The environmental protection industry refers to the general term for technological product development, commercial circulation, resource utilization, information services, project contracting and other activities in the national economic structure for the purpose of preventing and controlling environmental pollution, improving the ecological environment, and protecting natural resources. The upstream of the environmental protection industry industrial chain is mainly steel, nonferrous metals, power, chemical, electronic components and other industries. These industries provide raw materials for the production and engineering implementation of products in the environmental protection industry, and their price fluctuations directly affect the cost of the environmental protection industry. The downstream mainly includes municipal and industrial pollution industries such as steel, electricity, cement, metallurgy, and chemical industry. The government department is an important demand side of environmental protection governance. This is because the environmental protection industry has strong public welfare attributes, and its demand changes largely depend on industrial policies.
Environmental analysis credit analysis framework. We set up an analytical framework for the issuers of environmental debt from the basic situation and financial situation. In terms of basic conditions, we mainly focus on the impact of changes in the company's technology level, industrial chain integration, business model, and related industrial policies; on the financial situation, we focus on the capital structure, profitability, and debt repayment of debt-issuing companies. Ability, cash flow and financial flexibility, focusing on the cash flow of environmentally friendly companies.
Screening and analysis of environmental debt issuers. Based on the business scope, main products and business, we have selected 55 environmental protection bond issuers. According to the analysis, it can be seen that the debt-to-equity environmental protection companies have increased their asset-liability ratio in recent years, and their revenue and net profit have declined. Since 18 years, the ROIC of most environmental protection companies has declined, and the ROIC of individual companies has even been negative, and there are certain problems in corporate governance. From the perspective of financial flexibility, the external financing capacity of the sample companies has declined, and the cash flow gap is greater than the net cash inflow of financing activities. The companies still face greater refinancing pressure.
Environmental protection companies have a cash flow gap. In recent years, the cash flow of operating activities of the environmental protection industry has weakened, especially in the third quarter of 2018, and the decline has been more obvious. In terms of investment activities, the typical characteristic of the environmental protection industry is that the cash flow of investment activities is relatively large. In addition to the capital occupation under the PPP model, a big reason is that the environmental protection industry mostly involves the upgrading of production equipment, the construction and installation of governance facilities and equipment, etc. The initial investment scale is large, so the investment cash flow continues to be negative. Due to its long natural operating cycle and slow cash withdrawal, the cash outflows from overlapping investment activities have caused a serious cash flow gap for environmental protection companies.
Selection of environmental debt issuers. After analysis, we screened five environmentally friendly companies with a higher comprehensive ranking. Among them, Longjing Environmental Protection had a higher ROIC in the third quarter of 2018, reflecting a better corporate governance level; companies such as China Resources Capital and the Environment had a higher ROE in the third quarter of 2018 , The company's profitability is high; Longjing Environmental Protection in the third quarter of 2018 the highest value of EBITDA / interest-bearing debt.
Risk reminders: 1. Pay attention to the adverse impact of the advancement of environmental protection policies, changes in policies such as refinancing, etc., on the credit qualifications of relevant entities. 2. The negative impact of the concentrated outbreak of environmental protection industry on the industry.
I. Overview of the environmental protection industry
In 2018, in the context of deleveraging and tight credit, the bond financing environment became tighter, and environmental protection companies such as Shenwu Environmental Protection, Kaidi Ecology, Shengyun Environmental Protection and other environmental protection companies successively defaulted, which attracted great attention from investors. This article conducts an in-depth analysis of the environmental protection industry, and sorts out relevant issuers by setting up an environmental debt credit analysis framework for investors' reference.
1. Bird's eye view of the environmental protection industry
1.1. What is the environmental protection industry
The environmental protection industry refers to the general term for technological product development, commercial circulation, resource utilization, information services, project contracting and other activities in the national economic structure for the purpose of preventing and controlling environmental pollution, improving the ecological environment, and protecting natural resources.
Environmental protection industry has narrow and broad sense. In a narrow sense, the environmental protection industry refers to the industry that provides equipment and services for environmental pollution control and emission reduction, pollution clean-up, and waste treatment. It is the end of the "three wastes" (waste water, waste gas, solid waste) that are emitted during the production process. Comprehensive governance. The environmental protection industry in the broad sense not only covers the narrow sense, but also includes clean production technology and clean products in the product production process, which is also the future development direction of the environmental protection industry.
1.2. Classification of environmental protection industry
According to the classification of products and services, the environmental protection industry can be divided into water pollution control, air pollution control, solid waste management, and soil remediation. Water pollution treatment refers to the use of certain technical methods to separate the pollutants contained in sewage or convert them into harmless substances, so that the sewage is purified, or further reused to meet water standards; air pollution treatment is divided into desulfurization and denitration And dust removal, the industry's policy is clearly oriented, industrial structure adjustment, and the release of market demand all rely on the promotion of policies; solid waste can be divided into industrial solid waste, domestic garbage and hazardous waste, the latter amount of which accounts for a small proportion; soil Remediation refers to the use of physical, chemical, and biological methods to transfer, absorb, degrade, and transform pollutants in the soil, reduce their concentrations to acceptable levels, or convert toxic and harmful pollutants into harmless substances. Water pollution control, air pollution control, and solid waste control dominate the environmental protection industry.
Divided by industry chain, the narrowly defined environmental protection industry industrial chain can be roughly divided into: upstream environmental protection product production, midstream environmental protection engineering, and downstream environmental protection operations; according to business model classification, the environmental protection industry can be divided into engineering income and investment belts brought by investment. Project income from operating income or technical services.
