Today’s recommended article provides an analysis of the development stages, profit models, and market trends in specific segments of China’s environmental protection industry—providing valuable insights for your reference.

　　Over the past few years, the development of China's environmental protection industry can roughly be divided into two stages:

　　From 2013 to 2015, upstream companies extended into the midstream and downstream sectors, while downstream companies pursued horizontal expansion.

　　During the 12th Five-Year Plan period, we observed a characteristic of the environmental protection industry: upstream equipment vendors are extending their reach into the midstream and downstream sectors—for example:

　　Wanbangda secures EPC and operation-related orders by leveraging its expertise in industrial wastewater technology.

　　Huaxi Energy/Shengyun Environmental Protection enters waste-to-energy BOT projects by leveraging fluidized-bed and grate-furnace technologies.

　　Qingxin Environment and Yuanda Environmental Protection are expanding their market share in flue gas treatment, desulfurization, and denitrification retrofit and operations for thermal power plants through their unique flue gas treatment technologies.

　　We believe this represents a typical growth path for listed environmental protection companies at the time—leveraging their technological expertise and first-mover advantages to secure large-scale orders and achieve organic growth. Meanwhile, downstream enterprises have been focusing on their core businesses while pursuing both external expansion and internal growth through horizontal business diversification, thereby harnessing synergies among different business lines. For instance, Weirli, building on its expertise in leachate treatment, has acquired Hangneng, Hanfeng Technology, and Dule Refrigeration, thus laying out a platform strategy that targets high-growth segments such as anaerobic treatment, motor energy conservation, and VOC control.

　　2016-2017: Heavy-asset enterprises go lightweight.

　　As we enter the 13th Five-Year Plan period, environmental protection companies are gradually recognizing that the capital-intensive nature of downstream operations has become a bottleneck restricting the expansion of their balance sheets. Many forward-thinking leading enterprises have taken the lead in developing unique business models: For instance, Biyuan has used joint ventures to remove its capital-intensive businesses from its balance sheet; Beijing Enterprises Water Group has leveraged PPP funds and financial leverage to quickly generate profits; and Dongjiang Environmental Protection has utilized ABS to unlock future cash flows. We believe this trend will continue throughout economic cycles marked by rising funding costs.

　　Three Dimensions for Analyzing the Profit Models of Environmental Protection Companies

　　A company’s revenue generation boils down to three main channels: the government (t-G), enterprises (t-B), and consumers (t-C). These can be understood as the government-pays model, the enterprise-payment model, and the market-oriented consumer-sales model.

　　The government picks up the tab—looking at fiscal revenue and expenditure.

　　The government is the main investor in environmental protection. Nationwide, annual investment in environmental protection reaches hundreds of billions of yuan, accounting for more than 1% of GDP during the same period. Government fiscal investment in the environmental protection sector is also steadily increasing; in 2016, fiscal budget expenditures for the environmental protection sector reached 293.2 billion yuan, and actual expenditures exceeded the budgeted amounts.

　　The government’s investment in the environmental protection industry is primarily focused on wastewater and solid waste management—specifically, drainage projects, landscaping projects, urban appearance and sanitation, and the treatment of industrial pollution sources within urban environmental infrastructure development.

　　The government’s investment approaches in environmental protection mainly fall into two categories: direct procurement and the PPP model. Since the PPP model can alleviate the government’s fiscal burden, leverage the strengths of both government agencies and private entities, and reasonably share risks, it is becoming the mainstream approach for government investment in the environmental protection sector. The revenue models for PPP projects in the environmental protection industry primarily include user fees, government payments, and feasibility gap subsidies. The key factors for the government procurement model lie in the financial strength and policy consistency of local governments.

　　Enterprise-payment-based, focusing on the demand side.

　　A significant portion of the revenue model for environmental protection companies comes from orders placed by industrial enterprises—meaning their downstream customers are often industrial firms. Specifically, upstream environmental protection companies sell consumables and environmental equipment to industrial enterprises; midstream companies undertake environmental engineering construction projects for these industrial firms; and downstream companies provide technical planning and consulting services to industrial enterprises and participate in project operations.

　　▲ Under the policy, enterprises make payments. Currently, the primary source of revenue for this business model lies in the mandatory payments from downstream industrial enterprises, driven by intense government policies. These mandatory payments by enterprises depend on both the payment capacity of industrial firms—currently, upstream sectors are bottoming out and rebounding, while midstream sectors continue to face pressure—and the strength of government policies.

　　The government has introduced relevant environmental protection enterprises as third-party operators to provide industrial enterprises with environmental protection equipment for their production facilities and assist in the construction of environmental protection projects. This approach helps prevent polluting enterprises from engaging in illegal emissions. Moreover, fees are charged based on the volume of pollutants treated. Such a profit model typically focuses on industries such as exhaust gas treatment and industrial wastewater treatment, with thermal power and chemical enterprises being the primary clients.

