Initiation: another strong CEI story in the making 1asiaresearch.daiwacm.com/eg/cgi-bin/files/Canvest_Environment... · Utilities / Hong Kong 1381 HK 4 May 2015 - 2 - Another strong

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■ Investment case We initiate coverage of Canvest Environment Protection Group (Canvest), a pure waste-to-energy (WTE) operator in China, with a Buy (1) rating and 12-month target price of HKD5.50. We forecast a net profit CAGR of 43% (or EPS CAGR of 30%) in 2014-17, driven mainly by confirmed capacity expansion to 8.4ktpd over the period, from 3.6ktpd as at end-2014. Benefits of FB-MG upgrades. 1) Upgrading can improve a plant’s gross operating margin by 30-40pp to 50-70%, due to the absence of auxiliary flue costs, and higher utilisation. 2) The construction time needed for an FB-MG upgrade project is only half that needed to build a greenfield WTE project, as significantly less preparatory work is needed and it is easier to obtain EIA

approvals. 3) MG plants are more environmentally friendly as they comply with higher emissions standards. Strong growth expected. Canvest currently has 3.6ktpd of WTE projects in operation and 4.8 ktpd under construction or in preparation. We forecast a low net-debt-to-equity ratio of 23% in 2016, which we think would allow for an additional 7,000tpd of WTE capacity to be secured before gearing reaches the comfortable 100% level. Adding this capacity could enhance our target price by 39%. We forecast Canvest to achieve a 12% share of China’s FB-MB upgrade market in 2016 in terms of contracted capacity. ■ Catalysts We see the following potential earnings catalysts: 1) if the company secures new highly profitable FB-MG upgrade projects, and 2) if it makes steady progress in securing greenfield projects, especially not in Guangdong Province. ■ Valuation Our DCF-based 12-month target price of HKD5.50 is equivalent to a 2016E PER of 24x, in line with that of closest peer China Everbright International (CEI) (257 HK, HKD14.52, Outperform [2]). We believe Canvest deserves to trade in

line with CEI on Canvest’s superior upgraded WTE business operating model and technological edge. ■ Risks The main risks: 1) an unexpected slowdown in securing new WTE projects, and 2) unexpected delays in project execution.

Utilities / Hong Kong1381 HK

4 May 2015

Canvest Environment Protection Group

Initiation: another strong CEI story in the making

• A pure WTE operator that has moving grate (MG) and fluidised bed (FB) technology; focuses on upgrade projects

• Set to double capacity by 2016 from FB-MG upgrade projects, which have higher IRRs and shorter construction times

• Initiate with a Buy rating and 12-month TP of HKD5.50, supported by our net profit CAGR forecast of 43% (2014-17E)

Source: FactSet, Daiwa forecasts

Utilities / Hong Kong

Canvest Environment Protection Group1381 HK

Target (HKD): 5.50Upside: 20.9%30 Apr price (HKD): 4.55

Buy (initiation)

OutperformHoldUnderperformSell

1

2

3

4

5

90

109

128

146

165

2.0

2.6

3.3

3.9

4.6

Dec-14 Mar-15

Share price performance

CEPGC (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 2.25-4.55Market cap (USDbn) 1.173m avg daily turnover (USDm) 3.61Shares outstanding (m) 2,000Major shareholder Best Approach (65.1%)

Financial summary (HKD)Year to 31 Dec 15E 16E 17ERevenue (m) 1,262 982 1,202Operating profit (m) 421 612 748Net profit (m) 302 461 556Core EPS (fully-diluted) 0.151 0.230 0.278EPS change (%) 18.6 52.5 20.7Daiwa vs Cons. EPS (%) 7.9 9.7 26.3PER (x) 30.1 19.8 16.4Dividend yield (%) 0.3 0.8 1.2DPS 0.015 0.035 0.056PBR (x) 3.5 3.0 2.6EV/EBITDA (x) 18.3 13.0 9.9ROE (%) 12.3 16.4 17.1

Dennis Ip, CFA(852) 2848 [email protected]

Nicole Jiang(852) 2848 [email protected]

How do we justify our view?How do we justify our view?

Utilities / Hong Kong 1381 HK 4 May 2015

- 2 -

Another strong CEI story in the making ........................................................................................ 6

Dominant WTE services provider in Dongguan and Guangdong .............................................. 6

Focusing on FB-MG upgrades ................................................................................................... 10

Advantages of FB-MG upgrades relative to greenfield projects ............................................... 14

Consolidating outdated FB WTE plants in China ..................................................................... 17

Similarities between CEI and Canvest ....................................................................................... 19

Operations ................................................................................................................................. 22

Valuation and rating ................................................................................................................. 25

Risks .......................................................................................................................................... 26

Management background ......................................................................................................... 30

Appendix 1: business background ............................................................................................. 31

Appendix 2: two types of technology used for WTE................................................................. 33

Appendix 3: BOT and BOO models .......................................................................................... 35

Appendix 4: IFRIC 12 accounting for a WTE project ................................................................ 37

Appendix 5: IRR analysis (MG: 1,000ktpd capacity) ............................................................... 39

Appendix 6: IRR analysis (MG: 1,500ktpd capacity) ................................................................ 41

Appendix 7: IRR analysis (FB: 1,000ktpd capacity) ................................................................ 43

Appendix 8: IRR analysis (Upgrade: 1,000ktpd capacity, assuming no acquisition premium) ................................................................................................................................................... 45

Contents


- 3 -

Growth outlook Canvest: net profit forecasts by business segment

Given the nation’s move towards better environmental protection standards, we expect to see more outdated small-scale (<500tpd) FB plants being upgraded to large-scale (>1,000tpd) MG plants. MG plants are more profitable, and once upgraded their gross margins typically increase by 30-40pp to 50-70%, from 20-40% for a non-upgraded plant. Also, their emissions are reduced by more than 80pp on average. As such, we forecast a net-profit CAGR of 43% for the company in 2014-17, driven mainly by its WTE capacity expanding from 3.6ktpd in 2014 to 8.4ktpd over the same period.

Source: Company, Daiwa forecasts

Valuation Canvest vs. China peers: PER comparison (2016E)

The stock is trading at about a 20x 2016E PER, representing a 15% discount to CEI (23.4x), but a premium to Dynagreen (1330 HK, HKD6.67, Hold [3]) (17.3x), on our forecasts. Our DCF-based valuation yields a fair value of HKD5.50/share, equivalent to a 2016E PER of 24x. We believe Canvest merits a higher valuation, considering its superior upgraded WTE business operating model, and because its earnings are cash-based (its WTE projects mostly operate under the BOO [build-own-operate] model). Canvest’s China peers, however, mostly adopt the build-operate-transfer (BOT) model, under which a proportion of earnings are classified as construction revenue and finance income, which are considered non-cash under the IFRIC 12 accounting standards (see Appendix 3).

Source: Bloomberg

Note: For CEI* and Dynagreen*, we have removed non-cash earnings from BOT construction revenue in our 2016E PER calculation. For Canvest*, there will be no BOT construction revenue in 2016E. Share prices as at 30 April 2014

Earnings revisions Canvest: Bloomberg-consensus EPS forecasts

Due to its newly listed status (December 2014), Canvest is covered by only 2 other firms. The fluctuation in consensus forecasts (as shown in the chart at right) is the result of differences among these few firms. Our forecasts for 2015 and 2016 are broadly in line with consensus, but we expect a higher 2017 EPS as we factorin an improvement in utilisation and the recognition of recently announced projects.

Source: Bloomberg

How do we justify our view?

Growth outlook

Valuation

Earnings revisions

3.5%

45.9%

58.1%52.5%

20.7%

0%

10%

20%

30%

40%

50%

60%

70%

0

100

200

300

400

500

600

2012 2013 2014 2015E 2016E 2017E

(HKDm)

Project operating (LHS) Project construction (LHS)Finance income (LHS) YoY (RHS)

19.8x 19.8x

23.4x

31.1x

17.3x

29.7x

0

5

10

15

20

25

30

35

Canvest Canvest* CEI CEI* Dynagreen Dynagreen*

(x)

0.10

0.12

0.14

0.16

0.18

0.20

0.22

0.24

Jan-15 Feb-15 Mar-15 Apr-15

(HKD)

2015E EPS 2016E EPS 2017E EPS

0.160

0.210

Canvest is only covered by two firms currently0.220

Buy (initiation)

OutperformHoldUnderperformSell

1

2

3

4

5


- 4 -

Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Year-end operating WTE capacity (ktpd)

n.a. 3.00 3.00 3.00 3.60 6.90 8.40 8.40

Waste processing capacity utilization rate (%)

n.a. 56 97 90 91 90 92 92

Per unit on-grid generation of wet waste (KWh/ton)

n.a. 345 369 403 378 361 378 381

Average waste treatment fee (CNY/ton)

n.a. 89 89 101 110 110 104 105

Annual on-grid electricity sold (GWh) n.a. 154 408 409 525 580 1,032 1,268

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017EProject operating n.a. 154 387 390 542 584 954 1,175Construction revenue n.a. 0 0 0 248 661 0 0Other Revenue n.a. 0 0 0 4 17 27 27Total Revenue n.a. 154 387 390 794 1,262 982 1,202Other income n.a. 1 13 13 52 44 72 88COGS n.a. (59) (180) (188) (452) (784) (363) (447)SG&A n.a. (17) (35) (42) (97) (101) (79) (96)Other op.expenses n.a. 0 0 0 0 0 0 0Operating profit n.a. 79 185 174 297 421 612 748Net-interest inc./(exp.) n.a. (25) (32) (26) (62) (48) (66) (70)Assoc/forex/extraord./others n.a. 0 0 0 0 0 0 0Pre-tax profit n.a. 54 153 148 236 373 546 678Tax n.a. (11) (26) (17) (27) (34) (43) (68)Min. int./pref. div./others n.a. (4) 0 0 (17) (37) (43) (55)Net profit (reported) n.a. 39 127 131 191 302 461 556Net profit (adjusted) n.a. 39 127 131 191 302 461 556EPS (reported)(HKD) n.a. 0.026 0.084 0.087 0.127 0.151 0.230 0.278EPS (adjusted)(HKD) n.a. 0.026 0.084 0.087 0.127 0.151 0.230 0.278EPS (adjusted fully-diluted)(HKD) n.a. 0.026 0.084 0.087 0.127 0.151 0.230 0.278DPS (HKD) n.a. 0.000 0.000 0.000 0.000 0.015 0.035 0.056EBIT n.a. 79 185 174 297 421 612 748EBITDA n.a. 107 225 216 402 533 767 945

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017EProfit before tax n.a. 54 153 148 236 373 546 678Depreciation and amortisation n.a. 28 40 42 105 112 155 197Tax paid n.a. 0 (10) (29) (20) (34) (43) (68)Change in working capital n.a. (33) (19) 29 36 (134) (43) 9Other operational CF items n.a. 28 40 30 (154) (629) 39 42Cash flow from operations n.a. 76 204 221 202 (312) 654 859Capex n.a. (122) (34) (33) (207) (570) (726) (60)Net (acquisitions)/disposals n.a. 26 (16) 0 (113) 0 0 0Other investing CF items n.a. 0 0 (176) 53 11 3 3Cash flow from investing n.a. (96) (50) (209) (267) (559) (723) (57)Change in debt n.a. 60 (23) (103) (105) (10) 149 (3)Net share issues/(repurchases) n.a. 0 0 0 1,088 0 0 0Dividends paid n.a. 0 0 0 0 (12) (46) (86)Other financing CF items n.a. (22) (143) 95 362 (59) (69) (72)Cash flow from financing n.a. 38 (166) (8) 1,345 (81) 34 (162)Forex effect/others n.a. 1 0 1 (0) 0 0 0Change in cash n.a. 19 (12) 5 1,278 (953) (36) 640Free cash flow n.a. (46) 170 187 (6) (882) (72) 799

Financial summary


- 5 -

Balance sheet (HKDm)

Key ratios (%)


Company profile

Canvest is a leading WTE provider focused on the development, management and operation of WTE plants. As of June 2014, Canvest had a total MSW processing capacity of 4.8ktpd and was ranked the second-largest WTE provider in Guangdong Province, occupying 13.0% of the market

As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017ECash & short-term investment n.a. 56 45 183 1,461 509 473 1,113Inventory n.a. 2 3 2 1 6 3 4Accounts receivable n.a. 72 92 158 103 277 215 264Other current assets n.a. 0 0 46 1 1 1 1Total current assets n.a. 130 139 389 1,566 793 692 1,381Fixed assets n.a. 526 490 472 530 1,062 1,713 1,652Goodwill & intangibles n.a. 175 175 181 1,271 1,541 1,465 1,392Other non-current assets n.a. 182 184 198 400 733 727 721Total assets n.a. 1,014 989 1,241 3,767 4,129 4,597 5,146Short-term debt n.a. 96 148 88 253 255 292 291Accounts payable n.a. 387 243 64 213 258 119 147Other current liabilities n.a. 4 2 3 2 2 2 2Total current liabilities n.a. 486 393 154 468 515 413 440Long-term debt n.a. 399 324 294 776 764 875 873Other non-current liabilities n.a. 26 43 31 106 106 106 106Total liabilities n.a. 912 760 479 1,349 1,384 1,394 1,419Share capital n.a. 0 0 0 20 20 20 20Reserves/R.E./others n.a. 102 229 676 2,295 2,585 3,000 3,469Shareholders' equity n.a. 102 229 676 2,315 2,605 3,020 3,489Minority interests n.a. 0 0 86 103 140 183 238Total equity & liabilities n.a. 1,014 989 1,241 3,767 4,129 4,597 5,146EV n.a. 9,539 9,527 9,384 8,770 9,750 9,977 9,389Net debt/(cash) n.a. 439 427 198 (433) 510 694 51BVPS (HKD) n.a. 0.068 0.153 0.451 1.157 1.302 1.510 1.745

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017ESales (YoY) n.a. n.a. 150.6 0.8 103.5 58.9 (22.2) 22.5EBITDA (YoY) n.a. n.a. 110.3 (3.8) 86.1 32.3 44.1 23.1Operating profit (YoY) n.a. n.a. 134.5 (5.6) 70.7 41.5 45.5 22.2Net profit (YoY) n.a. n.a. 226.6 3.5 45.9 58.1 52.5 20.7Core EPS (fully-diluted) (YoY) n.a. n.a. 226.6 3.5 45.8 18.6 52.5 20.7Gross-profit margin n.a. 61.5 53.4 51.9 43.1 37.9 63.1 62.9EBITDA margin n.a. 69.2 58.1 55.4 50.7 42.2 78.2 78.6Operating-profit margin n.a. 50.9 47.7 44.6 37.5 33.3 62.4 62.2Net profit margin n.a. 25.1 32.7 33.6 24.1 23.9 46.9 46.2ROAE n.a. 75.7 76.4 28.9 12.8 12.3 16.4 17.1ROAA n.a. 7.6 12.6 11.7 7.6 7.6 10.6 11.4ROCE n.a. 26.3 28.4 18.9 13.0 11.7 15.1 16.2ROIC n.a. 11.5 25.5 19.0 17.9 14.6 15.8 17.5Net debt to equity n.a. 428.4 186.6 29.3 n.a. 19.6 23.0 1.5Effective tax rate n.a. 20.8 17.3 11.7 11.6 9.0 7.8 10.0Accounts receivable (days) n.a. 84.5 77.1 117.1 60.2 54.9 91.4 72.7Current ratio (x) n.a. 0.3 0.4 2.5 3.4 1.5 1.7 3.1Net interest cover (x) n.a. 3.1 5.8 6.7 4.8 8.8 9.2 10.8Net dividend payout n.a. 0.0 0.0 0.0 0.0 10.0 15.0 20.0Free cash flow yield n.a. n.a. 1.9 2.1 n.a. n.a. n.a. 8.8

Financial summary continued …


- 6 -

Another strong CEI story in the making

A pure play on the WTE theme with a competitive edge over China peers on FB-MG upgrade projects.