1.3. Industrial chain of environmental protection industry
In the broad sense of the environmental protection industry industrial chain, its upstream is mainly steel, nonferrous metals, power, chemical, electronic components and other industries. These industries provide raw materials for the production and engineering implementation of environmental protection industry products, and their price fluctuations directly affect the cost of the environmental protection industry, which in turn affects the profits of the environmental protection industry's sub-sectors. Rising energy and bulk raw material prices and rising labor costs will increase the operating costs of the environmental protection industry, which will impact its profitability. The downstream mainly includes municipal and industrial pollution industries such as steel, electricity, cement, metallurgy, and chemical industry. The government department is an important demand side of environmental protection governance. This is because the environmental protection industry has strong public welfare attributes, and its demand changes largely depend on industrial policies. The state's increased support for the environmental protection industry will increase the demand for pollution reduction and emission reduction of high-pollution and energy-consuming industrial enterprises in the downstream of the environmental protection industry, thereby helping the development of the environmental protection industry. The distinctive feature of the environmental protection industry chain is that there is a certain overlap between upstream and downstream industries, that is, the demand side of the environmental protection industry is also the supplier, such as steel, power, chemical and other industries.
Take water pollution control and air pollution control as examples. The upstream industries of the water pollution treatment industry include engineering construction, electricity, pharmaceuticals, special equipment, and building materials. The upstream industry will directly affect the cost of the sewage treatment industry, which will have an impact on the profits of the sewage industry. Pharmaceuticals are necessary materials for sewage treatment. There are many suppliers in this industry, the market is highly transparent, and the choice of space is large; the products and services of engineering construction, electricity, special equipment, and building materials are easy to obtain from the market, and the price of electricity is affected by the country's overall Regulation is relatively stable; engineering construction, special equipment, and building materials have certain differences depending on the project, and are greatly affected by macroeconomics.
The downstream industries of the water pollution control industry mainly include government departments and their environmental management companies, and industrial enterprises that discharge wastewater such as petroleum and coal chemical industries. The downstream industry's investment in sewage treatment directly affects the demand of the sewage industry. If the downstream industry develops rapidly or the policy requires stricter discharge water quality, the demand of the sewage treatment industry will increase; otherwise, the downstream industry will slow down due to economic impact and will Affect the overall demand of the sewage treatment industry, which in turn has a certain impact on profits. In recent years, with the country ’s emphasis on the water environment, especially the introduction of related laws and regulations such as the “Water Pollution Prevention Action Plan”, it has greatly stimulated the development of the sewage treatment industry, and also promoted the development of new technologies and the use of new processes in the sewage industry. Adapt to market needs.
The upstream industries of the air pollution control industry chain mainly include general-purpose equipment manufacturing, special-purpose equipment manufacturing, and raw material suppliers. The equipment provided by the general equipment manufacturing industry includes fans, ball mills, mixers, vacuum belt dewatering machines, bucket elevators, pulse solenoid valves, valves, circulation pumps, DCS control systems, etc. This type of equipment has the characteristics of large production scale, relatively uniform quality standards, short supply time, and stable prices, which is beneficial to the stable operation of air pollution control enterprises. The equipment provided by the specialized equipment manufacturing industry includes demisters, distributors, Receiver, spray system, filter bag, etc. The number of manufacturers of such equipment is not large. Usually, air pollution control companies cooperate with them to make special customizations. Since a good cooperative relationship has been formed, the supply of equipment and supply prices are generally relatively stable. The products supplied by raw material suppliers include steel, Cables, limestone, activated carbon, non-metallic materials, coatings, welding materials, energy sources, filters, solvents, etc., among which the price of steel and cables easily fluctuates, which directly affects the production costs of air pollution control enterprises.
The downstream of the air pollution control industry mainly includes electric power, metallurgy, chemical engineering, non-metallic mineral manufacturing, petroleum processing, and papermaking. These industries are the main sources of sulfur dioxide, nitrogen oxides, and soot, but their respective proportions of atmospheric pollutants and emissions standards are different, and the requirements and requirements for air pollution treatment technologies will also be different.
1.4. Characteristics of the environmental protection industry
The environmental protection industry has two main characteristics: weak periodicity and high barriers to entry.
First of all, the environmental protection industry has less correlation with the macro economy, but is closely related to industry policies. It is a public welfare and policy-driven industry. From the analysis of the correlation between the growth rate of investment in environmental pollution treatment and GDP growth rate, there is a certain positive correlation between the two, but the correlation is not large, and the correlation coefficient is only 0.56. The environmental protection industry is similar to the defense military industry. The benefits are shared by the people and can even cross national borders. Therefore, the payer is difficult to define and has strong externalities. This makes it necessary for the government to intervene and regulate its industrial development. Other social events such as haze events and crude oil spills will also have a strong driving effect on the environmental protection industry.
Second, the environmental protection industry has high barriers to entry. This is mainly reflected in three aspects: funding barriers, technical barriers and qualification barriers. Firstly, capital barriers, for example, the sewage treatment industry is a capital-intensive industry, the total project investment is large, and the investment recovery period is relatively long, so it has strong financial pressure on investors; secondly, technical barriers, whether it is sewage treatment, atmospheric treatment or The solid waste treatment industry has high technical barriers. Only mastering professional technology and possessing high-quality professionals can continue to operate in the industry. Finally, qualification barriers. Enterprises must have relevant qualifications for design, operation and engineering services. , Engaged in sewage treatment and hazardous solid waste industry must also have relevant operating permit qualifications.
