Environmental Protection and Renewable Energy:Overall neutral impact of the outbreak of novel coronavirus

12 Feb, 2020 14:23
source: ZTResearch

Author: 周健鋒

Overall neutral impact of the outbreak of novel coronavirus

Outbreak of novel coronavirus will affect the short-term demand of industrial and commercial sectors

The outbreak of novel coronavirus leads to the recent suspension of work and production in Mainland China, and some areas and cities are under lockdown. This results in the short-term slowdown in industrial and commercial activities. We reckon this will affect the demand for environmental protection and renewable energy services, such as natural gas, environmental protection for industries, and hazardous waste treatment, in Q1 this year. The situation in Q2 depends on the development of epidemics and government measures.

Natural gas industry is subject to larger impact in the near term

China’s natural gas demand mainly comes from industrial and commercial users, not residential users. We therefore believe the natural gas industry will be subject to relatively more impact of the novel coronavirus in the near term. According to the latest interim results of natural gas distributors which are listed companies at the Hong Kong Stock Exchange, industrial and commercial users accounted for more than 50.0% of total natural gas retail sales for companies. For example, the respective ratios of China Gas (384 HK; not rated), Towngas China (1083 HK; not rated), China Resources Gas (1193 HK; not rated), Tian Lun Gas (1600 HK; Buy; TP: HKD11.15), and ENN Energy (2688 HK; not rated) are 69.0%, 74.0%, 70.1%, 54.2% and 74.6%. According to the ratio distribution, ENN Energy is the most affected; and Tian Lun Gas is the least affected.

Overall impact on the environmental protection and renewable energy sector: Neutral

Nonetheless, more environmental protection and renewable energy services still originate from the needs of residents, such as tap water supply and solid waste treatment. The outbreak of novel coronavirus exerts limited impact on the related industry. In some areas under lockdown, there may be a temporary surge in demand for services by residential users. We therefore believe the overall impact on the environmental protection and renewable energy sector is neutral.

Investment top picks: China Water Affairs (855 HK), Canvest Environmental (1381 HK)

Our top picks include:(1) China Water Affairs (855 HK; Buy; TP: HKD10.50), (2) Canvest Environmental (1381 HK; Buy; TP: HKD5.15). China Water Affairs focuses on urban water supply and residential users account for around 45.0% of the company’s total water supply volume, so it is less affected by the outbreak of coronavirus. Canvest Environmental is a WTE provider focusing on the development, management and operation of WTE projects. It processes waste which largely comes from urban households, so it is basically not affected by the epidemic.