Dominant WTE services provider in Dongguan and Guangdong

Company background Founded in 2003, Canvest is a leading WTE provider focused on the development, management and operation of WTE plants. As at end-2014, Canvest had total MSW (municipal solid waste) processing capacity of 3.6ktpd and was ranked the second-largest WTE provider in Guangdong Province, occupying 13.0% of the market. Via organic growth and acquisitions, Canvest grew from having only a single WTE plant with daily MSW processing capacity of 1.2ktpd in 2006, to 3 WTE plants in operation (operations at one plant with a capacity of 1.2ktpd were suspended in 1H14 for upgrade work) at the end of 2014, with total daily MSW processing capacity of 3.6ktpd. Based on Canvest’s confirmed projects, daily MSW processing capacity looks set to more than double to 8.4ktpd in 2016, representing an MSW processing CAGR of 53% in 2014-16. Canvest: 2014-16E capacity growth

Source: Company

Note: Daiwa expectations are based on confirmed capacity

Solid expansion, driven by experience in FB-MG upgrades In 2007, Canvest’s first WTE plant, Eco-Tech, commenced commercial operations with installed MSW processing capacity of 1,200tpd and installed power-generation capacity of 36MW. Unlike other major listed WTE operators in China, which at the time had mostly adopted MG technology, Eco-Tech used FB technology, which has a lower utilisation rate and higher pollution (dioxin) emissions than MG technology. After 2 years, Canvest started construction of its 1.8ktpd capacity for its Kewei (in Dongguan) plant, which employs MG incineration technology. Through this project, management accumulated valuable operation and technical knowledge about MG technology. In mid-2012, Canvest helped start the first FB-MG upgrade trial for the Scivest plant (designed MSW processing capacity of 1,800tpd). Upon completion of the technology upgrade to MG incineration, Canvest acquired Scivest in 2014. With this experience under its belt, Canvest started the FB-MG upgrade of its Eco-Tech plant in April 2014 (the plant’s technology will be upgraded from FB to MG incineration), which should increase the plant’s designed daily MSW processing capacity to 1.8ktpd, from 1.2ktpd. After completion of the FB-MG upgrade of the Eco-Tech WTE plant (slated for 3Q15), all of Canvest’s WTE plants will be using MG incineration technology.

6.9ktpd

8.4ktpd

4.8ktpd0.6ktpd

1.5ktpd

1.5ktpd

0

2

4

6

8

10

2014 Eco-TechUpgrade (Trial

operation in3Q15)

ZhanjiangYuefeng

2015E Eco-TechPhase II(4Q16)

2016E

(ktpd)

Upgrade:1.2ktpd


- 7 -

Canvest: list of projects

Eco-Tech Eco-Tech Phase II Kewei China Scivest

Zhanjiang Yuefeng

Location Dongguan, Guangdong

Dongguan, Guangdong

Dongguan, Guangdong

Dongguan, Guangdong

Zhanjiang, Guangdong

Daily MSW processing capacity

1.2ktpd (1.8ktpd after upgrades)

1.5ktpd 1.8ktpd 1.8ktpd 1.5ktpd

Installed Power Generation Capacity

36MW Planning 30MW 42MW 30MW

Technology Fluidised bed (Moving grate after FB-MG upgrade)

Moving grate Moving grate

Moving grate Moving grate

Business model

BOO BOO BOO BOT BOT

Concessionary Period

NA NA NA 24 year (to 30 Nov 2028)

28 years (to 17 April 2041)

Commercial Operation

Sep-07 End-2016 Nov-12 Aug-14 End-2015

Latest Status FB-MG upgrade (Trial operation in 2015Q3)

In preparation

Commercial operation

Commercial operation

Construction

Shareholding 100% 100% 100% 100% 55%

Source: Company

Note: China Scivest BOT project did not record any construction revenue as the government has not guaranteed any offtake

BOT: Build-operate-transfer; BOO: Build-operate-own

Dominant player in Guangdong Canvest has high project concentration in Dongguan, Guangdong Province (all operating projects are located in the city), with daily MSW processing capacity of 3,600 tonnes as at the end of 2014, and treating 36% of the waste produced locally. Furthermore, about 71% of its projects pending operation in terms of capacity are also in Dongguan. Upon the completion of these projects, Canvest would have an 82% share of the MSW-incineration market in Dongguan, with capacity of 6.9ktpd in 2016. Canvest keeps learning from its experience and improving its technology. Its second plant in Dongguan was given a “Grade AA Innocuous Waste Incineration Plant” award by the Dongguan Department of Housing and Urban-Rural Development when the plant began operations in 2012. Only 8 out of 18 WTE plants in Guangdong had obtained this award at that time.

Canvest: China Scivest WTE plants

Source: Daiwa

The WTE market in Guangdong is dominated by companies with SOE backgrounds, constituting 50% of the market share as of end-2013. As Canvest is a non-SOE company with no strong connections to local governments, and without the support from a parent company, it believes it owns up to its expertise, which we think helps the company to stand out among its peers in obtaining government projects. In 2013, Canvest expanded its business out of Dongguan, and won the bid for the Zhanjiang Project together with High Point Investment Group Limited, which engages in industrial investment and enterprise investment, among other things. Guangdong: Operators by daily MSW processing capacity as of end-2013

Source: Euromonitor

Canvest achieved annual revenue growth of 73% in 2011-14, while operating revenue accounted for 100% of revenue before 2013 and 68% in 2014, as the company started the construction of its first greenfield BOT in 2014. Thus, its revenue is mostly cash-based, with minimum mismatch in revenue recognition and cash-flow collection.

Shenzhen Energy (SOE)

23.7%Canvest Group13.0%

Guangzhou Grantop (SOE)

9.8%

China Science General Energy & Environment

(SOE)7.8%

Donguan Bohai (Private)

6.5%

Foshan Nanhai (Private)

6.5%

Others32.6%


- 8 -

Canvest: revenue mix


Canvest: revenue mix proportion


Strong balance sheet to support business growth With net IPO proceeds of HKD1.07bn, Canvest’s net debt-to-equity ratio fell from 29.3% as at the end of 2013 to net cash of HKD433m as at the end of 2014. The low debt level allows for more leverage for acquisitions, and newly acquired access to more flexible financing methods, such as equity financing and the issuance of bonds, which could lower finance costs (average of 6.5% in 2014). Given its intensive capacity expansion plans for 2015-16, we forecast Canvest to incur capex (including BOT construction costs) of HKD1,120m in 2015 and HKD726m in 2016 (including BOT construction costs). In order to support its business development, we expect Canvest’s net debt-to-equity ratio to increase to 20% in 2015 and 23% in 2016. Canvest: capex plans, gearing, and cash flow before financing

2012 2013 2014 2015E 2016E 2017EAdjusted capex (incl. BOT construction) (HKDm)

50 33 527 1,120 726 60

Net debt to equity 187% 29% Net

cash 20% 23% 1%

Cash flow before debt financing (HKDm) 11 107 1,384 (942) (184) 643


Note: Canvest raised net proceeds of HKD1.07bn from IPO in December 2014

We think Canvest’s balance sheet should be able to support more debt, and that it will remain in a rapid development phase, typified by high capex and negative free cash flow, in 2015-16. We forecast a gearing ratio of 23% in 2016, still significantly below its historical high of over 400% before its listing. Management suggests that a comfortable net-gearing level would be 100%, and our analysis shows that this would allow Canvest to secure an additional 7,000tpd in WTE project capacity by 2016, which is almost double its current contracted capacity, and suggests 39% upside potential to its current share price, based on our estimates. In our sensitivity analysis, we assume that half of the projects secured by Canvest in 2016 are FB-MG upgrade projects, and the rest are green-field projects. We calculate that every additional 1ktpd of WTE projects that commence construction in 2016 and start operating in 2017 (FB-MG upgrades) and 2018 (greenfield) would have a +10ppt impact on Canvest’s 2016E net debt-to-equity ratio. Canvest: sensitivity of 2016E net debt-to-equity from additional WTE projects for which construction starts in 2016

Source: Company, Daiwa estimates

Canvest: sensitivity of target price to additional WTE projects for which construction starts in 2016E


(50%)

0%

50%

100%

150%

200%

0

500

1,000

1,500

2011 2012 2013 2014 2015E 2016E 2017E

Revenue from power sales (LHS) Waste treatment fee (LHS)Project construction (LHS) Finance income (LHS)YoY (RHS)

(HKDm)

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015E 2016E

Revenue from power sales Waste treatment fee Project construction Finance income

0%10%20%30%40%50%60%70%80%90%

100%110%

Base

cas

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1,00

0tpd

2,00

0tpd

3,00

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4,00

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5,00

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6,00

0tpd

7,00

0tpd

Comfort level: 100%

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

Base

cas

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1,00

0tpd

2,00

0tpd

3,00

0tpd

4,00

0tpd

5,00

0tpd

6,00

0tpd

7,00

0tpd

(HKD)

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- 9 -

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- 10 -

Focusing on FB-MG upgrades

Fluidised bed: legacy technology for China MG solid waste incinerators are a mature technology, with a history going back more than 40 years. Widely deployed in developed countries, MG solid waste incinerators have around an 80% share worldwide. Introduced to China in the early 1990s, MG plants are mainly in the south-eastern coastal provinces, particularly in provincial and sub-provincial capitals. As of 2010, only 21% of the MG incinerators in use in China were produced domestically; 64% of the incinerators used imported key components and 15% were produced with foreign technology. China: technology used in MG incinerators

Source: Standard for Pollution Control on the Municipal Solid Waste Incineration

While the MG incinerators in China largely feature foreign technology, the FB approach has been developed primarily by domestic institutions and requires modest initial investment of CNY350k-500k/tpd, compared with CNY400-550k/tpd for MG incinerators. However, operating costs for FB are 3x those for MG due to the auxiliary fuel (usually coal) needed to assist combustion, as well as the environmental protection expenses charged in the form of the cost to handle the residue from the incineration of fly ash, wastewater and flue gases (FB generates 10x more fly ash residue than MG technology). FB plants are mostly in use in lower-tier cities and rural areas, especially in midwestern and eastern prefecture-level cities, given the relatively low heat value (<4,000 kJ/kg of solid waste), as well as a lack of financial support from the government for the substantial initial investment needed for MG incinerators. Designed primarily for international use, MG incinerators operate with a higher heat value of above 5,000kJ/kg. Due to differences in living standards and daily consumption, the organic content in waste tends

to be higher in southeastern coastal provinces (than elsewhere in China). To achieve burning temperatures in excess of 850ºC, FB plants add coal to waste to assist combustion, making it possible to burn waste with a low heat value and high moisture rate. Comparison of moving grate and fluidised bed technology Moving Grate Fluidised Bed

Description of process

Waste is introduced by a waste crane through the “throat” at one end of the grate, from where it moves down the descending grate (sectioned as drying, combustion and complete combustion) to the ash pit on the other end.

The furnace is filled with a bed of quartz sand that is heated to over 600℃. A strong airflow heated to over 200℃ is supplied through the bottom of the furnace, separating the sand particles to let the air through, and then the waste is introduced. The waste and sand are then mixed and churned to combust the waste.

Heating value of waste

1,200 kcal/kg (5,040 kJ/kg) and above

800 kcal/kg (3,360 kJ/kg) and above

Auxiliary fuel Nil (diesel used to ignite incinerators)

Coal (diesel to ignite incinerator)

Advantages

• Mature technology adopted worldwide • Lower requirements for waste composition and solid mass • Lower requirements for waste pre-treatment • Lower fly ash production • Easier to operate • Lower cost of operation • More stable in operation

• Lower initial investment • Higher waste combustion efficiency • Longer service life

Disadvantages

• Higher initial investment • Higher requirements on unit tonne maintenance • Core technology relies on imports • Higher heat resistance requirements on incinerator • Lower waste combustion efficiency • Larger volume of facility

• Higher requirements on waste pre-treatment • More fly ash production • More difficult to operate • Shorter duration of full load operation• Higher cost of operation due to requirement on auxiliary fuel

Source: Company

The following table shows the operating data of 10 typical FB plants operating in China. We can see that the MSW heat value ranges from 3,800kJ/kg to 4,600kJ/kg, which is lower than the requirement for MG plants to achieve a burning temperature of more than 850ºC. Burning at low temperatures also causes increased polycyclic aromatic hydrocarbon (PAH) and dioxin emissions. For FB incinerators, with the additional coal needed to assist combustion, heat values can reach 5,000-6,186kJ/kg.

Produced domestically

21.0%

Imported key components

64.0%

Produced with foreign

technology15.0%


- 11 -

China: operating data for 10 typical FB plants MSW heat value Coal heat value WTE capacity

No. (kJ/kg) (kJ/kg) (tpd) MSW: Coal Actual MSW: coal1 4,389 22,359 350*2 90:10 97:32 4,180 20,064 400*3 95:5 95:53 4,180 18,810 550*3 90:10 95:54 4,389 20,482 500*3 90:10 97:35 3,971 17,974 500*2+300+650 90:10 94:66 4,180 17,974 400*3+650 90:10 95:57 4,293 19,299 650*4 90:10 96:48 4,293 19,299 650*3 90:10 96:49 4,598 17,974 700*1+600*3 95:5 96:410 3,970 22,390 500*3 90:10 96:411 3,762 20,064 500*2+300 90:10 90:10

Source: Technical Guideline on Municipal Solid Waste Fluidized Bed Incineration

In some less developed areas in China, due to the low collection rate, the waste supply is insufficient for the continuous operation of WTE plants, thus leading to the frequent suspension of operations. Under these circumstances, the FB model is preferred for its low start-up and turn-off costs. Further, the average yearly utilisation of a typical FB plant is 6,500-7,800 hours, or less than the threshold level of 8,000 hours per year needed to ensure continuous full -year operation (MG: >8,500 hours). Hence, FB is not suitable for full-year continuous operation, which is a requirement for centralised MSW processing in large cities. The history of FB in Japan Japan adopted FB technology back in the early 1990s. In 2000, daily WTE capacity in Japan stood at 202ktpd and FB accounted for 14% of the market (MG: 78%). Similar to China, most large cities in Japan in 2000 were using MG technology with an operating scale of 200-300tpd, while FB was adopted in counties and lower-tier cities with an operating capacity of less than 100tpd. Japan implemented strict emission standards for dioxin in 2003, with a limit of 0.1ng TEQ/m3N. To meet the new standard, FB plants started investing to upgrade emission technologies in order to reduce dioxin discharges. Plants failing to meet the new standards were shut down immediately. Against this backdrop, MG incinerators were promoted as they produced less pollution and were more suited to large-scale production. Over the period 2000 to 2009, the number of MG plants in Japan increased by 21%, while the number of FB plants declined by 35%, and the number of fixed-bed plants and other types decreased by 53% and 68%, respectively.