Since 2015, China has successively introduced a series of measures such as the new environmental protection law, environmental PPP model, third-party governance, and environmental supervision vertical management, which are carried out in five aspects: responsible parties, supervision systems, pollutant charges, pollution permits, and emissions trading. Major reforms. During the "Twelfth Five-Year Plan" period, the total investment in environmental protection of the whole society was 4.17 trillion yuan, an increase of 92.8% over the "Eleventh Five-Year Plan" period and an average annual growth rate of nearly 10%. During the "Twelfth Five-Year Plan" period, government investment in environmental protection totaled about 839 billion yuan, with an average annual growth rate of 14.5%. Among them, the central government's special environmental protection fund cumulative spending reached nearly 180 billion yuan, an increase of about 140% over the "11th Five-Year Plan" period. Especially after the three "Ten Articles" came out, investment continued to increase every year. 
With the continuous promulgation of the Environmental Protection Law and other policies supporting the development of the environmental protection industry, in recent years, the protection of the natural environment and the prevention and control of pollution have been extensively stressed, which has promoted the development of the environmental protection industry in China.
2. Aspects of the environmental protection industry
2.1. Water pollution treatment
Water pollution treatment is mainly divided into two categories: domestic sewage treatment and industrial wastewater treatment. Domestic sewage is mainly the discharge of residential water. The amount of drainage is greatly affected by the degree of urbanization and the number of people. The pollution is not as strong as that of industrial sewage. Industrial sewage, that is, sewage discharged in industrial production, is generally more polluted than domestic sewage and is more difficult to treat. Industrial wastewater discharge reached its peak in 2007. Later, with the country's vigorous implementation of industrial structure adjustment, elimination of backward production capacity, and active promotion of energy conservation and emission reduction policies, industrial wastewater discharge gradually showed a downward trend, but the urbanization process accelerated. As a result, urban sewage discharge has grown rapidly, becoming a major source of new sewage discharge. In 2015, domestic sewage discharge accounted for more than 70% of the country's total sewage discharge.
In the field of water pollution prevention, the progress of construction projects of urban sewage treatment plants is accelerating, the sewage treatment market in China is developing rapidly, and the sewage treatment capacity and sewage treatment rate have been greatly improved. The urban sewage treatment capacity increased from 104.36 million cubic meters per day in 2010 to 149.1 million cubic meters per day in 2016, with a compound annual growth rate of 6.13%; the amount of urban sewage treatment increased from 31.170 billion cubic meters in 2010 to 2016 44.879 billion cubic meters, with an average annual compound growth rate of 6.26%; the urban sewage treatment rate increased from 82.31% in 2010 to 93.44% in 2016.
In terms of sewage treatment technology, according to the degree of water treatment, sewage treatment technology can be divided into primary treatment, secondary treatment, and tertiary treatment; according to the process principle, sewage treatment methods mainly include physical treatment methods, chemical treatment methods and biological treatment methods. Three categories.
At present, the domestic and foreign sewage treatment process is a secondary biological treatment method, and the most widely used is the activated sludge method  and its derivative technology. Activated sludge process has very high chemical conversion efficiency, and it is very effective for the treatment of pollutants contained in urban sewage and organic industrial wastewater. It is a relatively mature technology. However, this technology also has the problems of limited degradation of pollutants and low effluent standards, especially sludge swelling easily, which results in the increase of suspended solids in the effluent and the quality of the effluent. To this end, the biofilm reactor technology (MBR)  technology came into being. It eliminated the limitations of traditional technology, and organically combined membrane separation technology with sewage biological treatment technology, greatly simplifying the process and saving land. In the future, water treatment companies that have mastered MBR technology are highly competitive.
The wastewater treatment industry is a typical utility, so its main driver is industrial policy. In recent years, national policies have been tilted towards the industry. On the one hand, since 2013, the State Council has issued a series of documents and regulations intensively to encourage the development of wastewater treatment enterprises, regulate market management, and provide a good policy environment for wastewater treatment enterprises. On the other hand, fiscal expenditures for energy conservation and environmental protection have shown a growth trend. In 2017, environmental protection expenditures accounted for 0.7% of GDP, and the importance of the industry was prominent.
2.2. Air pollution control
The air pollution control industry is a typical policy-driven industry. Its downstream demand is usually generated in order to fulfill national emission reduction requirements and atmospheric environmental protection goals. Due to the mandatory nature of policies and regulations, the creation of demand is passive.
The characteristics of China's energy reserves are "rich in coal, lean in oil, and low in gas", which determines that China's primary energy production and consumption are mainly coal. In China's energy structure, raw coal energy basically accounts for about 60%. This coal-based energy consumption structure determines that China's air pollution is a typical soot pollution, and the main pollutants are sulfur dioxide and nitrogen oxides. And soot.
The "Twelfth Five-Year Plan" has vigorously promoted energy conservation and emission reduction policies. Up to now, the introduction of the "Thirteenth Five-Year Plan" has achieved some results in terms of atmospheric governance, especially in terms of emission reduction.
