Just like any other rapidly growing emerging economy, China is facing severe environmental threats attributable to rampant industrialisation and urbanisation. Realising the fact that the costs of environmental pollution are astounding both in economic and non-economic terms, the Chinese government is enforcing environmental regulations rigorously and has made environmental protection a national priority.

Under its 11th Five-Year Plan (2006-2010), the Chinese government has notably embraced major reforms, which mandate, among others, a cut in major pollutants by 10% by 2010. Furthermore, it announced in November last year a Rmb4 trillion economic stimulus plan, comprising Rmb580 billion direct investments in rural infrastructure, energy and the environment.

Riding on these key initiatives is Mainboard newcomer China Environment, which recently made its trading debut through a reverse takeover of Gates Electronics. “The environmental protection industry is a niche sector, driven largely by stringent government policies and rigorous enforcement measures. It is also fuelled by positive market drivers of demand such as growing environmental awareness in key emerging and high-growth industries and the adoption of environmental best practices by many multinational, state-owned and large companies. These are all indicators of a strong upside for growth in this niche sector,” Huang Min, Chairman and CEO of China Environment, remarked during an exclusive interview with Shares Investment (Singapore).

Creating A Greener World
Located in Longyan Economic Development Zone in Fujian Province, China Environment specialises in the design and production of air pollution control and treatment systems, which remove particulate matter from waste gas. The Electrostatic Precipitator (ESP) is the company’s flagship product, constituting over 90% of its total turnover.

According to Huang, China Environment’s products are deployed in industries such as power generation, cement, chemical, steel as well as pulp and paper industries. He added that in China, the demand for environmental protection and control equipment far exceeds supply. High barriers to entry in the industry mean that only a small number of players can meet the growing demand for such products.

A major differentiating factor of China Environment from its industry peers is the former’s continuous pursuit of innovation through research and development (R&D). As highlighted by Huang, China Environment will continue to strengthen its R&D capabilities by investing in new technologies and infrastructure.

In addition, the company will increase collaboration with relevant academic and research institutes so as to gain access to new talents, develop new products as well as improve the quality and effectiveness of existing products.

Growth Drivers In Place
Reaping the fruit of its relentless R&D efforts, China Environment has developed the Electrostatic Lentoid Precipitator (ESLP), which is a new generation of the existing ESP. “Our ESLP technology is able to achieve emissions of less than 30 mg per cubic metre, which is way below the required particles emissions standard of 50 mg per cubic metre stipulated by the government,” commented Huang, who has more than 17 years of experience in the waste gas treatment solutions and steel industries.

Meanwhile, plans are on the cards for China Environment to expand its existing array of products to include desulphurisation and denitrogenation (de-NOx) systems to provide a comprehensive waste gas treatment solution to customers. Nonetheless, Huang pointed out that a typical contract size for this business segment lies in the vicinity of a few hundred millions, thus requiring a huge amount of working capital.

Apart from establishing a firm foothold in the environmental protection and control market in China, the company seeks to extend its international reach, carrying out business activities as a sub-contractor in Southeast Asia, Middle East and India. Although China Environment has not set up an overseas office as yet, Huang said that if the company’s overseas business activities continue to increase, they might consider doing so in order to facilitate overseas operations.

In terms of its financial performance, China Environment has been raking in the bucks in recent years. From FY06 to FY08, the company’s top and bottom lines grew at a compounded annual growth rate (CAGR) of 53% and 37% respectively, with an average gross profit margin of approximately 27%. For FY08, it chalked up net profit of Rmb82.9 million on the back of Rmb464.0 million revenue.

A report by BCC Research in November 2008 stated that the market for environmental protection products and equipment is estimated to be worth more than Rmb235 billion by 2013 and projected to expand at a CAGR of 23% between 2009 and 2013. Leveraging on its proven track record and solid technical expertise, China Environment is certainly well positioned to capitalise on emerging opportunities and capture a substantial share of this lucrative and promising market.