Japan: number of WTE plants (2000-09)

Source: Japan Ministry of the Environment

Note: Fixed bed is another WTE incineration technology adopted in Japan which has long been used in process industries. It features a catalyst, typically in pellet form, packed in a static bed.

Also, the Japan government encouraged centralised large-scale continuous production, such that many FB plants with a capacity of less than 100tpd were replaced by modern plants using the latest MG technology. Japan also sought to shift towards the large-scale efficient treatment of waste, from a scattered, unregulated pattern previously. From 2001 to 2006, the total number of WTE plants fell by 23% from 1,680 units to 1,301 units, while the average processing capacity of a single plant rose from 120tpd to 146tpd. Small-scale and inefficient FB plants were replaced with large-scale MG plants. Japan: capacity of WTE plants (2000-09)


Note: Fixed bed is another WTE incineration technology adopted in Japan which has long been used in process industries. It features a catalyst, typically in pellet form, packed in a static bed.

Given the increased proportion of advanced MG plants and the adoption of centralised production, aggregate dioxin emissions per WTE plant in Japan fell to 64ng TEQ/m3N by 2004, down 98.72% from the 1997 level at 5,000 ng TEQ/m3N.

0

500

1,000

1,500

2,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Moving grate Fluidised bed Fixed bed Others

(no.)

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Moving grate Fluidised bed Fixed bed Others

(ktpd)


- 12 -

Japan: emission of dioxin for all WTE plants


Tightening of emissions standards favours MG technology Similar to the experience in Japan, China has been seeking to impose more stringent environmental standards in relation to WTE facilities, given its rapidly developing economy and mounting concern over the environment. In May 2014, the country released its updated Standard for pollution control on municipal

solid waste incineration (Chinese-language version), which is applicable to all newly built WTE plants from 1

July 2014 and to all existing plants from 1 January 2016. With the goal of limiting secondary pollution from emissions discharged by WTE plants, the new rules call for stricter gas emissions standards that are similar to the related EU directive. Due to a previous lack of universally applied industry standards for FB plants, some FB plants in China escaped from installing pollution control facilities and, as a result, failed to meet the new standards. Therefore, this tightening of emission controls could compel operators to upgrade their facilities from FB plants to MG plants.

Pollution control standards: comparison of China’s standards and Euro2000

1-hour average 24-hour average

Pollutants (mg/m3) China new standard China old standard Euro 2000 standard China new standard China old standard Euro 2000 standard FB - 1h MG - 1hTSP 30 80 10 20 80 10 80 10Nox 300 400 200 250 N/A 200-400 400 200SO2 100 260 50 80 N/A 50 260 50HCI 60 75 10 50 N/A 10 75 10Hg 0.05 0.2 0.05 0.05 0.2 0.05 0.2 0.05Cd+Ti 0.1 0.1 (Cd only) 0.05 0.1 0.1 (Cd only) 0.05 - 0.05Sb+As+Pb+Cr+Co+Cu+Mn+Ni 1.0 1.6 (Pb only) 0.5 1.0 1.6 (Pb only) 0.5 1.6 0.5Dioxin (ng TEQ/m3) 0.1 1 0.1 0.1 1 0.1 1 0.1CO 100 150 50 80 N/A 10 150 50

Source: Ministry of Environmental Protection, European Integrated Pollution Prevention and Control Bureau, Technical guideline on municipal solid waste fluidized bed incineration, Company

We expect a similar trend, whereby out-dated small-scale FB plants shift towards large-scale MG plants in China, given the nationwide push to protect the environment. Moreover, there is an economic incentive to upgrade, since doing so should enhance profitability (we estimate that gross margins would rise by 30-40pp, from 20-40% to 50-70%, once MG technology is installed). MG offers better scale economies WTE plants using MG technology to generate electricity from waste are more operationally efficient than those using FB technology. Operating costs can be more than halved, while the power generation capacity factor can be raised by an average of 10-20pp. Saving on auxiliary fuel cost On the cost side, MG incinerators do not require coal as an auxiliary fuel in the incineration process. During the

incineration process, waste passes through a downward inclined moving grate as it is being burned and is continuously turned during incineration to maximise its contact with air to achieve full combustion. This process allows MG technology to achieve a combustion temperature of more than 850ºC without the need for additional coal to assist combustion, while Chinese domestic waste generally has a high moisture content and low heat value. In the incineration process, only a little fuel, such as diesel, is needed to start up the incinerator after an outage or maintenance overhaul. Less labour intensive, more hygienic Compared with MG technology, FB plants require more workers to operate the incinerator, as the waste must be treated before reaching the incineration bed in order to meet the stringent requirements for size and calorific value. Manual sorting exposes workers directly to waste and hence involves hygiene issues.

5,000

1,550 1,350 1,019 812

370 71 64

0

1,000

2,000

3,000

4,000

5,000

6,000

1997 1998 1999 2000 2001 2002 2003 2004

(ng-TEQ/m3N)

http://kjs.mep.gov.cn/hjbhbz/bzwb/gthw/gtfwwrkzbz/201405/t20140530_276307.htm

http://kjs.mep.gov.cn/hjbhbz/bzwb/gthw/gtfwwrkzbz/201405/t20140530_276307.htm


- 13 -

With MG technology, the waste may be burned without sorting, shredding, or drying, as the requirements for waste composition and solid mass are lower. However, an overhead crane typically removes inappropriate bulky waste from the pit through a coarse and simple sorting. FB: pre-sorting of waste

Source: Media report

Lower environmental protection expenses Compared with FB technology, MG produces less fly ash. Fly ash production totals around 10% of the feed material on average for FB technology but can be less than 2% for MG. Fly ash, also known as flue-ash, is one of the non-combustible residues generated in combustion, and comprises the fine particles that rise with the flue gases. Treated as hazardous waste, fly ash is required to be processed by third-party operators in accordance with strict controls. Hence, the reduced fly ash generation not only benefits the environment but also lowers the environmental protection expenses that WTE plants are subject to. These environmental protection expenses mainly represent the cost of handling the residue of incineration, including fly ash, wastewater and flue gases. Stable operation ensures high utilisation hours MG technology is designed to transport and agitate waste efficiently and evenly distribute combustion air. In contrast, FB technology is adapted from coal burning boilers, and because the heated precipitate comes into direct contact with the tubes (heating by conduction), some unburned particles are left in the bed of the reactor. FB incinerators need maintenance to clean up the residual every month (or even every 1-2 weeks if sorting is insufficient) and, as a result, operations have to be suspended, which caps the number of utilisation

hours. The average utilisation hours of a typical FB plant are 6,500-7,800, according to China’s Technical Guideline on Municipal Solid Waste Fluidized Bed Incineration, well below the 8,500-hour average of MG plants. Comparing Eco-Tech and Kewei, 2 adjacent plants with similar waste compositions that operate under the same subsidy policy, the gross profit margin of Eco-Tech, which formerly used FB technology before being upgraded to MG, was only 21.6-25% in 2011-14, significantly lower than Kewei’s 60%-plus figure (Kewei has always used MG technology). Canvest: GPM comparison of Eco-Tech and Kewei


Based on the operating data of the 2 plants, on the revenue side, sales-to-generation ratios can improve and utilisation rise following an upgrade from FB to MG. MG consumes less power during its operation and thus has a higher power generation capacity factor. Canvest: operating comparison of Eco-Tech and Kewei Eco-Tech (FB) Kewei (MG)

2011 2012 2013 2014 2011 2012 2013 2014

Sales to generation ratio (%) 82.3 80.2 82.8 84.2 89.2 89.1 88.3 86.9Power generation capacity factor (%) 70.6 76.8 75.9 67.2 52.7 91.0 90.8 91.3Received MSW (tonnes’000) 70 430 399 104 377 676 615 563Waste utilisation rate (%) 95.3 95.5 90.1 75.0 51.9 97.4 89.3 85.8


Distinct operating edge over peers In our view, Canvest’s extensive experience in operating FB and MG plants gives it a clear competitive edge over other listed WTE operators in terms of executing FB-MG upgrade projects.

21.6% 23.1% 25.0%

8.3%

29.5%

8.3%

69.7%76.3% 73.1%

62.0%

76.4%68.2%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 1H13 1H14

Eco-Tech (FB) Kewei (MG)


- 14 -

Canvest: upgraded plant (Scivest)

Source: Daiwa

Among the listed WTE companies, China Everbright International (CEI) and Dynagreen do not have prior experience of operating FB WTE facilities, and among the top-10 players in China’s WTE market, only Hangzhou Jinjiang (not listed) operates both FB and MG plants simultaneously. However, as a pioneer in the FB segment, Jinjiang is actively involved in improving FB technology but has no track record of upgrading FB plants to MG.

Advantages of FB-MG upgrades relative to greenfield projects

IRR of over 20% Since WTE is an economical waste treatment and an alternative method of generating energy, it is encouraged by the government in the form of generous subsidies and policy support. However, as they involve public utility operations that must be closely concerned with the interests of local citizens, BOT projects acquired directly from the governments are strictly regulated with an IRR of 10-12%. While the on-grid tariff is regulated under unified national standards, the waste treatment fee is jointly set by the municipal government and WTE plant operator to ensure a reasonable return. In the case of Canvest, even though operating costs have halved with the FB-MG upgrade, its first upgrade project, Scivest, still enjoys its previous contracted waste treatment fee of CNY110/tonne. The unit investment for upgrading from FB to MG is around CNY380k/tpd (construction cost: CNY230k/tpd), assuming no acquisition premium, equivalent to a 23-30% discount to the investment needed for a new construction project (CNY400-550k/tpd). As a result, the IRR on an FB-MG upgrade project can rise to nearly 20% (see Appendix 9 for a detailed look at the numbers for an upgrade project). MG, FB and FB-MG upgrade projects: operating results and IRR comparison

Green field MG

Green field MG

Green field FB

FB-MG upgrade

Capacity (tpd) 1,500 1,000 1,000 1,000Construction CAPEX per unit (CNY/ton) 530k 540k 360k 230kTotal CAPEX per unit (CNY/ton) 530k 540k 360k 380kEBIT margin - Operation Yr 6 (%) 56.3 52.8 20.3 52.8Net margin - Operation Yr 6 (%) 38.1 34.8 9.4 34.8Project IRR (%) 11.6 10.9 6.6 15.5Equity IRR (%) 17.4 15.9 7.6 21.9

Source: Daiwa forecast

Although there have been few upgrades to date in the WTE segment, we note that many BOT projects in China’s wastewater treatment market have implemented upgrades with the goal of meeting higher discharge standards. According to our research, after being upgraded to Grade I-A discharge standards, from Grade I-B, a municipal WWT plant can generally raise its tariffs by 30-50% and usually extend its contract period accordingly. Even though in our base case for IRRs for FB-MG upgrade projects we assume no hikes in waste treatment tariffs, we do see the potential for such hikes, as the government is encouraging upgrades with a view


- 15 -

to improving operational efficiency and tightening emission controls, as well as the possibility of BOT project concession periods being extended. In this context, we believe there is upside potential (relative to our base case) on upgrade projects. For a detailed comparison of the IRRs on greenfield projects and FB-MG upgrade projects, and the operating results of FB plants compared with MG plants, refer to the Appendices in this report. Shorter project time On average, there is a 5-year lag between a company winning the bidding for a greenfield WTE project and the project starting to generate cash flow. For FB-MG upgrade projects, however, the time lag is a much shorter, at 2.0-2.5 years. In accordance with the law in Mainland China, WTE projects are subject to an onsite environmental impact assessment (EIA). The EIA report must be prepared and filed with the local authority for its approval and published in advance of public hearings, where local

residents can express their concerns. This process can take months. Greenfield WTE plants can experience various project delays due to changes in site selection in the face of opposition from nearby households. Negative public perceptions concerning WTE projects have mainly arisen as a result of concerns over the environmental impact of WTE projects on public health. For example, in May 2014, local residents protested strongly against a proposed WTE project in Hangzhou City, Zhejiang province. In response to the protest, the project was suspended pending a public consultation. Project delays due to public opposition have become a concern for the WTE operators. Due to a change in site selection, Dyangreen saw its Wuhan project commence operation a full 8 years after the company had signed the concession agreement. Moreover, the company’s Qingdao, Shenyang and Jintan projects, whose concession agreements were entered into in 2005, 2007 and 2008, respectively, are still in the preparation phase and construction has not yet started.

China: recent public protests against WTE projects

Source: media report

Operating in the same location as existing WTE plants, upgraded projects should not give rise to similar

concerns about possible public opposition, as the upgraded plants would comply with higher emissions standards. Even for leading operators with good

2007 2010 2011 2013 20142008 2009 2012

Date: May 2009Location: Shenzhen, GuangdongProject: Baigewu WTE plantInvestor: China Energy Conservation Investment Company & Shanghai Environmental Status: Suspended Reason: Public questioned validity of the environmental assessment

Date: Aug 2009Location: BeijingProject: Asuwei WTE PlantInvestor: N/AStatus: SuspendedReason: Strong public opposition

Date: Oct 2009Location: Wujiang, JiangsuProject: Pingwang WTE plant with CNY 300 million being investedInvestor: Wujiang Oasis Environmental Thermal Power Limited CompanyStatus: Suspended Reason: Strong public opposition

Date: Oct 2009Location: Guangzhou, GuangdongProject: Panyu WTE plantInvestor: Guangri Group & Maywide Technology Co., LtdStatus: SuspendedReason: Strong public opposition

Date: Dec 2008Location: Shenzhen, GuangdongProject: Nanshan WTE Phase IIInvestor: Shenzhen Environmental Energy LimitedStatus: Suspended Reason: Strong public opposition

Date: March 2010Location: Qingdao, ShandongProject: Huangdao District WTE plantInvestor: DynagreenStatus: Suspended Reason: Strong public opposition

Date: Sep 2007Location: Nanjing, JiangsuProject: Jiangbei WTE plantInvestor: Shanghai EnvironmentalStatus: Suspended Reason: Strong public opposition

In Dec 2013, CEI successfully entered into a concession rights agreement with Wujiang Government to build, operate and own Wujiang WTE plant. Commercial operations should start in 1H15.