From the perspective of the national sulfur dioxide emissions, after reaching the highest level in 2006, the sulfur dioxide emissions have gradually decreased. For SO2, the power industry, non-metallic mineral products industry and ferrous metal smelting industry are industries with a lot of sulfur dioxide pollution. Among the three industries, the contribution rate of SO2 pollution in the power industry is the highest, but it has been decreasing year by year since 2006. The non-metallic mineral products industry's contribution to SO2 pollution has increased in recent years.
NOx was listed as a major air pollutant after the 12th Five-Year Plan. It can be seen that NOx emissions have gradually decreased since 2010. Structurally, the industrial source is the main emission component, which has been declining since 11 years. Beginning in 2011, a new “motor vehicle” emission was added. Motor vehicles were classified as urban living sources before 2011. Later, they were separated, and it can be seen that motor vehicle nitrogen oxide emissions are on a downward trend.
Beginning in 2005, smoke and dust emissions entered a period of decline, and the "Twelfth Five-Year Plan" period was in the plateau period. 14 years into the downward orbit. In recent years, due to the haze problem, dust emissions have attracted much attention. Industrial dust emissions have been well controlled. In the stage of the platform, urban living sources are not controlled due to excessive dispersion. The growth rate has been fluctuating up and down. Emissions have been reduced, which indicates that China's regulations on motor vehicle dust emissions have produced certain effects in recent years.
The policy of air pollution prevention and control is clear. The development direction and scale of the industry are closely related to national policies, laws, and industry standards. The adjustment of industrial structure and the release of market demand all depend on the promotion of policies. Air pollution control is divided into desulfurization, denitration and dust removal.
The peak period of the construction of thermal power flue gas treatment projects in China is nearing its end. After 10 years of development, the thermal power desulfurization market has entered a mature stage and the market concentration is relatively high; while the thermal power denitration market is too low and lacks mandatory The denitration installation measures and electricity price subsidy policies, etc., have slow market development; similar to the desulfurization market, the thermal power dedusting market is quite mature and highly concentrated, with industry leaders occupying a dominant position. Desulfurization and dust removal have basically developed and matured, and future increases will come from the improvement of environmental protection standards.
At present, industrially applied flue gas desulfurization technologies can be divided into dry (including semi-dry) desulfurization and wet desulfurization; denitration technologies mainly include selective catalytic reduction (SCR) and selective non-catalytic reduction (SNCR); commonly used The dust removal technology includes mechanical dust removal, wet dust removal, electrostatic dust removal, bag dust removal and so on.
2.3. Solid waste management
Solid waste refers to solid and semi-solid waste materials that pollute the environment generated in production and construction, daily life and other activities. Containers in the world are usually filled with flammable, explosive, toxic, corrosive waste liquids and waste gas. Also stipulated as solid waste.
China's solid waste treatment industry started in the early 1980s, and started relatively late compared to developed countries. The Law of the People's Republic of China on the Prevention and Control of Environmental Pollution by Solid Wastes, which came into effect on April 1, 1996, is China's first law on the prevention and control of environmental pollution by solid wastes, marking that the prevention and control of solid waste pollution in China has been incorporated into legalized management track. After 2000, the country successively introduced a series of national standards and industry standards, which promoted the regulation and development of the solid waste pollution prevention industry. Solid waste treatment technology combines disciplines such as physics, chemistry, and biology. Especially in the field of industrial waste treatment, with the gradual improvement of the national environmental protection policy, the standards for the disposal and utilization of industrial waste continue to increase, and companies with leading processes, equipment, technology and rich operating experience will occupy an advantageous position.
Solid waste treatment requires a lot of funding sources, so most of the solid waste treatment adopts TOT, BOT, PPP and other models. All three models can alleviate government funding pressure to a certain extent.
The focus of China's solid waste pollution prevention and management is municipal solid waste, general industrial solid waste and hazardous waste.
2.3.1. Domestic waste
Municipal solid waste refers to solid waste generated in daily life or activities that provide services for daily life, and solid waste deemed to be domestic waste by laws and administrative regulations. China's municipal solid waste has the characteristics of low calorific value, high water content and complex composition. The goal of municipal solid waste treatment is to achieve "reduction, resource utilization and harmlessness" of waste. From 2002 to 2017, the volume of domestic garbage removal and transportation in China increased by 57.66%, reaching 215 million tons in 2017. At the same time, the capacity of harmless treatment of garbage has increased significantly. The rate of harmless treatment of urban domestic waste in China has increased from 50.80% in 2003 to 97.74% in 2017. With the acceleration of urbanization, the production of municipal solid waste will continue to increase, and it is expected that the demand for urban solid waste treatment will continue to be strong.
From the technical point of view, the current methods of harmless treatment of urban domestic waste in China mainly include sanitary landfill, garbage compost and waste incineration. Among them, sanitary landfill is the main treatment method of current domestic garbage, but it has the disadvantages of occupying land resources, higher cost of leachate treatment, and greater risk of leakage. The compound growth rate in the past five years is not high, less than 3%. In contrast, waste incineration has more advantages and is expected to be the mainstream method of domestic waste treatment in the future.
2.3.2. Industrial solid waste
Industrial solid waste refers to solid waste generated in industrial production activities, including blast furnace slag, steel slag, red mud, non-ferrous metal slag, fly ash, coal slag, sulfuric acid slag, waste gypsum, desulfurized ash, calcium carbide slag, salt mud and so on. China's industrial solid waste treatment is divided into three ways: comprehensive utilization, storage and disposal. Comprehensive utilization refers to the extraction or transformation of industrial solid waste to produce usable resources, energy or raw materials; storage refers to the temporary storage or storage of solid waste in special facilities or places; disposal refers to the use of landfill, incineration, etc. to treat solid waste .