　　For example, during the previous “12th Five-Year Plan” period, flue gas desulfurization and denitration were fully implemented across the board in coal-fired power enterprises. Many environmental protection companies also secured a large number of desulfurization and denitration project orders during this wave. However, the retrofitting of conventional coal-fired power plants—covering desulfurization, denitration, and dust removal—is now largely coming to an end.

　　▲ Looking ahead, pay close attention to the demand side. When examining the profit models of environmental protection companies, it’s crucial to focus on stable, certain demand. We recommend paying particular attention to downstream industrial enterprises that demonstrate strong profitability or show a trend of improvement. In non-power sectors, desulfurization and denitrification are poised to become key growth areas in the future. As efforts to control air pollution continue to intensify, the policy emphasis in atmospheric governance is shifting from the thermal power sector toward heavily polluting industries such as steel, cement, and flat glass.

　　The 2014 emission-control plans for air pollution in the Beijing-Tianjin-Hebei region, the Yangtze River Delta, and the Pearl River Delta specifically outlined concrete remediation tasks for three key pollution-control sectors: iron and steel, cement, and flat glass. Relevant documents—including the "Emission Standards for Air Pollutants from Boilers (New Edition, 2014)," the "Emission Standards for Air Pollutants from the Cement Industry (2013)," and the "Emission Standards for Air Pollutants from the Iron and Steel Sintering and Pelletizing Industries (2012)"—have been issued one after another.

　　The green market is starting to target consumers.

　　In terms of timing, t-G has emerged the earliest (with the greatest flexibility in the short term; currently, a flurry of environmental protection-related policies is being released, which facilitates order fulfillment and accelerates project implementation). Next comes t-B (which boasts significant market potential, but China’s standards for environmental protection manufacturing are too low, and downstream buyers have weak purchasing power). As for t-C, its business volume is relatively small (including Dison’s wall-mounted boilers, Changqing’s gas stoves, and water purifiers from Biyuan/Nanfang Huitong).

　　In the environmental protection industry, the sectors that generate direct sales revenue from consumers are primarily concentrated in upstream equipment suppliers and downstream sanitation operation service providers. These companies have already established sales revenues by directly connecting with consumers to sell products or provide services. Compared to government projects or enterprise-order projects, they enjoy advantages such as stronger intrinsic growth sustainability and faster payment collection. However, since they directly participate in the market to generate sales revenue, they also face intense competition and the inevitable pressure of survival of the fittest. For product-selling environmental protection companies—such as Biyuan and Nanfang Huitong, which sell water purifiers directly to consumers—their R&D capabilities, technological innovation, product quality, and channel management strength are all critical factors influencing their operational performance.

　　Delve deeply into the sub-sectors of the environmental protection industry.

　　Looking at the sub-sectors, they can be divided into three major categories: water treatment, air pollution control, and solid waste management.

　　Water treatment encompasses six major sub-sectors: rural domestic wastewater, seawater desalination, reclaimed water, industrial wastewater, urban domestic wastewater, and urban water supply.

　　Atmospheric pollution control encompasses 10 major sub-sectors, including flue gas desulfurization for industrial boilers, denitrification for industrial boilers, VOC treatment, cement denitrification, flue gas management for thermal power plants, steel industry denitrification, steel industry desulfurization, thermal power plant denitrification, thermal power plant desulfurization, and dust removal.

　　Solid waste disposal encompasses eight sub-sectors: food and kitchen waste management, sludge treatment, industrial solid waste management, electronic waste handling, hazardous waste treatment, waste incineration, landfilling, and soil remediation.

　　These subindustries are at different stages of the lifecycle, and in pursuit of lean practices, this report will delve into the specifics of each subindustry.

　　Examine the future development of sub-sectors from three dimensions: industry growth rate, industry concentration, and market potential.

　　We have calculated the compound annual growth rates (CAGRs) for 24 sub-sectors from 2017 to 2020, as well as the industry concentration ratio (CR4) in 2020 and the market size (operating scale) in 2020. Among these, industrial solid waste, urban water supply, and soil remediation will each have a market size exceeding 200 billion yuan in 2020. Waste incineration, kitchen and food waste treatment, and soil remediation are expected to see an increase in industry concentration, with the industry concentration ratio (CR4) potentially reaching 20% or higher by 2020. In terms of growth rates, soil remediation, VOC control, reclaimed water, and rural domestic wastewater treatment are projected to exhibit substantial growth, with CAGRs ranging from 20% or higher from 2017 to 2020.