Date: June 2007Location: Liulitun, BeijingProject: WTE plantInvestor: N/AStatus: AbandonedReason: Strong public opposition

Date: May 2014Location: Hangzhou, ZhejiangProject: Jiufeng WTE plantInvestor: Hangzhou Urban Construction Investment Group & Hangzhou Road and Bridge Co., LtdStatus: Project suspended

Date: Sep 2014Location: Huizhou, GuangdongProject: Boluo Longtandi WTE plantStatus: UncertainReason: More than 10,000 protestors took to the streets


- 16 -

execution records, like CEI, there is an average 1.0-1.5-year lag between the company winning a bid for a greenfield project and construction commencing. In terms of the construction stage, an FB-MG upgrade takes only 1.5 years on average, compared with 2 years to build a new project. Together with the 20-30% lower unit investment cost, the payback period for an FB-MG upgrade project should be around 4 years, assuming no acquisition premium, or half the average for a greenfield WTE project. Lower initial investment Meanwhile, the unit investment for an FB-MG upgrade project is lower than that for a greenfield BOT project, as the upgraded plant can use the qualified components from the original plant. In order to acquire the Scivest plant, Canvest spent CNY415.7m on an upgrade (1.8ktpd); the total acquisition cost for the plant was CNY690m. Hence, the per-unit investment was CNY380k/tpd, a 20-30% discount to the average construction cost of a greenfield project, at CNY400-550k/tpd. Given the low per-unit investment and short investment payback period for FB-MG upgrade projects, we believe Canvest can achieve rapid capacity growth, putting less of a burden on its balance sheet than its peers, which are mainly engaged in greenfield projects. Greenfield MG projects vs. FB-MG upgrade projects Greenfield MG project FB-MG upgrade project

Project selection

Tender process; project agreement negotiation; usually 30 days after winning the bid, sign the contract

Select poorly managed FB plant for upgrade

Preparation stage

Design, plan and EIA process usually takes more than 9 months (optimal conditions)

Easier to pass EIA as the new plant at the original site will meet higher emissions standards

Construction stage

2-3 years 1.0-1.5 years

Investment CNY400-550k/tpd CNY350-500k/tpd

(including acquisition cost)

Entry barriers High -- requires high level of investment and proven record of project operation

High -- requires operational experience of both FB and MG projects

Equity IRR 10-12% regulated by the government Over 20%



- 17 -

Consolidating outdated FB WTE plants in China

The use of solid municipal waste to produce biogas and electricity dates back to the late 1980s in China. By end-2013, China had urban non-hazardous MSW treatment capacity of 492ktpd. Of the 3 major treatment methods, landfill is dominant with a 66%/68% market share in terms of capacity/treatment volume in 2013; in Gansu, Guizhou, Jiangxi, Ningxia and Qinghai provinces, landfill is the only available treatment method. China: MSW treatment capacity in cities

Source: National Bureau of Statistics

Backed by supportive government policies, the number of WTE plants in China saw a CAGR of 13% in 2003-13. Before 2012, all on-grid electricity generated by WTE plants was entitled to a CNY0.25/kWh subsidy and subject to the coal-fired benchmark tariff and CNY0.002/kWh renewable energy fee. As a result of the attractive subsidy on electricity generated, many unregulated small FB plants had an incentive to abuse the favourable on-grid tariff by adding coal to waste. While official regulations state that coal may account for no more than 20% of the total volume of waste, many FB plants chose to ignore the regulations, and some plants, seeking to maximise their entitlements under the subsidy, had coal content of more than 60% or even 100% of the waste. In a move to regulate the market, the NDRC in March 2012 issued a revised subsidy policy, whereby all WTE plants approved on or after 2006 would be subject to on-grid tariffs for the first 280 kWh of power generated by every tonne of waste at CNY0.65 per kWh (VAT inclusive), and any additional power output would be charged at the same rate as for coal-fired power projects in neighbouring areas (CNY0.4-0.5/kWh). Monitoring of the coal mix was tightened, with all FB plants required to install instant monitoring systems. FB plants that formerly abused the favourable on-grid

tariff by adding coal to waste are now being forced out of the market, and the need for FB-MG upgrades has increased. China: on-grid tariffs for electricity generated by WTE plants Electricity generation Tariff On-grid electricity generation ≥ 560kWh/tonne

Local coal-fired power on-grid tariff (CNY0.43/kWh on average)

280kWh/tonne ≤ on-grid electricity generation < 560kWh/tonne

For every 280kWh/tonne, apply on-grid tariff of CNY0.65/kWh For the remaining electricity (ie, actual generation/ton minus 280kWh/tonne), apply coal-fired power on-grid tariff

On-grid electricity generation < 280kWh/ton On-grid tariff of CNY0.65/kWh

Source: National Development and Reform Commission

Should have 12% share of FB-MG upgrade market by 2016 In mid-2012, Canvest helped to start the first FB-MG trial upgrade, at Scivest’s plant (designed MSW processing capacity of 1,800tpd), and in 2014 the company implemented the FB-MG upgrade for its Eco-Tech plants. Management explained that the economic incentive of upgrading plants from FB to MG has created M&A opportunities, as it estimates a plant’s gross margin can increase by 30-40pp to 60-70% once MG technology has been installed. According to AAstocks, as of 5M14, China had 67 WTE plants using FB technology, with installed operational capacity of 58ktpd, equivalent to almost 35% of all WTE capacity in China. Moreover, with the stricter emission controls and tendency toward large-scale regulated WTE treatment centres, there is an increasing need for small FB plants to upgrade to MG facilities. China: WTE market breakdown as of 5M14

Source: AAstocks

We believe Canvest’s balance-sheet position will support the company’s efforts to gain market share in the rapidly developing WTE market, which requires high capex resulting in negative free cash flow over the next few years. We forecast the company’s net gearing to reach its highest level of 23% in 2016.

0

100

200

300

400

500

600

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(ktpd)

Landfill Incineration Others (mainly compost)

Moving grate 105ktpd63.3%

Fluidized bed58ktpd34.9%

Other3ktpd1.8%

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- 18 -

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- 19 -

Similarities between CEI and Canvest

We believe Canvest could become the next CEI in terms of market share of the WTE market in China and be one of the major winners from the ongoing consolidation of inefficient FB plants in China. In our view, earnings growth for Canvest in 2015-17 could follow a similar pattern to that of CEI 5 years ago, when CTE had 4.2ktpd of WTE projects (see charts below). After becoming the dominant WTE operator in Shandong and Jiangsu, CEI had a 6% national market share in terms of operating capacity and a 9% share, including new projects under construction and in preparation as of 2013. CEI: operating capacity and net profit (2009-16E)

Source: Company, Daiwa forecast

National operating urban WTE capacity and CEI’s market share

Source: National Bureau of Statistics, Daiwa

In 2009-14, CEI’s share price rose by an average of 40% annually, while the company’s net profit saw a CAGR of 36% over the same period. During this 5-year period, CEI more than tripled its operating WTE capacity to 14.6ktpd (CAGR of 29%), in step with a 22% CAGR in nationwide urban WTE capacity over the same period. CEI’s share price has appreciated by 7x over the past five years.

CEI: share price and market cap

Source: Bloomberg

Note: Price and market cap as at 17 April 2015

How does Canvest compare with CEI? From 4.8ktpd as of 2014 (including 1.2ktpd currently being upgraded), we expect that, based on confirmed capacity, Canvest’s MSW processing capacity will nearly double to 8.4ktpd in 2016, a CAGR of 32% over the period. Canvest: the next CEI in terms of operating capacity?

Note: Yr 1 for CEI is 2007, for Canvest is 2011

Source: Company, Daiwa forecast

Better positioned in the market Moreover, compared with CEI, we believed Canvest is exposed to better market conditions in the WTE industry and has a sharper technological edge, which we believe could support a higher capacity growth rate compared with that seen by CEI 5 years ago.

1) Accelerated market growth

In the 12th FYP issued in April 2012 (Construction of non-hazardous treatment facilities for municipal solid waste (click here for the Chinese-language version), the government said it plans to invest CNY263.6bn in the MSW treatment market, with the largest proportion of CNY173bn (accounting for 65.6% of the total) going to the construction of WTE treatment plants.

1.6ktpd3.2ktpd 4.2ktpd 4.6ktpd

8.2ktpd 8.2ktpd

9.7ktpd 14.6ktpd

17.3ktpd

28.8ktpd

0

5

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1,000

1,500

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2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E

(ktpd)(HKDm)

Net profit (LHS)Operating household waste processing capacity at end of year (RHS)

44.7 51.6 71.3 84.9 94.1 122.6 158.5

3%

6% 6%5%

9%

7%

6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

020

4060

80

100120

140160

180

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(ktpd)

National urban WTE capacity (LHS) CEI's Mkt Share (RHS)

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11

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-11

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12

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13

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-13

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14

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-14

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15

(HKDm)(HKD)

Share price (LHS) Market cap (RHS)

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35

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11

CEI Canvest

(ktpd)

Forecasts for Canvest are based on pipeline projects

http://www.gov.cn/zwgk/2012-05/04/content_2129302.htm


- 20 -

Planned investment under the 12th FYP is more than triple than that for the 11th FYP and 4.7x the actual investment during the 11th FYP period (2006-10). We regard this increase as a sign of the government’s increasing focus on environmental protection (MSW treatment), which we consider to be positive for the long-term development of the waste treatment market in China. Based on China’s 12th FYP, we estimate urban WTE capacity will see a 27% CAGR in 2010-15. Pursuing ambitious targets, China realised annual growth of 30% (in urban WTE capacity) in 2012 and 2013, and we are confident it will meet its 12th FYP target by 2015. Given that China had 166ktpd of installed urban WTE capacity as of 5M14, we expect its capacity growth to accelerate (32% CAGR in 2013-15E). On a long-term basis, we forecast steady urban WTE capacity expansion at CAGRs of 16% in 2015-20 and 10% in 2020-25. These figures are equivalent to a further 300 WTE plants being installed in cities in during each of 2015-20 and 2020-25. We would regard such expansion as providing a solid foundation for long-term growth in the urban WTE market. China: WTE capacity forecasts

Source: State Council, National Bureau of Statistics, Daiwa forecast

China: number of WTE plants in cities

Source: National Bureau of Statistics, State Council, Daiwa forecasts (2015)

2) Short project times and payback periods

WTE plants that have undergone FB-MG upgrades can readily obtain EIA approval, as the plants will comply with higher emissions standards than previously and construction takes only 1.5 years on average — much less than for a greenfield project. Even for leading operators with good execution track records, like CEI, there is an average 5-year lag between winning the bidding and the commencement of commercial operations and cash flow being generated (ie, not construction revenue). These short project times in turn significantly shorten the investment payback period for FB-MG upgrade projects to around 4 years, compared with 8 years for an average BOT project. Moreover, the unit investment (CNY280k/tpd) is only half of that for new construction projects (CNY400-550k/tpd), assuming no acquisition premiums. Considering the relatively low per-unit investment and short investment payback period for FB-MG upgrade projects, Canvest should see accelerated capacity growth, versus that seen by CEI 4 years ago. Major concern: is there room for a new consolidator? China’s WTE market is less fragmented, compared with the municipal WWT market, such that there are several dominant players on a regional basis. As at the end of 2013, the top-10 WTE companies accounted for 54.5% of the national market in terms of operating capacity. China: top-10 WTE companies (end-2013)

Source: E2O Environmental Platform, Company, Daiwa estimates

15 17 33 40 45 52 71 85 94 123 158 166

276

570

908

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2003 2005 2007 2009 2011 2013 2020E

(ktpd)

5M14 2015 2025E

47 54 67 69 66 74 93 104 109138 166 178

256

404

704

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300

400

500

600

700

800

2003 2005 2007 2009 2011 2013 2020E5M14 2015E 2025E

Hangzhou Jinjiang14.9%

China Everbright6.1%

CSGEE5.6%

Chongqing Sanfeng

5.6%Shenzhen Energy4.4%

CECEP Group4.4%

Zhejiang Weiming

4.4%

Shanghai Chengtou

3.6%C&G3.1%

Tianjin Teda2.3%

Others45.5%


- 21 -

China: top-10 WTE companies (end-2013) Rank Company Operating capacity

(ktpd) Operating

capacity (%)1 Hangzhou Jinjiang 23.6 14.9%2 China Everbright 9.65 6.1%3 China Science General Energy & Environment 8.9 5.6%4 Chongqing Sanfeng 8.9 5.6%5 Shenzhen Energy 7.05 4.4%6 China Energy Conservation and Environmental

Protection Group 7.05 4.4%

7 Zhejiang Weiming 6.91 4.4%8 Shanghai Chengtou 5.7 3.6%9 C&G 4.9 3.1%10 Tianjin Teda 3.7 2.3%11 Canvest 3.0 2.0% Others 72 45.5% National total 158 100.0%

Source: Euromonitor

We forecast growth in China’s WTE market to accelerate, with 294ktpd WTE plants being installed in cities in 2015-20 and 338ktpd installed in 2020-25, or more than double the capacity of existing plants. Hence, tomorrow’s dominant players should be those that can take advantage of the opportunities for growth that we expect to arise in the next several years. China: number of WTE plants in cities by province

Source: National Bureau of Statistics, State Council, Daiwa forecasts (2015)

We believe there is still room for companies to enter the market and play a leading role in its consolidation, as today’s dominant player, CEI, only tends to win projects in certain provinces. For example, 88% of CEI’s operational projects are in Jiangsu and Shandong provinces. We think there are regionally dominant players in the China WTE market because companies tend to have an advantage in securing projects in places where they have track records with the local government and have more bargaining power to secure preferential contract terms, such as higher waste treatment fees or higher guaranteed waste treatment volumes. Canvest also has the benefit of being a publicly listed company. Listed companies have an advantage in the WTE industry because it is easier for them to become regional leaders; listed companies generally have solid

operating and safety track records, with good project execution. Moreover, given Canvest’s technological edge in being able to upgrade outdated FB plants, we expect it to have first-mover advantage in the initial stages of market consolidation for China’s existing WTE operators.