In 2017, China's general industrial solid waste production was 3.316 billion tons, an increase of 37.62% over 2010, and the comprehensive utilization was 1.812 billion tons, an increase of 12% over 2010. The disposal amount was 798 million tons and the storage amount was 7.84 100 million tons. The growth rate of comprehensive utilization of industrial solid waste is lower than the growth rate of solid waste generation, and the industry has a lot of room for improvement.
2.3.3. Hazardous waste treatment
Hazardous solid wastes are also called hazardous wastes, toxic waste residues, etc., and usually refer to solid wastes with one or more hazardous properties such as toxicity, corrosivity, flammability, reactivity and infectivity. The main sources of hazardous waste are traditional industrial fields, including paper and product industries, non-metallic mining and dressing industries, and chemical raw materials industries.
In 2017, the amount of hazardous waste produced in the country reached 69.369 million tons, of which, the comprehensive utilization amount was 40,434,200 tons, the disposal amount was 25,155,600 tons, and the storage amount was 8.7087 million tons. The comprehensive utilization of hazardous wastes accounted for 54.16% of the total utilization and disposal, and disposal and storage accounted for 34.18% and 11.66%, respectively. From the perspective of the trend, the amount of hazardous waste generation is still on the rise. Although the disposal ratio has increased, the disposal capacity is still weak.
Classified according to the treatment method of hazardous waste, hazardous waste is divided into resource-based and harmless disposal. Recycling hazardous wastes often contain metals such as copper, tin, gold, and silver, which have a certain recycling value; while innocuous disposal usually deals with hazardous wastes that cannot be recycled, they are treated by incineration, landfill, etc. , Hazardous waste production enterprises need to pay disposal fees to hazardous waste disposal enterprises.
 Activated sludge process technology refers to continuously sending air into sewage containing a large amount of dissolved organic matter, and through the metabolism of microorganisms attached to it, organic pollutants are converted into non-toxic gases, liquids and organic matter. The solids are separated by solid-liquid to achieve the effective separation of biological sludge and purified water.
 Bio-membrane reactor technology (MBR) is a new water treatment technology combining activated sludge method and membrane separation technology. By increasing the concentration of activated sludge and extending the age of sludge, COD, BOD and other pollution factors can be improved. The degradation efficiency meets emission standards.
 Five-day biochemical oxygen demand is a comprehensive indicator reflecting the content of organic pollutants in water.
2. Credit analysis framework and main indicators of environmental protection industry
Based on the previous analysis of the environmental protection industry and its characteristics, we set up an analytical framework for the issuers of environmental protection debts, and listed the areas and some indicators that were mainly concerned when conducting the qualification analysis of environmental protection entities.
Basic situation: First of all, the environmental protection industry has higher requirements on technology level. A higher R & D capability is the core competitiveness of an enterprise. When conducting a fundamental analysis of an environmental protection enterprise, it is first necessary to pay attention to the company's R & D team and R & D investment. Secondly, the size of the market that has been developed by the environmental protection industry is relatively small, focusing only on a certain field. Under the limited market size, it will face fierce competition. Horizontal integration through mergers and acquisitions can broaden the business layout, so when conducting fundamental analysis, you can evaluate the degree of integration of the company's industrial chain. In addition, with regard to the business model, with the implementation of the PPP model in the field of environmental protection, it is necessary to pay due attention to the situation in which the company wins the PPP project. Finally, the development of the environmental protection industry is highly dependent on policies, and its development speed is closely related to the environmental protection standards formulated by the state and the intensity of policy implementation. It is necessary to pay attention to the impact of changes in related industrial policies on the industry and companies. In terms of financial situation: we mainly focus on the company's capital structure, profitability, solvency, cash flow and financial flexibility.
1. Basic indicators
1.1. Technical level
The environmental protection industry has high technical requirements, and advanced processing technologies can improve processing efficiency and reduce costs. Therefore, companies in the environmental protection industry are based on research and development technology to maintain their core competitiveness. Many companies in the industry have invested heavily in research and development of new technologies, and have their own high-quality core research and development teams. Focus on the company's R & D team and R & D investment.
Taking water pollution control in the fine-molecule industry as an example, water pollution control has high technical requirements. Many companies in the industry attach great importance to the development of membrane technology, mainly focusing on the development and optimization of new series of membrane materials, equipment manufacturing and application technology, and equipment integration. As well as the four major areas of civilian use, the investment of funds is huge. With the gradual improvement of national environmental protection policies, environmental protection standards will be improved, and advanced technology is an essential core competitiveness of enterprises.
Take Beijing Bishuiyuan Technology Co., Ltd. as an example. The company has a world-class membrane R & D and manufacturing base in Huairou, Beijing. The annual production capacity is 10 million square meters of microfiltration membranes and ultrafiltration membranes, and 6 million square meters of nanofiltration membranes and reverse osmosis membranes. Meters, further reducing product costs, becoming the world's leading manufacturer of membrane products and advanced environmental protection equipment manufacturers capable of producing a full range of products. It is also one of the few manufacturers in the world with a full range of MF, UF, DF and RO production membrane technology and Production line company.
