via three main sources:
- Planning and construction of new facilities
- Operation of existing facilities (waste treatment fees)
- Energy sales from the completed WTE process
Newly completed facilities tend to take one year of more before they operate profitably, hence companies in this space need to carefully manage their investing cash flow to ensure a steady growth in profits.
Why the Boom?
In November 2016, China released its ‘’13th Five-Year’’ Eco-Environmental Protection Plan, with a distinct focus on targeting air, water and soil pollution. China plans to accelerate the construction of urban waste facilities and has raised the national target ratio of waste treatment via incineration by from 31% in 2015 to 54% in 2020.
To put this in context, Sweden (with a population of under 10 million) is often cited as a world leader in waste management using 32 WTE plants to dispose of 50% of its waste. At last count, China’s population was 1.357 billion and it had 263 WTE plants in operation.
Given the strength of the Chinese Government, it goes without saying that China’s policy directives tend to be quite effective.
How Could It Play Out for Investors?
Given the Government’s highly supportive mandate, we expect surprises to the upside, with faster than expected approvals and construction of new plants, as well as increasing volumes of waste diverted to existing plants.
Here are 4 current stock ideas on our watchlist:
Canvest Environmental Protection Group Co Ltd (HK:1381) listed in Hong Kong, is a key stock to watch in this space. Canvest issued a Positive Profit Alert in February reporting a 45% increase in profits compared to the prior year. On 28 February the stock broke out of a 30 day long flat base pattern and is now trading around 10% higher. Consensus forecasts are for 20% earnings growth which we think could prove conservative given the momentum in this space.
Dynagreen Environmental Protection Group Co Ltd (HK:1330) also listed in Hong Kong, is another stock in the same sector currently breaking out of a sound cup with handle base pattern. Dynagreen also released a Positive Profit Alert in February anticipating profit growth of 50%. Consensus earnings for Dynagreen are for 12% growth, which is conservative given the company has three projects coming on line in 2017 and five more in the pipeline.
China Jinjiang Environment Holding Co Ltd (SI:CJEH is the largest operator of WTE plants in China and only listed on the Singapore stock exchange in August 2016. In early March 2017 China Jinjiang reported a 34.6% lift in net profit for the calendar year ended 2016. Once again consensus earnings are conservative with 9% growth for 2017. The stock has formed a sound IPO base and is starting to see some large volume buying.
Covanta Holding Corporation (NYSE:CVA) is listed on the NYSE and has 70% of the WTE market in the US. Convanta had interests in WTE plants in China, however it divested the majority of its stake to Chinese investment firm CITIC Limited in 2016 for a pre-tax gain of $41 million. Convanta maintains an office in China, so time will tell whether they re-invest in this space. Convanta has been trading in a long flat base pattern, which as yet is not showing any signs of life.