(5)05

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Cho

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Gan

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Gua

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Gui

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ngjia

ngH

enan

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eiH

unan

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gsu

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gxi

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ning

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Zhej

iang

2010 2010-2013 2013-2015 Target


- 22 -

Operations

Canvest started its WTE business in 2003, and established its first WTE plant, Eco-Tech, in Dongguan, Guangdong Province. With the experience it has accumulated, its second project, the Kewei WTE plant in Dongguan, was awarded a Commendation of Key Construction by the Dongguan Municipal People’s Government. Canvest gained a good reputation and then expanded its business beyond Dongguan. In 2013, Canvest won the bid for Zhanjiang Project, together with High Point. It acquired Scivest in January 2014 to bolster its dominant market position in Dongguan. Backed by the good reputation it had built up over the previous 10 years, Canvest in 2014 received approval from the local municipal administration to build 1.5ktpd of capacity (with maximum designed capacity of 1.8ktpd) for Eco-Tech Phase II, which could boost its share of the Dongguan market to 82%, from 70% currently. The company expects the construction work to be completed in 4Q16. Construction work for Eco-Tech Phase II and the FB-MG upgrade for Eco-Tech Phase I are scheduled to take place at the same time, thus saving on construction costs and project time. Operating model Canvest has high project concentration in Dongguan, and two-thirds (once Eco-Tech resumes operations in 3Q15) of Canvest’s capacity in Dongguan is operated under the BOO model, with no guaranteed offtake. However, despite the high concentration in Dongguan, we are not concerned about any potential shortfall in the supply of municipal waste to Canvest. Some 94% of Eco-Tech’s previously designed capacity was committed to long-term offtake contracts with the local authorities, and Kewei has entered into similar contracts with third parties. The utilisation rates for the Eco-Tech and Kewei plants were 90-95% in 2011-14 (Eco-Tech’s utilisation declined in 2014 due to the suspension of operations in 2Q14).

Canvest: BOO project and utilisation rate


Furthermore, Canvest’s WTE business currently accounts for only 51% of the total waste treated in Dongguan. Under the government’s long-term plan to increase incineration rates, and with the improvement in waste collection and the waste classification system, we expect sufficient supply for the Eco-Tech, Kewei and the future Eco-Tech Phase II expansion plants. Dongguan: waste collected and incineration rate

WTE power plant End-2014 (ktpd)

End-2016E MSW Treatment

Capacity (ktpd)

End-2016Emarket share in

DongguanKewei WTE Plant 1.8 1.8China Scivest WTE Plant 1.8 1.8Eco-Tech WTE Plant (Upgrading) 1.8Eco-Tech WTE Plant Phase II - 1.5Subtotal 3.6 6.9 82%Other 1.5 1.5 18%Incineration proportion (%) 5.1 8.4 100%Overall waste amount 10 10Incineration portion in as a % of Total MSW 51% 84%

Source: Company

Tariffs WTE is an economical form of waste treatment and an alternative method of generating energy. A WTE plant has 2 revenue sources, waste treatment fees and electricity sales. Under the local policy in Guangdong, for WTE plants approved after 2006, if the power transmission line connecting the WTE plant and the grid was built by the plant, the on-grid tariff can be increased by CNY0.01 to CNY0.03/kWh a year. The on-grid tariff for the Eco-Tech plant was exempt from this as it started operations before the effective date of the latest policy (2006). After its FB-MG upgrade is completed, all of Canvest’s plants will be subject to the subsidised tariff (see the following table).

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Eco-Tech utilizat ion ra te Kewei utiliza tion rate

Eco-Tech II u tilization rate EOY BOO capacity (RHS)

(ktpd)Capacity fell at end-2014 due to the upgrading of the Eco-Tech plant


- 23 -

Canvest: on-grid tariff Effective date Eco-Tech Other plants (also in Guangdong) 1-Jan-14 CNY0.58 (Before FB-

MG Upgrade) CNY0.66 for the first 280kWh of power generated by every tonne of MSW processed; CNY0.524 for any additional power generated

1-Sep-14 CNY0.66 for the first 28 kWh of power generated by every tonne of MSW processed; CNY0.512 per kWh for any additional power generated

20-Apr-15 CNY0.66 for the first 280kWh of power generated by every tonne of MSW processed; CNY0.492 per kWh for any additional power generated

Source: Company

The municipal waste treatment fee in Guangdong province is regulated by the government at CNY90-110/tonne, depending on which city. The waste treatment fee is set at CNY110/tonne in Dongguan and CNY81.8/tonne in Zhanjiang, which is located in the west of Guangdong, and a less developed city; thus the waste treatment fee is at the lower range of guidance. Industrial WWT operators that adopt the BOO business model must negotiate with each wastewater supplier in terms of contract treatment fees and supply amount. Canvest does operate certain projects under a BOO business model, but given the unified waste treatment fees, as set by the government, Canvest does not have to negotiate with counterparties. The average contract size is 250tpd of capacity, primarily contracted with local governmental bodies at the county or town level, with an average term of 28 years. Canvest: waste treatment fees Effective date Eco-Tech Kewei China Scivest Zhanjiang Yuefeng

1-Jan-11 89 89 N/A N/A

1-Jun-13 110 110 From 1 January 2014 110 110 110 81.8Source: Company

Cost structure The expense of coal as a percentage of total COGS dropped from 35%, the highest in 2012, to 4% in 2014, and we forecast it to drop to 0% from 2015, after all of the company’s plants have been installed with MG technology. Thus, Canvest would be free from any major gross profit margin impact caused by coal price volatility for a while. MG plants require little material cost for operations. Therefore, depreciation & amortisation accounts for 40-50% of COGS for a typical BOO project, employee salaries 20%, and the remainder is taken up by fuel (<1%), maintenance costs and environmental protection expenses for treating hazardous residual produced. Canvest has maintained a gross margin of around 65% for its WTE plants that have adopted MG technology. We see this margin remaining stable as the WTE

business is basically immune to any hikes in raw-material costs, and any increase in operating expenses can be passed on if the government approves it. Canvest: COGS breakdown

Source: Company

Canvest: cost breakdown

Source: Company

Earnings-growth drivers in 2015 and 2016 Based on Canvest’s confirmed projects, we expect its daily MSW processing capacity to nearly double to 8.4ktpd in 2016 from 3.8ktpd currently, representing a CAGR of 53% in 2014-16. Based on the increase in capacity, its annual on-grid electricity generated would rise at a 34% CAGR in 2014-17. We highlight the following factors as key earnings-growth drivers for Canvest in 2015 and 2016.

(1) The newly commissioned Zhanjiang Yuefeng plant (1.5ktpd) in 4Q15, and the commissioning of Eco-Tech Phase II (1.5ktpd) in 4Q16. Zhangjiang Yuefeng should also contribute to construction revenue income for 2015.

(2) Upgrade work on Eco-Tech, which should expand capacity from 1.2ktpd to 1.8ktpd and improve power generation efficiency (operations suspended; due to resume in 3Q15).

As such, we forecast a 30% CAGR for Canvest’s project operating revenue, and a 15% overall revenue CAGR in

59.5

180.4 187.5

451.6

85.7

148.0

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Coal MaintenanceDepreciation & amortisation Employee benefit expensesEnvironmental protection expenses Construction cost and others

(HKDm)

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2011 2012 2013 2014 1H13 1H14Coal MaintenanceDepreciation & amortisation Employee benefit expensesEnvironmental protection expenses Construction cost and others


- 24 -

2015-16. The 22% YoY revenue decline we forecast for Canvest in 2016 reflects the drop we expect in its construction revenue, as management expects its only greenfield BOT project currently under construction to commence operation before end-2015. Still, we expect Canvest to keep up its pace of securing and carrying out more WTE projects in 2015 and 2016, to support construction revenue in 2017 and beyond. Canvest: revenue forecast and revenue mix


We expect the strong earnings growth to drive a 43% net profit CAGR and a 30% EPS CAGR (diluted due to last year’s IPO) in 2014-17. Canvest’s gross profit margin declined to 43% in 2014, from 52% in 2013, and we forecast the gross margin to decline further to 38% in 2015, as construction work for Zhanjiang Yuefeng should continue in 2015. However, we expect the gross margin on operating projects to improve to 61% in 2016, as after the FB-MG upgrade of Eco-Tech, all of Canvest’s plants should have adopted MG technology, which should provide a stable operating margin of 60-70%, due to the stable tariff and cost structure for MG plants. Canvest: net profit and YoY growth


(50%)

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Revenue from power sales Waste treatment feeProject construction Finance incomeYoY (RHS)

(HKD mn)

3.5%

45.9%

58.1%52.5%

20.7%

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Project operating (LHS) Project construction (LHS)Finance income (LHS) YoY (RHS)


- 25 -

Valuation and rating

We initiate coverage of Canvest with a Buy (1) rating and DCF-based 12-month target price of HKD5.50, supported by our forecasts of a 43% net profit CAGR and a 30% EPS CAGR in 2014-17. Our target price implies 20.9% upside potential from the current share price. DCF-based valuation We derive our target price by adopting a DCF-based valuation, employing a WACC of 6.0% and a 2% terminal growth rate. We believe DCF is the most appropriate method as it takes into account the time value of potentially varied future cash flows, reflecting Canvest’s capacity expansion plans. The following table shows the sensitivity of Canvest’s DCF to changes in our WACC and terminal growth rates. For WACC, a ±0.5% change in our assumption would have an impact of -8.6% or +10.9 % on our target price. Meanwhile, for the terminal growth rate, a +0.5% change in our assumption would have an impact of +4.7% on our target price.

Canvest: WACC assumptions Assumptions Risk-free rate 1.4%Equity-risk premium 8.2%Equity beta 0.81Cost of equity 8.0%Debt-to-assets 55%Pre-tax cost of debt 5.5%Tax rate 20%WACC 6.0%Terminal growth rate 2%

Source: Daiwa forecasts

Canvest: sensitivity of target price (HKD) to changes in WACC and terminal growth rate assumptions WACC 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5%

Term

inal

gro

wth

ra

te

0.5% 6.51 5.91 5.41 5.00 4.65 4.35 4.091.0% 6.86 6.15 5.59 5.13 4.75 4.43 4.161.5% 7.31 6.46 5.81 5.30 4.88 4.53 4.232.0% 7.95 6.88 6.10 5.50 5.03 4.64 4.312.5% 8.89 7.46 6.48 5.76 5.21 4.77 4.423.0% 10.46 8.32 7.01 6.11 5.45 4.94 4.54

3.5% 13.57 9.76 7.80 6.59 5.77 5.16 4.70

Source: Daiwa estimates

Canvest: DCF valuation Non-IFRIC EBIT (HKDm) 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E … 2034E 2035E

EBIT (IFRIC) 421 612 748 790 833 858 867 874 877 879 880 876 876 859 669 668 … 664 663 Construction revenue (661) - - - - - - - - - - - - - - - … - -Construction cost 550 - - - - - - - - - - - - - - - … - -Re-statement of operational income 17 (3) (3) (5) (7) (9) (9) (10) (11) (12) (12) (17) (18) (19) (19) (20) … (25) (26)Non-IFRIC EBIT 327 609 745 784 826 849 858 864 866 867 867 860 859 841 650 648 … 639 637 YoY 26% 86% 22% 5% 5% 3% 1% 1% 0% 0% 0% -1% 0% -2% -23% 0% … 0% 0% FCF (HKDm) 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2034E 2035ENon-IFRIC EBIT 327 609 745 784 826 849 858 864 866 867 867 860 859 841 650 648 … 639 637 Depreciation/amortization 112 155 197 188 180 173 167 160 155 149 144 123 120 117 115 111 … 99 96 Adjusted income tax (24) (43) (68) (65) (74) (85) (95) (105) (114) (124) (134) (143) (153) (159) (132) (140) … (171) (178)Adjusted net change in working capital (134) (74) (21) (7) (7) (2) (1) (1) (0) (0) (0) 1 0 3 30 0 … 0 0 Adjusted CAPEX (incl. BOT construction)

(1,120) (726) (60) (62) (63) (64) (65) (65) (65) (66) (66) (65) (65) (64) (50) (50) …

(50) (50)

Adjusted FCF (839) (78) 792 839 862 872 863 853 841 826 812 775 761 737 612 570 518 505 2015 DCF 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 19 20Discount factor 0.94 0.89 0.84 0.79 0.74 0.70 0.66 0.62 0.59 0.55 0.52 0.49 0.46 0.44 0.41 0.33 0.31 PV of FCF (CNYm) (73) 705 704 683 651 608 566 526 488 452 407 377 345 270 237 170 157 Sum (PV of FCF) - 20yrs 7,877 Terminal value 3,973 Total 11,850 Net cash / (debt) @ 2015 510 Total DCF (CNY m) 12,359 % of Minority interest @ 2015 11% Less: valued shared by M.I. (1,360) NPV (HKDm) 11,000 NPV per share (HKD) – end-2015 5.50

Source: Daiwa forecasts


- 26 -

Our DCF-based valuation yields a fair value of HKD5.50/share, equivalent to a 2016E PER of 24x, in line with that of CEI, on our forecasts. We believe Canvest deserves to trade in line with CEI, given Canvest’s superior upgraded WTE business operating model and technological edge. FB-MG upgrade projects have an equity IRR of over 20% as a result of the significant improvement in utilisation (up 10-20pp after an upgrade), and 50% lower construction costs on average. Moreover, the investment payback period and construction period is half for FB-MG upgrade projects vs. that for greenfield plants, which should play a critical role in speeding up Canvest’s capacity expansion. Our end-2015 NAV estimate factors in only currently secured projects, and a faster-than-expected capacity expansion and/or the company’s ability to secure quality projects could provide further upside to our earnings forecasts. Waste treatment peer comparison: 2014-16E EPS CAGR and 2016E net debt-to-equity ratio


Waste treatment company peer comparison: 2014-16E EPS CAGR and adjusted 2016E PER


Note: For CEI and Dynagreen, we have removed non-cash earnings from BOT construction revenue in our 2016E PER calculation. For Canvest and CTE, we assume no BOT construction revenue in 2016E. Share prices as at 30 April 2015

Risks

Risks due to geographic mix - the main risk to our call Currently, all of Canvest’s operating projects are located in Dongguan city, Guangdong Province, and the company is able to charge a treatment fee of CNY110/tonne as the local government has been emphasising environmental protection. When expanding into other markets, its Zhanjiang project (also in Guangdong), to be commissioned in 2015, the company says it will charge a waste treatment fee of CNY81.8/tonne, which is still higher than the CNY70-80/tonne range charged by its national peers. As Canvest plans to expand into other provinces outside Guangdong, especially the inland provinces, we see risks to the returns on these projects (and this is the main risk to our Buy call on the stock) as: 1) the financial strength of inland local governments might not be as strong as those in the coastal regions, and thus they might offer a lower waste treatment tariff, and 2) the waste heat value may be lower in inland provinces due to the lower level of organic components in the collected MSW in inland provinces, as a result of both slower economic development vs. coastal regions and cultural norms. As a result, if Canvest secures more projects beyond Guangdong Province, it is likely that its blended average waste treatment tariff per project will be dragged down. These new projects could have a dilution effect on Canvest’s overall waste treatment fees. However, as the equity IRR on FB-MG upgrade projects (~20%) is higher than Canvest’s current ROE of 12.8%, we expect any future FB-MG upgrade projects to be value-accretive to shareholders. And the as company has said it has a target IRR of 10% for future greenfield projects, we see limited risk to the company’s overall IRR. According to our sensitivity analysis, a ±3% change in the average tariff (our base case) for 2016 could affect Canvest’s 2014-17E net profit CAGR by ±0.4pp, its 2016E EPS by ±1.1%, and our target price by ±HKD0.02, on our estimates.