1.2. Industry chain integration
The environmental protection industry has great market potential, but the market size that has been developed so far is relatively small. If it focuses on a single field, it will face fierce competition with a limited market size. Based on this, many environmental protection companies, while focusing on their main business, also pay attention to the diversification of the company's business, that is, they are not limited to a single industry chain, but expand their industrial scope through mergers and acquisitions as much as possible. This can not only achieve the company's scale effect, but also reduce the cost of technology research and development. At the same time, business diversification can also improve the company's overall strength and brand recognition.
Take Anhui Guozhen Environmental Protection and Energy Conservation Technology Co., Ltd. as an example. In 2015, the company acquired 72.31% of McWang Environmental Technology Co., Ltd. for 369 million yuan, thereby entering the industrial wastewater field. At the same time, it acquired 100% shares of Norwegian Goodtech EnvironmentAS company in the international market, thereby entering the field of small sewage treatment equipment. The business layout has gradually expanded from a single sewage treatment to the urban water environment comprehensive treatment, industrial wastewater treatment and small town environmental treatment areas.
1.3. Industrial Policy
Environmental protection has the characteristics of large investment and social benefits are often greater than economic benefits, which determines the development of environmental protection industry is more dependent on policies, and its development speed is closely related to national environmental protection standards and the intensity of policy implementation.
Taking tax incentives as an example, in 2017, the Ministry of Finance, the State Administration of Taxation, the National Development and Reform Commission, the Ministry of Industry and Information Technology and the Ministry of Environmental Protection jointly issued the Notice , enjoy corporate income tax credit preferential policies for enterprises to purchase and actually use special equipment for energy conservation and water conservation and environmental protection.
In addition, the state also protects the company's revenue by promulgating relevant industrial policies. For example, in terms of waste incineration power generation, on April 10, 2012, the National Development and Reform Commission issued the "Notice on Improving the Price Policy of Waste Incineration Power Generation" , setting the national benchmark electricity price for waste incineration power generation projects to 0.65 yuan / kWh. (Including tax), which to some extent protects the income of waste incineration power generation projects.
1.4. Operation Mode
Environmental protection projects can be divided into operating and non-operating projects. Non-operating projects such as environmental governance and restoration, wetland protection, etc., have no or low revenue. The main payer is the government department; operating projects such as sewage treatment and garbage Although there are user payments, the public welfare nature is strong, the charging standards are often low, and the investment recovery cycle is long. Therefore, local governments are also constrained by insufficient fiscal budgets and it is difficult to promote environmental protection projects.
Since 2015, the state has vigorously promoted the PPP model in key areas such as ecology and environmental protection, and the business undertaking in the industry has shifted to the PPP model. The PPP model gives environmental protection companies the opportunity to introduce local governments, industrial capital, financial capital and other parties to jointly invest in environmental protection projects. The investment and financing structure of the PPP model has changed the business development model of environmental protection companies on the traditional industrial ecological chain.
With the implementation of the PPP model in the field of environmental protection, companies in the industry have won a large number of PPP projects. According to data from the National Government and Social Capital Cooperation (PPP) Integrated Information Platform of the Ministry of Finance, as of the end of December 2016, 11,260 projects were included in the PPP Integrated Information Platform project database, with a total investment of 13.5 trillion yuan, of which ecological and environmental protection projects were included in the database. 633, with an investment scale of 653.4 billion yuan, involving sewage treatment, garbage treatment, black odorous water bodies, sponge cities, comprehensive management of underground comprehensive pipeline corridor areas, soil remediation and other fields. There are 743 national demonstration projects with an investment scale of about 1.9 trillion yuan, of which 60 ecological and environmental protection demonstration projects have been completed. PPP projects have become one of the mainstream models for the implementation of large-scale integrated environmental protection projects .
The project settlement mode of PPP projects is generally "7-2-1", that is, 70% of the completed project volume is recovered during the construction of the project, 20% of the final settlement is charged, and 10% is collected 1 year or 2 years after settlement. However, the PPP project has a large investment amount and a long project cycle. Especially for projects that have not obtained financing from financial institutions, the repayment depends to a large extent on the performance and financial strength of the final owner's government. Financing can pose a challenge to corporate financing.
2. Financial indicators
Financial situation We mainly focus on the capital structure, profitability, solvency, cash flow and financial flexibility of the debt-issuing companies.
2.1. Capital structure
The capital structure reflects the financial policies of the enterprise. In general, the more stable the capital structure, the lower the level of leverage, and the lower the financial risk. Environmental protection projects have a long construction cycle, large capital requirements, and high external debt financing. Therefore, a better capital structure allows companies to have stronger financial flexibility, enabling environmentally friendly companies to weather the credit crunch. The financial indicators we focus on are asset-liability ratio, debt-to-capital ratio, and debt structure.
We mainly focus on the company's gross sales margin, net sales margin, profit, ROA and ROE. Due to the implementation of the PPP model in recent years, after companies in the industry have won bids for PPP projects, revenue scale and gross profit have begun to increase. However, due to the expansion of business scale, R & D investment and strategic mergers and acquisitions, management costs have increased year by year, which has increased the company's financial costs to a certain extent.
In terms of solvency, we mainly focus on the interest multiples earned by the company, total debt / EBITDA, total rigid debt, and short-term rigid debt pressure. We mainly focus on the extent to which the company's operating net cash flow and monetary funds cover short-term debt.