CEI, mkt cap USD8,400m

Dynagreen, mkt cap USD899m

CTE, mkt cap USD2,151m

Canvest, mkt cap USD1,174m

0%

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30%

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45%

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0.0 20.0 40.0 60.0 80.0 100.0 120.0

(2016E Net debt-to-equity:%)

(2014-16E EPS CAGR)

CEI, mkt cap USD8,400m

Dynagreen, mkt cap USD899m

CTE, mkt cap USD2,151m

Canvest, mkt cap USD1,174m

0%

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15.0 20.0 25.0 30.0 35.0

(Adjusted 2016E PERx)

(2014-16E EPS CAGR)


- 27 -

Canvest: sensitivity analysis of target price and profitability to changes in tariffs in 2016E (base case represented by blue line) 2016E 2014-17E 2016E 2016E 2016EChange in tariff TP NP CAGR EPS ROE Average tariff-9% 5.45 41.4% 0.222 15.9% 95 -6% 5.47 41.9% 0.225 16.0% 98 -3% 5.48 42.3% 0.228 16.2% 101 0% 5.50 42.7% 0.230 16.4% 104 3% 5.52 43.2% 0.233 16.5% 107 6% 5.53 43.6% 0.235 16.7% 110 9% 5.55 44.1% 0.238 16.9% 113


Canvest: sensitivity analysis of target price and profitability to changes in tariffs in 2016E (relative to base case) 2016E 2014-17E 2016E 2016EChange in tariff TP NP CAGR EPS ROE-9% -0.8% -1.3ppt -3.4% -0.5ppt-6% -0.6% -0.9ppt -2.3% -0.3ppt-3% -0.3% -0.4ppt -1.1% -0.2ppt0% 0.0% 0.0ppt 0.0% 0.0ppt3% 0.3% 0.4ppt 1.1% 0.2ppt6% 0.6% 0.9ppt 2.3% 0.3ppt9% 0.8% 1.3ppt 3.4% 0.5pptSource: Daiwa estimates

Risk of a shortage of waste supply Unlike other WTE operators adopting a BOT business model with a certain MSW amount guaranteed by the local government, Canvest, which has Eco-Tech, Kewei, and the future Eco-Tech II accounting for 62% of its contracted capacity, has undertaken to run its business using the BOO business model. Even if these projects involve long-term (average 28 years) supply contracts with customers (mostly government authorities) accounting for 95-98% of its treatment capacity, the operation of these projects depends on the capacity of the waste supplier to fulfil the corresponding waste supply agreement. A shortage of waste supply would bring down both waste-treatment fee income and the electricity-generation income, the two most important sources of revenue for Canvest. But we are not too concerned about a shortfall in waste supply as Canvest’s WTE business currently accounts for only 51% of the total waste treated in Dongguan. Under the government’s long-term plan to increase the MSW incineration rate, and given the improvement in waste collection and classification system, we expect a sufficient supply of waste for Eco-Tech, Kewei and the future Eco-Tech Phase II expansion. According to our sensitivity analysis, a -1pp change in the average utilisation for 2016 would affect Canvest’s 2014-17E net profit CAGR by -0.58pp and its 2016E EPS by -0.71%, on our estimates.

Canvest: sensitivity of target price and profitability to changes in average utilisation in 2016 2016E 2014-17E 2016E 2016EAverage utilisation TP net profit CAGR EPS ROE88% 5.30 40.99% 0.225 16.1%90% 5.46 41.58% 0.227 16.2%91% 5.49 42.16% 0.229 16.3%92% 5.50 42.75% 0.230 16.4%93% 5.51 43.90% 0.234 16.6%Source: Daiwa estimates

Canvest: sensitivity of target price and profitability to changes in average utilisation in 2016 (relative to base case) 2016E 2014-17E 2016E 2016EAverage utilisation TP NP CAGR EPS ROE88% -3.6% -1.76ppt -2.13% -0.31ppt90% -0.8% -1.17ppt -1.42% -0.21ppt91% -0.2% -0.58ppt -0.71% -0.10ppt92% 0.0% 0.00ppt 0.00% 0.00ppt93% 0.1% 1.15ppt 1.42% 0.21pptSource: Daiwa estimates

Equity dilution risk We expect Canvest to quickly roll out its WTE projects in 2015-16, as it should have access to enough capital after being listed, and to increase its household MSW waste processing capacity from 3.6ktpd as at the end of 2014, to 8.4ktpd by end-2016. Due to the capital-intensive nature of WTE construction – on average, Canvest’s aggressive capacity expansion requires access to large amounts of capital – we estimate that Canvest will incur adjusted capex of HKD1,120m in 2015 and HKD726m in 2016 (including BOT construction costs for the Zhanjiang project). To support its business development, we expect Canvest’s net debt-to-equity level to increase to 23% in 2016, which is still far from the company’s comfortable net debt-to-equity level of 100%, and significantly below its historical high of 400%+ before it was listed. Thus, we see little possibility of the company undertaking any equity financing in the near term. However, in our model, we only factor in secured projects; thus, the additional secured capacity should push up the gearing ratio. According to our sensitivity analysis, an additional 1000tpd in capacity of WTE projects (assuming 50% MG greenfield projects and 50% FB-MG upgrade projects), whose construction starts in 2016 and operations commence in 2018, would have a +10ppt impact on Canvest’s 2016 net debt-to-equity ratio.


- 28 -

Canvest: net debt-to-equity ratio


Canvest: sensitivity of 2016E net debt-to-equity to additional WTE projects for which construction would start in 2016


On-grid tariff risk Under current NDRC regulations, WTE plants are subject to an on-grid tariff of CNY0.65 per kWh (VAT included) for the first 280 kWh of power generated by every tonne of waste, and any additional power output is charged at the same rate as that for coal-fired power projects in neighbouring areas. The continuing electricity reforms could lead to the lowering of the on-grid tariff for coal-fired power plants. Under the revised coal cost-pass-through mechanism, which was announced by the State Council in December 2012, the NDRC cut the coal-fired IPP tariff in September 2014 by 2.0-2.5% (CNY0.0093/kWh in average), and again in April 2015, by 1.2-7.1% (CNY0.02/kWh on average). As a result, Canvest’s on-grid tariff for its additional power output (>280kWh/tonne) decreased by 3.9% from CNY0.512/kWh to CNY0.492/kWh. But we see minimum impact from a possible cut in the coal-fired benchmark tariff, given the government’s support of biomass (WTE) power-generating companies. If the on-grid tariff decreases further, we think the WTE operators could negotiate to raise waste treatment fees to ensure a reasonable return.

Based on our sensitivity analysis for our 2016 earnings, our base-case estimate is that a further 2% decrease in the coal-fired power tariff in 2016 could lead to Canvest’s 2016 EPS falling by 0.44%, and our target price by HKD0.02. Canvest: sensitivity analysis of target price and profitability to changes in coal-fired tariffs in 2016 2016E 2014-17E 2016E 2016E 2016EChange in coal-fired tariff TP NP CAGR EPS ROE

Average coal-fired tariff

-6.0% 5.45 42.10% 0.227 16.2% 1.505-4.0% 5.47 42.32% 0.228 16.3% 1.507-2.0% 5.48 42.53% 0.229 16.3% 1.5080.0% 5.50 42.75% 0.230 16.4% 1.5102.0% 5.52 42.96% 0.231 16.4% 1.5114.0% 5.53 43.17% 0.232 16.5% 1.5136.0% 5.55 43.39% 0.233 16.6% 1.514


Canvest: sensitivity analysis of target price and profitability to changes in coal-fired tariffs in 2016 (relative to base case) 2016E 2014-17E 2016E 2016EChange in coal-fired tariff TP NP CAGR EPS ROE-6% -0.9% -0.64ppt -1.33% -0.18ppt-4% -0.6% -0.43ppt -0.89% -0.12ppt-2% -0.3% -0.21ppt -0.44% -0.06ppt0% 0.0% 0.00ppt 0.00% 0.00ppt2% 0.3% 0.21ppt 0.44% 0.06ppt4% 0.6% 0.43ppt 0.89% 0.12ppt6% 0.9% 0.64ppt 1.33% 0.18ppt


Execution risk We think it is worth mentioning that the company may not able to secure FB-MG upgrade projects outside of Guangdong, as there are regionally dominant players in the China WTE market, and SOEs backed by local/central governments are likely to have stronger bargaining power with the local governments in reaching more preferential contract terms, as well as having access to more competitive financing terms to develop their businesses in this capital-intensive industry, and to acquire smaller players. In addition, WTE projects require the government’s EIA approval for the commissioning of construction, which can take a long time. As such, we are unsure as to whether Canvest can secure and successfully execute projects that are not in its familiar region.

29%

0%20%

23%

1%

0%

20%

40%

60%

80%

100%

120%

(600)

(400)

(200)

0

200

400

600

800

2012 2013 2014 2015E 2016E 2017E

(HKDm)

Net debt Net debt to equity (RHS) Comfortable net debt-to-equity level (RHS)

0%10%20%30%40%50%60%70%80%90%

100%110%

Base

cas

e,0t

pd

1,00

0tpd

2,00

0tpd

3,00

0tpd

4,00

0tpd

5,00

0tpd

6,00

0tpd

7,00

0tpd

Comfort level: 100%


- 29 -

Canvest: site visit picture Canvest: site visit picture

Source: Daiwa Source: Daiwa






- 30 -

Management background

Canvest: management profiles

Name Age Position Responsibilities Date of Joining

Date of Appointment Background

Lee Wing Yee Loretta

39 Chairwoman and executive director

Formulate overall strategy and make major corporate and operational decisions

15-Nov-11 28-Jan-14 Ms. Lee served as an officer of the finance and human resource department of Dongguan Sanyang Industrial Development Co., Ltd, from September 1997 to September 2012. The last position she held was manager of the finance and human resources department. The principal business of Dongguan Sanyang Industrial Development Co., Ltd, included the trading of heavy oil. Ms. Lee achieved a higher diploma in Public Administration and Management from City University of Hong Kong in November 1997.

Lai Kin Man 35 Deputy chairman and executive director

Formulate overall strategy and make major corporate and operational decisions alongside chairwoman

19-Jun-03 10-Feb-14 Mr.KM Lai has been a director of Eco-Tech since June 2003 and a director of Kewei since October 2011. Before founding Canvest, he worked at Dongguan Sanyang Industrial Development Co., Ltd, from September 1998 to October 2002, and was responsible for business development. Mr. KM Lai obtained an EMBA degree from South China University of Technology in December 2008.

Yuan Guozhen

48 CEO and executive director

Execute overall strategy and manage daily operations

19-Jun-03 24-Sep-14 Mr. Yuan has been a director of Eco-Tech since June 2003 and a director and general manager of Kewei since October 2011. He served as the executive deputy general manager of Dongguan Sanyang Industrial Development Co., Ltd from September 1995 to July 2004. Mr. Yuan served as general manager of Dongguan Dongcheng Dongxing Thermal Power Company Limited from July 2004 to September 2008. He served as the general manager of Yunnan Shuang Xing Green Energy Company Limited from November 2007 to December 2008. Mr. Yuan obtained an EMBA degree from South China University of Technology in June 2009.

Lai Chun Tung

40 Executive director

Oversee overall strategy and make major corporate and operational decisions

1-Aug-07 24-Sep-14 Mr. CT Lai has worked at Dongguan Sanyang Industrial Development Co., Ltd since September 1997 and is currently its general manager. He has been a director of Dongguan Rural Commercial Bank Co., Ltd, since December 2009. He obtained a higher diploma in Public Administration and Management from City University of Hong Kong in November 1997 and an EMBA degree from South China University of Technology in December 2007. Mr. CT Lai is the husband of Ms. Loretta Lee, and a cousin of Mr. KM Lai.

Song Lanqun 47 Vice-president and chief engineer

Production operation and technology management

17-Feb-04 17-Feb-04 Mr. Song serves as an executive deputy general manager of Eco-Tech and Kewei, and the general manager of Zhanjiang Yuefeng. He was awarded the title of mechanical engineer by the Office of Title Reform Leading Group of Huizhou City in August 1995. Mr. Song worked at Guangdong Guohong Electric Power Co., Ltd. as deputy general manager and chief engineer from February 1997 to February 2004. The principal business of Guangdong Guohong Electric Power Co., Ltd. included electricity generation. He graduated from Hebei College of Technology in July 1989 with a Bachelor degree in thermal power engineering. He obtained a Master’s in internal combustion engineering from the Inner Mongolia College of Technology in July 1992. Mr. Song completed the MBA programme of Huazhong University of Science and Technology in December 2004.

Chen Bo 38 Vice-president and chief engineer

Production operation and technology management

1-Mar-09 1-Mar-09 Mr. Chen joined China Scivest from Kewei in June 2011 as executive deputy general manager and chief engineer. He first joined Eco-Tech as a chief engineer in March 2003. Mr. Chen served as a deputy general manager and chief engineer of Yunnan Shuang Xing Green Energy Company Limited from November 2007 to December 2008. Yunnan Shuang Xing Green Energy Company Limited is a subsidiary of SOE CPNE and its principal business includes the generation and sale of electricity. Mr. Chen worked at Kewei as the deputy general manager and the chief engineer from March 2009 to May 2011. He joined China Scivest in June 2011 to lead the technological upgrade of China Scivest’s WTE Plant. Mr. Chen graduated from Northeast Dianli College in July 2000 with a Bachelor degree in thermal power engineering.

Source: Company

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- 31 -

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- 32 -

Guangdong: annual MSW collected and non-hazardous treatment rate

Source: Guangdong Bureau of Statistics and Euromonitor, Daiwa forecasts

China: annual MSW collected and non-hazardous treatment rate

Source: National Bureau of Statistics and Euromonitor, Daiwa forecasts

According to the 12th Five-Year Plan (2010-15), the Guangdong local government is expected to rank the highest among all provinces in China in terms of MSW treatment investment. As Guangdong has been emphasising environmental protection, Canvest gets to charge a treatment fee of around CNY110/tonne in Dongguan, higher than the CNY70-80/tonne charged by its national peers. Budgeted investment in MSW treatment for the 12th Five-Year Plan by province

Source: State Council

Within Guangdong Province, Dongguan is the second-largest MSW-collecting city and accounted for 20.3% of Guangdong’s total in 2011, while Zhanjiang accounted for 1.5% over the same period. Annual MSW collected and transported in Guangdong by city

Source: Bureau of Statistics of Guangdong and Euromonitor

Dongguan is famous for making electronics products, light industrial products and general manufacturing. As such, waste from Dongguan city has obvious characteristics, such as high volumes of rubber, plastic, and paper products. The combustion heat value of around 5,190-7,800kJ/kg (depending on the season and humidity level) is around 30-100% higher than the average level of 4,000-5,000kJ/kg of China. Canvest has high project concentration in Dongguan, and two-thirds (once Eco-Tech resumes operations in 3Q15) of Canvest’s capacity in Dongguan is operated under a BOO model, with no guaranteed level of MSW supply. We are not concerned about any potential shortfall in solid waste supply. While 94% of Eco-Tech’s previous designed capacity was under long-term offtake contracts with local authorities, Kewei has entered into similar contracts with third parties, and is expected to fulfil these contracts, contributing to revenue (offsetting the impact of the temporary closure of Eco-Tech).

50%

60%

70%

80%

90%

100%

0

5

10

15

20

25

30

35

2009

2010

2011

2012

2013

2014

E

2015

E

2016

E

2017

E

2018

E

Annual MSW collected in Guangdong (LHS)

Non-hazardous treatment rate in Guangdong (RHS)

(m tonnes)

50%

60%

70%

80%

90%

100%

0

50

100

150

200

250

300

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2010

2011

2012

2013

2014

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2017

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Annual MSW collected in China (LHS)

Non-hazardous treatment rate in China (RHS)

(m tonnes)

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20

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(CNY bn)

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- 33 -

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- 34 -

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- 35 -

Appendix 3: BOT and BOO models

The most common business models adopted by local governments to run WTE plant projects are the BOT/TOT (transfer-operate-transfer) models. Under the TOT model, the owner of a project (usually the government) transfers the operating rights of an already-built project to a WTE company for a negotiated contract price. The company then operates and manages the project for the duration of the contract period (usually 20-30 years), and transfers the project back to the owner upon the expiration of the contract. Under the BOT model, the WTE company is also responsible for the construction of the project, and is therefore entitled to both construction income and operating income. The contract period for a BOT project is also usually 20-30 years. For BT (build-transfer) projects, the WTE company mainly provides construction services and builds WTE facilities for local governments. It then receives a lump-sum payment following construction completion, but generates no sustainable operational revenue. Comparison of BOT, TOT and BT projects BOT BOO TOT BT Greenfield/existing project

Greenfield Greenfield Existing Greenfield

Contract period 20-30 years n.a 20-30 years 1-3 years Construction income

Yes No No Yes

Operation income Yes Yes Yes No Capex Construction

cost Construction cost

Contract consideration

Construction cost

Payback period 7-10 years 5-6 years 7-10 years 3 years Pros - 20-30 year

stable cash stream - Contract allows for cost pass-through - Minimum water intake guarantee (for WWT)

- Shorter payback period - Shorter receivable days

- 20-30 year stable cash stream - Contract allows for cost pass-through - Minimum water intake guarantee (for WWT)

- Shorter payback period

Cons - Longer payback period

- No guarantee of long-term cash stream - No guarantee for minimum water intake

- Longer payback period - Creditworthiness and political risk of local government

- No sustainable cash flow - Financial capability of local government - Lower gross-profit margin of 5-15%

Source: Daiwa

The IFRIC 12 Service Concession Arrangements is the accounting standard that governs the revenue recognition of BOT/TOT projects. This accounting treatment divides project cash flow streams into 3 types of revenue:

1) Construction revenue is recognised during the construction period of the project at the fair value of the construction services, based on construction progress. Accounts receivable are recognised on the balance sheet as financial assets instead of fixed assets, and are deducted from future cash payments received. Construction revenue is the major reason for erratic earnings as it boosts accounting earnings without actual cash inflow.

2) Finance income is recognised during the operation period and can be seen as interest income on financial assets recognised, based on incremental borrowing costs. This is essentially an allocation of operating income.

3) Operating income is recognised as operating income during the operation period by stripping out: 1) allocated construction revenue for the year, and 2) finance income, from the cash received.

Due to the accounting recognition and one-off nature of construction revenue, earnings for water companies can be quite erratic. Construction services yield a lower gross margin of around 15-25%, while that for operating services can be 30-50%; and this leads to margin volatility for water companies. Worth noting is that cash outflows for construction are recognised as part of operating cash flow instead of capex in investment cash flow; therefore, WTE companies tend to have negative operating cash flows during the capacity expansion phase.


- 36 -

Accounting treatment for BOT projects

Build (1-2 years) Operate (20-30 years) Transfer

Impact on income statement:

• Construction revenue recognised based on construction progress

Impact on balance sheet: • Accounts receivable for

construction services are partially recognised as financial assets (instead of fixed assets), usually termed “gross amount due from customers for contract work”, and the rest is recognised as “intangible asset”

Impact on cash-flow statement:

• Cash outflow for construction services is recognised as operating cash flow instead of capex


• Finance income recognised – the interest income on the financial assets realised during construction period

• Operating income recognised – stripping out construction revenue and finance income, the remaining estimated future cash flow is recognised as operating income over the concession period

Impact on balance sheet:

• The financial assets (accounts receivable) recognised as reduced against payments received


• Cash payments for operation services are recognised as operating cash flow


• No impact Impact on balance sheet:

• The financial assets should be reduced to zero during the concession period; no more accounts receivable


• No impact

Source: Daiwa

Example of how IFRIC 12 vs. traditional accounting standard applied to a BOT project


General BOT project management process

Source: Companies, Daiwa

(6)(4)(2)

02468

1012

Year

1Ye

ar 2

Year

3Ye

ar 4

Year

5Ye

ar 6

Year

7Ye

ar 8

Year

9Ye

ar 1

0Ye

ar 1

1Ye

ar 1

2Ye

ar 1

3Ye

ar 1

4Ye

ar 1

5Ye

ar 1

6Ye

ar 1

7Ye

ar 1

8Ye

ar 1

9Ye

ar 2

0Ye

ar 2

1Ye

ar 2

2Ye

ar 2

3Ye

ar 2

4Ye

ar 2

5Ye

ar 2

6Ye

ar 2

7

(CNYm)

Net income (under IFRIC 12) Net income (before IFRIC 12)

Project selection

Project planning

Tender process; project agreement

negotiation

Signing the project agreements

Design planning and obtaining government

approvals

Testing, inspection and trial operation

Operation and maintenance during concession period

Transfer to the government

8-20 months

Procurement and construction

25-30 years15-30 days6-9 months30 days


- 37 -

Appendix 4: IFRIC 12 accounting for a WTE project

Example of a WTE project (2-year construction and 30-year operation BOT project) Assumption Construction period (Years) 2Operation period (Years) 30Unit capex (CNY/tonne) 510,000Designed capacity (tpd) 1,000Guaranteed waste amount (%) 45%Moisture rate (%) 25%Waste treatment fee (CNY/ton) 75On-grid tariff - less than 280 kWh/tonne (CNY/kWh) 0.65On-grid tariff - the rest (CNY/kWh) 0.51Average Annual power generation (GWh) 167 Debt to capital (%) 70%Finance cost (%) 6.5%Payment period (Years) 15Operating days per year (Days) 330Tax rate (%) 25% Under IFRIC12 Construction revenue margin (%) 18%Operating revenue margin (%) 60%Imputed interest rate (%) 3.2% Equity IRR (%) 12.4%

(CNYm) Construction Operation

Profit and Loss (IFRIC 12) Year 1 Year 2 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 …… Year 25 Year 26 Year 27 Year 28 Year 29 Year 30Construction revenue 311 311 - - - - - - - - …… - - - - - -Operation revenue - - 50 61 72 78 83 89 89 89 …… 95 95 95 96 96 96 Waste treatment fee - - 3 6 10 12 14 16 16 16 …… 22 22 22 22 23 23 Sale of electricity - - 48 55 62 66 69 73 73 73 …… 73 73 73 73 73 73 Finance income 2 7 9 9 9 8 8 8 7 7 …… 2 2 1 1 1 0 Total revenue 313 318 60 70 81 86 91 96 96 96 …… 96 96 96 96 96 96 Construction cost (255) (255) - - - - - - - - …… - - - - - -Operation cost - - (20) (24) (29) (31) (33) (36) (36) (36) …… (38) (38) (38) (38) (38) (38)COGS (255) (255) (20) (24) (29) (31) (33) (36) (36) (36) …… (38) (38) (38) (38) (38) (38)Gross profit 58 63 39 46 52 55 58 61 61 61 …… 59 58 58 58 58 58 Amortization - - (6) (6) (6) (6) (6) (6) (6) (6) …… (6) (6) (6) (6) (6) (6)Interest expense - - (22) (21) (19) (18) (16) (15) (13) (12) …… 0 0 0 0 0 0 PBT 58 63 11 19 27 31 36 40 42 43 …… 53 53 53 52 52 52 Income tax (15) (16) - - - (4) (4) (5) (10) (11) …… (13) (13) (13) (13) (13) (13)Net income 44 47 11 19 27 27 31 35 31 32 …… 40 39 39 39 39 39 Operation data Year 1 Year 2 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 …… Year 25 Year 26 Year 27 Year 28 Year 29 Year 30Waste treatment amount - wet (kilo tonnes) - - 286 330 374 396 418 440 440 440 …… 440 440 440 440 440 440 Waste treatment fee received (CNYm) - - 21 25 28 30 31 33 33 33 …… 33 33 33 33 33 33 (capacity utilisation) (%) - - 65% 75% 85% 90% 95% 100% 100% 100% …… 100% 100% 100% 100% 100% 100%On-grid electricity generated (GWh) - - 92 106 120 127 135 142 142 142 …… 142 142 142 142 142 142 (Sales to generation ratio) (%) - - 85% 85% 85% 85% 85% 85% 85% 85% …… 85% 85% 85% 85% 85% 85% (Per unit wet waste on-grid generation) (kWh/tonne) 322 322 322 322 322 322 322 322 …… 322 322 322 322 322 322 On-grid electricity sales (CNYm) - - 48 55 62 66 69 73 73 73 …… 73 73 73 73 73 73


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BS (IFRIC 12) Year 1 Year 2 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 …… Year 25 Year 26 Year 27 Year 28 Year 29 Year 30Debt schedule ……Beginning balance - 179 357 333 309 286 262 238 214 190 …… - - - - - - - Borrowing 179 179 …… - Repayment - - (24) (24) (24) (24) (24) (24) (24) (24) …… - - - - - -Ending balance 179 357 333 309 286 262 238 214 190 167 …… - - - - - - Financial assets Beginning balance - 142 289 279 270 260 250 241 231 221 …… 58 48 39 29 19 10 Addition 140 140 …… Guaranteed waste treatment revenue - - (15) (15) (15) (15) (15) (15) (15) (15) …… (15) (15) (15) (15) (15) (15) Recognized operation revenue - - (4) (4) (3) (3) (3) (2) (2) (2) …… 3 4 4 4 5 5 Finance income 2 7 9 9 9 8 8 8 7 7 …… 2 2 1 1 1 0 Ending balance 142 289 279 270 260 250 241 231 221 212 …… 48 39 29 19 10 0 Change to financial asset 142 147 (10) (10) (10) (10) (10) (10) (10) (10) …… (10) (10) (10) (10) (10) (10) (recognizable cash revenue portion) 35% Intangible assets Beginning balance - 82 176 170 164 159 153 147 141 135 …… 35 29 23 18 12 6 Addition 77 77 …… Capitalized borrowing cost 6 17 …… Amortization - - (6) (6) (6) (6) (6) (6) (6) (6) …… (6) (6) (6) (6) (6) (6)Ending balance 82 176 170 164 159 153 147 141 135 129 …… 29 23 18 12 6 (0) CF (IFRIC 12) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 25 Year 26 Year 27 Year 28 Year 29 Year 30Cash receipt - - 69 80 90 96 101 106 106 106 …… 106 106 106 106 106 106 Construction cost (255) (255) - - - - - - - - …… - - - - - -Debt financing 179 179 - - - - - - - - …… - - - - - -Debt repayment - - (24) (24) (24) (24) (24) (24) (24) (24) …… - - - - - -Operating cost - - (20) (24) (29) (31) (33) (36) (36) (36) …… (38) (38) (38) (38) (38) (38)Tax expenses (15) (16) - - - (4) (4) (5) (10) (11) …… (13) (13) (13) (13) (13) (13)Interest expenses - - (22) (21) (19) (18) (16) (15) (13) (12) …… 0 0 0 0 0 0 Net cash flow (91) (92) 3 11 18 19 23 27 23 24 …… 55 55 55 55 55 55

Source: Daiwa


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Appendix 5: IRR analysis (MG: 1,000ktpd capacity)

WTE IRR: MG: 1,000ktpd (2 years construction + 30 years operation) Assumptions Construction period (Years) 2Operation period (Years) 30Unit capex (CNY/tonne) 540,000Designed capacity (tpd) 1,000 Moisture rate (%) 25%Waste treatment fee (CNY/ton) 75On-grid tariff - less than 280 kWh/tonne (CNY/kWh) 0.65On-grid tariff - the rest (CNY/kWh) 0.51Average Annual power generation (GWh) 167 Debt to capital (%) 70%Finance cost (%) 6.0%Payment period (Years) 15Operating days per year (Days) 330Tax rate (%) 25%Total investment (CNYm) 540

(CNYm) Construction Operation PL: MG – 1,000ktpd Year 1 Year 2 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 … Year 29 Year 30 Waste treatment fee 21 23 25 26 28 30 31 31 31 31 … 31 31 Sale of electricity 58 63 67 72 76 81 85 85 85 85 … 85 85 Total revenue 80 86 92 98 104 110 116 116 116 116 … 116 116 Operating cost (43) (45) (47) (48) (50) (52) (54) (54) (54) (54) … (54) (54) Coal - - - - - - - - - - … - - Fuel (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) … (0) (0) Maintenance cost (6) (7) (7) (8) (8) (9) (9) (9) (9) (9) … (9) (9) Depreciation and amortisation (19) (19) (19) (19) (19) (19) (19) (19) (19) (19) … (19) (19) Employee benefit expenses (7) (8) (8) (9) (9) (10) (11) (11) (11) (11) … (11) (11) Environmental protection expenses (10) (11) (12) (13) (14) (14) (15) (15) (15) (15) … (15) (15)

EBIT 37 41 45 50 54 58 62 62 62 62 … 62 62 EBIT margin 46% 48% 49% 51% 52% 53% 54% 54% 54% 54% … 54% 54%

…Interest expense (22) (20) (19) (17) (16) (14) (13) (11) (10) (8) … - -PBT 15 21 26 32 38 44 50 51 53 54 … 62 62 Income tax - - - (4) (5) (5) (12) (13) (13) (14) … (16) (16)Net income 15 21 26 28 33 38 37 38 39 41 … 47 47 Net margin 19% 24% 29% 29% 32% 35% 32% 33% 34% 35% … 40% 40%

PBT 15 21 26 32 38 44 50 51 53 54 … 62 62 +Depre 19 19 19 19 19 19 19 19 19 19 … 19 19 -Tax - - - (4) (5) (5) (12) (13) (13) (14) … (16) (16)+interest expense 22 20 19 17 16 14 13 11 10 8 … - -Capex (270) (270) - - - - - - - - - - … - -FCF-Project (270) (270) 56 60 64 64 68 71 69 68 68 68 … 66 66 -interest expense (22) (20) (19) (17) (16) (14) (13) (11) (10) (8) … - --Debt repayment (25) (25) (25) (25) (25) (25) (25) (25) (25) (25) … - -FCF-Equity (81) (81) 8 14 20 22 27 32 31 32 33 34 … 66 66