2.4. Cash flow
Affected by factors such as project construction cycle, settlement practice and longer account recovery cycle, the environmental protection industry has a longer business cycle, generally 1-3 years. In addition, cash withdrawal is slow. The company needs to improve the recovery of engineering funds by optimizing business models, raising project standards, and strengthening account collection. Compared with traditional engineering projects, PPP projects have a faster settlement progress and some projects receive a certain percentage of engineering funds in advance, which can improve the operating cash flow of companies within the industry to a certain extent. Because companies in the industry tend to increase their industrial scale through mergers and acquisitions, the outflow of cash flows from investment activities is on the rise, which has also led to the company's cash flow from financing activities to maintain growth.
2.5. Financial flexibility
Financial flexibility mainly refers to the ability of enterprises to refinance in the short to medium term. It can be analyzed by analyzing the bank's credit usage, credit borrowing, unused credit and the proportion of restricted assets in net assets.
Regarding the analysis of the financial indicators of the issuers of environmental protection bonds, we will elaborate in the third part.
Screening and analysis of the issuers of environmental debt
1. Basic issuance of environmental protection bonds
We have selected 55 environmental protection bonds based on their business scope, main products and businesses.  As of November 29, 2018, the 55 environmental protection companies had a total of 121 bonds with a stock scale of 95.380 billion yuan. From the perspective of company attributes, there are more private enterprises, and from the industry perspective, there are more public utilities.
From the perspective of the issuer's latest rating distribution, low and medium grades are dominant. Among the 55 issuers, unrated accounts for 20%, AAA accounts for 5.5%, AA + accounts for 18.2%, AA accounts for 38.2%, and AA- and below account for 18.2%. The two entities with an issuer rating of C are: Shengyun Environmental Protection and Kaidi Ecology, which have already defaulted.
From the perspective of the types of existing bonds, the types are relatively concentrated, with corporate bonds accounting for 51.87%, followed by MTN accounting for 23.22%, and corporate bonds and targeted instruments accounting for a relatively low proportion.
2. Analysis of the financial status of the environmental protection industry
2.1. Capital structure
In recent years, the asset-liability ratio of the sample enterprises has shown an increasing trend, which is mainly due to the impact of PPP, and the enterprises rely more on external financing to expand their business. In the third quarter of 2018, the industry's average debt ratio reached 64.36%. From the perspective of different nature of enterprises, local state-owned environmental protection enterprises have low leverage ratios, while private environmental protection enterprises have high leverage ratios. Among them, Botian Environment, Kaidi Ecology, and Shengyun Environmental Protection have higher leverage ratios. The asset-liability ratios disclosed in the report were 79.32%, 76.20%, and 74.84%. These enterprises' debts have expanded rapidly and risks have accumulated.
From the perspective of the industry's profitability, after 2017, the revenue and net profit of environmental protection companies have declined.Among them, Kaidi Ecology, Shenwu Environmental Protection, Tianxiang Environmental Protection, and Shengyun Environmental Protection all have negative net profits in the latest period. It was -1.934 billion yuan, -248 million yuan, -247 million yuan, and -214 million yuan, respectively. From the perspective of relative indicators, ROE and ROA showed a downward trend, and the industry's profitability level declined.
In addition to paying attention to the situation of ROA and ROE, ROIC is also a profit indicator worthy of attention. ROE is the return on investment of equity investors, but the premise is that ROIC (return on invested capital of the project)  must meet investment requirements, that is, ROIC must be greater than the weighted average cost of capital. ROIC's corresponding return on investment for equity investors and debt investors. When the project's ROIC exceeds WACC, after the project obtains a rate of return, it will be distributed between the interest-bearing debtor and the equity owner according to the leverage; when the ROIC is reduced, Below the weighted average cost of capital, if the company is still investing on a large scale, this increases the debt repayment risk of the debtor to a certain extent.
From the sample data compiled, the ROIC of most environmental protection companies has declined since 18 years, and the ROIC of individual companies has even been negative. The four companies with the lowest ROIC are: Shenwu Environmental Protection, Tianxiang Environment, Kaidi Ecology and Shengyun Environmental Protection. Their latest ROICs are -3.57%, -2.93%, -2.28%, and -0.40%, which are significantly lower than Weighted average cost of capital.
It can be seen that the environmental protection companies that defaulted in 2018 all had ROICs less than the weighted average cost of capital, which indicates that there are certain problems in corporate governance. Such companies generally show high leverage and repay debtors by borrowing new and old. Interest, refinancing pressure is greater.
From the perspective of solvency, the long-term and short-term solvency of environmental protection companies in the sample have all weakened. In particular, the cash flow interest protection multiple declined significantly in 2017, the operating cash flow's ability to cover debt has deteriorated, and the decline in the proportion of EBITDA / interest-bearing debt has slowed, but it is still not optimistic. At the same time, the current ratio and quick ratio are also showing a downward trend, and the short-term debt service ability has weakened. The three companies of Renhuai Water Investment, Tongren Water Affairs and Shenwu Environmental Protection had lower cash flow interest protection multiples in 2017; Shenwu Environmental Protection and Tianxiang Environmental had negative EBITDA / interest-bearing debt ratios; the three companies with lower quick ratios were Tiehan Ecology, Jidian Shares and Kaidi Ecology; the three companies with lower current ratios are Jidian Shares, Kaidi Ecology and Kaidi Sound. The overall debt repayment pressure of the environmental protection industry deserves attention.
2.4. Cash flow
The environmental protection industry has a strong positive externality and is a typical policy-driven industry. In addition to companies that generally have environmental protection needs, government departments are also their important downstream customers. Therefore, we can divide environmental protection companies into two modes: To-G and To-B. The cash flow situation in different modes is different.