Project IRR 10.9% Equity IRR 15.9%


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Operation data Year 1 Year 2 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 29 Year 30

Waste treatment amount - wet (kilo tonnes) - - 286 308 330 352 374 396 418 418 418 418 … 418 418 Waste treatment fee received (CNYm) - - 21 23 25 26 28 30 31 31 31 31 … 31 31 (capacity utilisation) (%) - - 65% 70% 75% 80% 85% 90% 95% 95% 95% 95% … 95% 95%On-grid electricity generated (GWh) - - 92 99 106 113 120 127 135 135 135 135 … 135 135 (sales to generation ratio) (%) - - 85% 85% 85% 85% 85% 85% 85% 85% 85% 85% … 85% 85% (Per unit wet waste on-grid generation) (kWh/tonne) 322 322 322 322 322 322 322 322 322 322 … 322 322 On-grid electricity sales (CNYm) - - 58 63 67 72 76 81 85 85 85 85 … 85 85 BS Year 1 Year 2 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 29 Year 30Debt schedule - - 286 308 330 352 374 396 418 418 418 418 Beginning balance - - 21 23 25 26 28 30 31 31 31 31 … - - - Borrowing - - 65% 70% 75% 80% 85% 90% 95% 95% 95% 95% - Repayment - - 92 99 106 113 120 127 135 135 135 135 … - -Ending balance - - 85% 85% 85% 85% 85% 85% 85% 85% 85% 85% … - -Interest expense 322 322 322 322 322 322 322 322 322 322 Capitalized borrowing cost - - 58 63 67 72 76 81 85 85 85 85

Source: Daiwa


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Appendix 6: IRR analysis (MG: 1,500ktpd capacity)

WTE IRR: MG: 1,500ktpd (2 years construction + 30 years operation) Assumptions Construction period (Years) 2Operation period (Years) 30Unit capex (CNY/tonne) 530,000Designed capacity (tpd) 1,500 Moisture rate (%) 25%Waste treatment fee (CNY/ton) 75On-grid tariff - less than 280 kWh/tonne (CNY/kWh) 0.65On-grid tariff - the rest (CNY/kWh) 0.51Average Annual power generation (GWh) 250 Debt to capital (%) 70%Finance cost (%) 6.0%Payment period (Years) 15Operating days per year (Days) 330Tax rate (%) 25%Total investment (CNYm) 795

(CNYm) Construction Operation PL: MG – 1,500ktpd Year 1 Year 2 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 … Year 29 Year 30 Waste treatment fee 32 35 37 40 42 45 47 47 47 47 … 47 47 Sale of electricity 87 94 101 107 114 121 128 128 128 128 … 128 128 Total revenue 119 129 138 147 156 165 175 175 175 175 … 175 175 Cost (60) (62) (65) (67) (70) (72) (75) (75) (75) (75) … (75) (75) Coal - - - - - - - - - - … - - Fuel (0) (0) (0) (0) (0) (0) (1) (1) (1) (1) … (1) (1) Maintenance cost (8) (9) (10) (10) (11) (12) (12) (12) (12) (12) … (12) (12) Depreciation and amortisation (28) (28) (28) (28) (28) (28) (28) (28) (28) (28) … (28) (28) Employee benefit expenses (10) (10) (11) (12) (13) (13) (14) (14) (14) (14) … (14) (14) Environmental protection expenses (14) (15) (16) (17) (18) (19) (20) (20) (20) (20) … (20) (20)

EBIT 60 66 73 80 86 93 100 100 100 100 … 100 100 EBIT margin 50% 52% 53% 54% 55% 56% 57% 57% 57% 57% … 57% 57%

…Interest expense (32) (30) (28) (26) (23) (21) (19) (17) (14) (12) … - -PBT 27 36 45 54 63 72 81 83 85 88 … 100 100 Income tax - - - (7) (8) (9) (20) (21) (21) (22) … (25) (25)Net income 27 36 45 47 55 63 61 62 64 66 … 75 75 Net margin 23% 28% 33% 32% 35% 38% 35% 36% 37% 38% … 43% 43%

PBT 27 36 45 54 63 72 81 83 85 88 … 100 100 +Depre 28 28 28 28 28 28 28 28 28 28 … 28 28 -Tax - - - (7) (8) (9) (20) (21) (21) (22) … (25) (25)+interest expense 32 30 28 26 23 21 19 17 14 12 … - -Capex (398) (398) - - - - - - - - - - … - -FCF-Project (398) (398) 87 94 101 101 106 112 107 107 106 106 … 103 103 -interest expense (32) (30) (28) (26) (23) (21) (19) (17) (14) (12) … - --Debt repayment (37) (37) (37) (37) (37) (37) (37) (37) (37) (37) … - -FCF-Equity (119) (119) 18 27 36 38 46 54 51 53 55 56 … 103 103 Project IRR 11.6% Equity IRR 17.4%


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Waste treatment amount - wet (kilo tonnes) - - 429 462 495 528 561 594 627 627 627 627 … 627 627 Waste treatment fee received (CNYm) - - 32 35 37 40 42 45 47 47 47 47 … 47 47 (capacity utilisation) (%) - - 65% 70% 75% 80% 85% 90% 95% 95% 95% 95% … 95% 95%On-grid electricity generated (GWh) - - 138 149 159 170 181 191 202 202 202 202 … 202 202 (sales to generation ratio) (%) - - 85% 85% 85% 85% 85% 85% 85% 85% 85% 85% … 85% 85% (Per unit wet waste on-grid generation) (kWh/tonne) 322 322 322 322 322 322 322 322 322 322 … 322 322 On-grid electricity sales (CNYm) - - 87 94 101 107 114 121 128 128 128 128 … 128 128 BS Year 1 Year 2 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 29 Year 30Debt schedule Beginning balance - 278 557 519 482 445 408 371 334 297 260 223 … - - - Borrowing 278 278 - Repayment - - (37) (37) (37) (37) (37) (37) (37) (37) (37) (37) … - -Ending balance 278 557 519 482 445 408 371 334 297 260 223 186 … - -Interest expense (8) (25) (32) (30) (28) (26) (23) (21) (19) (17) (14) (12) …Capitalised borrowing cost 8 25

Source: Daiwa


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Appendix 7: IRR analysis (FB: 1,000ktpd capacity)

WTE IRR: FB: 1,000ktpd (2 years construction + 30 years operation) Assumptions Construction period (Years) 2Operation period (Years) 30Unit capex (CNY/tonne) 360,000Designed capacity (tpd) 1,000 Moisture rate (%) 25%Waste treatment fee (CNY/ton) 75On-grid tariff - less than 280 kWh/tonne (CNY/kWh) 0.65On-grid tariff - the rest (CNY/kWh) 0.51Average Annual power generation (GWh) 194 Debt to capital (%) 70%Finance cost (%) 6.0%Payment period (Years) 15Operating days per year (Days) 270Tax rate (%) 25%Total investment (CNYm) 360

(CNYm) Construction Operation PL: FB – 1,000ktpd Year 1 Year 2 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 … Year 29 Year 30 Waste treatment fee 18 19 20 22 23 24 26 26 26 26 … 26 26 Sale of electricity 54 59 63 67 71 75 79 79 79 79 … 79 79 Total revenue 72 77 83 88 94 100 105 105 105 105 … 105 105 Cost (61) (64) (68) (72) (76) (79) (83) (83) (83) (83) … (83) (83)Coal (19) (20) (22) (23) (25) (26) (28) (28) (28) (28) … (28) (28)Fuel (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) … (0) (0)Maintenance cost (6) (7) (7) (8) (8) (9) (9) (9) (9) (9) … (9) (9)Depreciation and amortisation (13) (13) (13) (13) (13) (13) (13) (13) (13) (13) … (13) (13)Employee benefit expenses (12) (13) (14) (15) (16) (16) (17) (17) (17) (17) … (17) (17)Environmental protection expenses (11) (12) (12) (13) (14) (15) (16) (16) (16) (16) … (16) (16)

EBIT 11 13 15 17 18 20 22 22 22 22 … 22 22 EBIT margin 15% 17% 18% 19% 20% 20% 21% 21% 21% 21% … 21% 21%

…Interest expense (15) (14) (13) (12) (11) (10) (9) (8) (7) (6) … - -PBT (3) (1) 2 5 8 11 13 14 15 16 … 22 22 Income tax - - - (1) (1) (1) (3) (4) (4) (4) … (6) (6)Net income (3) (1) 2 4 7 9 10 11 12 12 … 17 17 Net margin -5% -1% 3% 5% 7% 9% 10% 10% 11% 12% … 16% 16%

PBT (3) (1) 2 5 8 11 13 14 15 16 … 22 22 +Depre 13 13 13 13 13 13 13 13 13 13 … 13 13 -Tax - - - (1) (1) (1) (3) (4) (4) (4) … (6) (6)+interest expense 15 14 13 12 11 10 9 8 7 6 … - -Capex (180) (180) - - - - - - - - - - … - -FCF-Project (180) (180) 24 25 27 28 30 31 31 31 31 30 … 29 29 -interest expense (15) (14) (13) (12) (11) (10) (9) (8) (7) (6) … - --Debt repayment (17) (17) (17) (17) (17) (17) (17) (17) (17) (17) … - -FCF-Equity (54) (54) (8) (5) (2) 0 3 5 6 7 7 8 … 29 29

Project IRR 6.6% Equity IRR 7.6%


- 44 -


Waste treatment amount - wet (kilo tonnes) - - 234 252 270 288 306 324 342 342 342 342 342 342 Waste treatment fee received (CNYm) - - 18 19 20 22 23 24 26 26 26 26 26 26 (capacity utilisation) (%) - - 65% 70% 75% 80% 85% 90% 95% 95% 95% 95% 95% 95%On-grid electricity generated (GWh) - - 88 95 102 109 116 122 129 129 129 129 129 129 (sales to generation ratio) (%) - - 70% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70% (Per unit wet waste on-grid generation) (kWh/tonne) 378 378 378 378 378 378 378 378 378 378 378 378 On-grid electricity sales (CNYm) - - 54 59 63 67 71 75 79 79 79 79 79 79

BS Year 1 Year 2 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 29 Year 30Debt schedule Beginning balance - 126 252 235 218 202 185 168 151 134 118 101 … - - - Borrowing 126 126 - Repayment - - (17) (17) (17) (17) (17) (17) (17) (17) (17) (17) … - -Ending balance 126 252 235 218 202 185 168 151 134 118 101 84 … - -Interest expense (4) (11) (15) (14) (13) (12) (11) (10) (9) (8) (7) (6) …Capitalised borrowing cost 4 11

Source: Daiwa


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Appendix 8: IRR analysis (Upgrade: 1,000ktpd capacity, assuming no acquisition premium)

WTE IRR: Upgrade: 1,000ktpd (2 years construction + 30 years operation) Assumptions Construction period (Years) 1Operation period (Years) 30Unit capex (CNY/tonne) 230,000Designed capacity (tpd) 1,000 Moisture rate (%) 25%Waste treatment fee (CNY/tonne) 75On-grid tariff - less than 280 KWh/tonne (CNY/KWh) 0.65On-grid tariff - the rest (CNY/KWh) 0.51Average Annual power generation (GWh) 167 Debt to capital (%) 70%Finance cost (%) 6.0%Payment period (Years) 15Operating days per year (Days) 330Tax rate (%) 25%Total investment (CNYm) 230

(CNYm) Construction Operation Profit and Loss Year 1 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 … Year 29 Year 30 FCF from MG – 1,000ktpd 56 60 64 64 68 71 69 68 68 68 … 66 66

… FCF from FB – 1,000ktpd 24 25 27 28 30 31 31 31 31 30 … 29 29

…Additional FCF (230) 32 34 37 36 38 40 38 38 37 37 … 37 37 -interest expense - - - (4) (5) (5) (9) (9) (9) (9) … (9) (9)-Debt repayment (9) (9) (8) (7) (7) (6) (5) (5) (4) (4) … - -FCF-Equity (11) (11) (11) (11) (11) (11) (11) (11) (11) (11) … - -

Project IRR 15.5% Equity IRR 21.9% BS Year 1 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 … Year 29 Year 30Debt schedule Beginning balance - (161) (150) (140) (129) (118) (107) (97) (86) (75) (64) … - Borrowing (161) … - Repayment - 11 11 11 11 11 11 11 11 11 11 …Ending balance (161) (150) (140) (129) (118) (107) (97) (86) (75) (64) (54) …Interest expense 5 9 9 8 7 7 6 5 5 4 4 …Capitalised borrowing cost (5)

Source: Daiwa


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Daiwa’s Asia Pacific Research Directory

HONG KONG

Takashi FUJIKURA (852) 2848 4051 [email protected] Regional Research Head

Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273

[email protected]

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected] Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional); Banking; Insurance (Taiwan)

Junjie TANG (852) 2773 8736 [email protected] Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong/China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 [email protected] Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected] Gaming and Leisure (Hong Kong/China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected]

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Becky HAN (852) 2848 4464 [email protected] Small/Mid Cap (Regional)

Joey CHEN (852) 2848 4483 [email protected] Steel (China)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong/China); Transportation (Regional)

Brian LAM (852) 2532 4341 [email protected] Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering (China)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES

Bianca SOLEMA (63) 2 737 3023 [email protected] Utilities and Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected] Banking; Capital Goods (Construction and Machinery)

Iris PARK (82) 2 787 9165 [email protected] Consumer/Retail

Jun Yong BANG (82) 2 787 9168 [email protected] Oil; Chemicals; Tyres

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)

Steven TSENG (886) 2 8758 6252 [email protected] IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

Helen CHIEN (886) 2 8758 6254 [email protected] Small/Mid Cap

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods

David LUM (65) 6329 2102 [email protected] Property and REITs

Evon TAN (65) 6499 6546 [email protected] Property and REITs

Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)


- 47 -

Daiwa’s Offices

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Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, OUE Downtown 2, Singapore 068809, Republic of Singapore

(65) 6220 3666 (65) 6223 6198

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, Seoul, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District， Beijing 100020, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai China 200120 , People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand

(66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

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Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship

Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Rexlot Holdings Ltd (555 HK); Neo Solar Power Corp (3576_TT); Accordia Golf Trust (AGT SP); Hua Hong Semiconductor Ltd (1347 HK).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. Thailand

This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).

This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. While the information is from sources believed to be reliable, neither the information nor the forecasts shall be taken as a representation or warranty for which Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees incur any responsibility. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any


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direct or consequential loss arising from any use of this research or its contents.

The information and opinions contained herein have been compiled or arrived at from sources believed reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.

Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research. United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain

This research material is distributed by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.

"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings

Rating Percentage of total

Buy* 61.0% Hold** 26.1% Sell*** 12.9%

Source: Daiwa

Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2015. * comprised of Daiwa’s Buy and Outperform ratings.


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** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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