First, the To-G model is an environmentally friendly company. Its downstream customers are government agencies, and the project operation mode mostly adopts the PPP model, and the acquisition of orders depends more on the environmental protection expenditure of the local government. Although the PPP model has increased the scale of enterprises' projects, this model occupies a large amount of funds and has a long repayment period, which is not conducive to the company's cash flow situation. This kind of environmental protection enterprise mainly deals with sewage treatment, sanitation, garbage treatment, environmental monitoring, etc.
Let's look at the environmental protection company of the To-B model. Its downstream customers are mainly enterprises, focusing on customers' ability to pay. If its downstream clients are mainly industries with poor cash flow, such as chemical industry, then the cash flow of environmental protection companies may be affected. In addition, more attention should be paid to whether the inventory and receivables have increased significantly, which means that the bargaining power has weakened and the cash flow situation may also have deteriorated. This type of environmental protection enterprise mainly deals with industrial sewage, industrial waste gas, industrial hazardous waste treatment and environmental monitoring.
In recent years, the cash flow of operating activities in the environmental protection industry has weakened, especially in the third quarter of 2018, and the decline has been more obvious. In terms of investment activities, a typical feature of the environmental protection industry is that cash flows from investment activities are relatively large. In addition to the capital occupancy under the aforementioned PPP model, a big reason is that the environmental protection industry mostly involves the upgrading of production equipment, construction and installation of governance facilities and equipment, etc. The initial investment scale is large, so the investment cash flow continues to be negative. Due to its long natural operating cycle and slow cash withdrawal, the cash outflows from overlapping investment activities have caused a serious cash flow gap for environmental protection companies.
Due to the serious cash flow gap of environmental protection companies, financing activities are particularly important. If its financial flexibility is poor and financing is blocked, there will be greater pressure on repayment of due debts. In the third quarter of 2018, the average cash flow of fund-raising activities of the sample companies was 959 million yuan, but the year-on-year growth rate fell by 3.40%, and the financing capacity declined to a certain extent. It is worth noting that the cash flow gap is greater than the net cash inflow from fundraising activities, and corporate financing pressure has increased.
After our selection, only seven of the environmental protection bond issuers have a positive net cash flow, as shown in the table below.
Companies with a positive net cash flow can be broadly divided into two categories. The first category is companies with high net cash flow from financing activities that can cover cash flow outflows from their operating and investment activities (mainly covering cash flow outflows from investment activities). For example, Beijing Enterprises Water, as of the third quarter of 2018, the net cash flow from operating activities was 48 million yuan, the net cash flow from investment activities was 2.812 billion yuan, and the net cash flow from financing activities was 7.99 billion yuan. Due to its strong fund-raising ability, the company's overall cash flow is relatively abundant, which can make up for the cash flow gap generated in operating and investment activities.
The other is that net cash flow from operating activities can cover cash flow outflows from investment activities. For example, as of the second quarter of 2018, as of the third quarter of 2018, the net cash flow from operating activities was 319 million yuan, and the net cash flow from investment activities was -46 million yuan. Net cash flow from financing activities was -209 million yuan.
Summary: After the above analysis, we have selected five environmental protection companies with a higher comprehensive ranking. Among them, Longjing Environmental Protection has a higher ROIC in the third quarter of 2018, reflecting a better level of corporate governance. High, the company's profitability is higher; Longjing Environmental Protection has the highest EBITDA / interest-bearing debt in the third quarter of 2018.
In summary, the asset-liability ratio of bond-issuing environmental protection companies has increased in recent years, especially the level of leverage of private environmental protection companies is relatively high. Among them, Botian Environment, Kaidi Ecology, and Shengyun Environmental Protection have high leverage ratios and risks have accumulated; From the perspective of the industry's profitability, after 2017, the revenue and net profit of environmental protection companies have declined.Among them, Kaidi Ecology, Shenwu Environmental Protection, Tianxiang Environmental Protection, and Shengyun Environmental Protection all have negative net profits in the latest period. . In addition, since 18 years, the ROIC of most environmental protection companies has declined, and the ROIC of individual companies is even negative. The four companies with the lowest ROIC are: Shenwu Environmental Protection, Tianxiang Environment, Kaidi Ecology, and Shengyun Environmental Protection. ROIC is significantly lower than the weighted average cost of capital, and there are certain problems with corporate governance; from the perspective of debt repayment ability, the long-term and short-term debt repayment capabilities of the sample environmental protection companies have all weakened. In particular, the cash flow interest protection multiple declined significantly in 2017, the operating cash flow's ability to cover debt has deteriorated, and the decline in the proportion of EBITDA / interest-bearing debt has slowed, but it is still not optimistic; in terms of external financing, the third quarter of 2018 samples The average net cash flow of financing activities of enterprises was 959 million yuan, a decrease of 3.40% year-on-year, and the financing capacity had a certain decline. And the cash flow gap is greater than the net cash inflow from financing activities, and the company is still facing greater refinancing pressure.
 The selection of environmental debt issuers is subjective.
 ROIC = EBIT * (1-tax rate) / invested capital, where: invested capital = interest-bearing liabilities + net assets, EBIT is the profit before interest and tax after deduction.
4. Risk warning
1. Pay attention to the adverse impact of the advancement of environmental protection policies, such as changes in policies, and refinancing policies, on the credit qualifications of relevant entities.
2. The negative impact of the concentrated outbreak of environmental protection industry on the industry.
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