1、 Definition and demand of sewage treatment industry

The sewage treatment industry refers to the use of physical and biological methods to remove pollutants from industrial wastewater and domestic sewage, so that the water quality of the sewage can meet the requirements for discharge or reuse. The work of the sewage treatment industry mainly includes three aspects: firstly, sewage treatment, including the treatment of industrial wastewater and domestic sewage; The second is sewage recycling, which refers to the deep treatment of sewage by appropriately treating it to meet certain water quality standards, meet certain usage requirements, and can be used for beneficial purposes; The third is sludge treatment, which refers to the landfilling and other treatments of the sludge generated after sewage treatment.

The per capita water resources in our country are lower than the world average, and the situation of water pollution is relatively serious. Water pollution exacerbates the contradiction of water scarcity and poses a threat to industrial and agricultural production as well as people's livelihoods. Therefore, improving the long-term mechanism for water pollution prevention and control, enhancing the technology of China's sewage treatment industry, and ensuring water ecological security are crucial to the fundamental interests of the people and the sustainable and healthy development of the entire economy and society. As the final stage of social production, the main task of the sewage treatment industry is to carry out terminal treatment. From the perspective of sewage treatment process, polluted water sources enter natural water bodies or reclaimed water reuse systems for the next cycle of water resources after treatment; From the perspective of supply and demand, as a public welfare industry that provides "governance services", the downstream of the sewage treatment industry is the "service" demander, which forms a demand relationship with the government.

2、 Analysis of the Competitive Landscape in the Sewage Treatment Industry

The development of China's sewage treatment industry was relatively late. From the founding of the People's Republic of China to the reform and opening up, the demand for sewage treatment in China was mainly focused on industry and national defense. After the reform and opening up, with the rapid development of the national economy and the significant improvement of people's living standards, the demand for sewage treatment has further increased.

(1) Water management enters the Chinese market, with significant competitive advantages in large-scale projects

In the 1990s, with the promulgation of reform policies and the allowing of social capital and diversified investment entities to enter the sewage treatment industry, the market-oriented exploration of China's sewage treatment industry began. A group of water companies, including Veolia Water Group, Suez Environment Group, Thames Water Group, Berlin Water Group, etc., have entered the Chinese sewage treatment market on a large scale through various means such as direct investment, holding, and equity participation, relying on their brand and capital advantages, and have achieved a leading position in the market. In large-scale projects, multinational water conglomerates have strong competitive advantages due to their strong capital strength and advanced technology. However, in small and medium-sized projects, due to relatively high management costs, the competitive advantage is not obvious.

(2) State owned enterprises have rapidly expanded their business scale through restructuring, mergers and acquisitions, and other means

In September 2002, the National Development and Reform Commission, the Ministry of Construction, and the State Environmental Protection Administration issued the "Opinions on Promoting the Industrialization of Urban Sewage and Garbage Treatment", requiring a change in the concept that sewage treatment facilities can only be invested by the government and operated and managed by state-owned units. Existing public institutions engaged in urban sewage operation should be restructured into independent enterprise legal persons in accordance with the "Company Law", and those who do not have the conditions for restructuring should sign entrusted operation contracts with government departments and establish a management system with a franchise system as the core. With the successive promulgation of reform policies and systems, the marketization process of China's sewage treatment industry has further accelerated. A group of large state-owned listed enterprises, such as Beijing Enterprises Water Group, Xingrong Investment, and Entrepreneurial Environmental Protection, have rapidly expanded their business scale through mergers and acquisitions. With strong capital strength and abundant social resources, they have developed and grown rapidly, actively exploring and seizing the market nationwide, becoming strong competitors for multinational water companies.

(3) Private enterprises have emerged as a new force with strong momentum

In recent years, with the further encouragement and guidance of private capital to enter the field of municipal public utilities by the government, a group of private enterprises represented by Sande Group, Guozhen Environmental Protection, and Pengyao Environmental Protection have rapidly risen with market-oriented management mechanisms, technological innovation, and other advantages, becoming a new force with good development potential in the industry, and have begun to occupy a certain * in regional and segmented markets. Multinational water companies, large state-owned listed enterprises, and private enterprises constitute the main market-oriented competitors in China's sewage treatment industry.

At present, China's sewage treatment industry is still in its early stages of development, with low market concentration. With the rapid development of China's environmental protection industry, the market size will continue to expand for a considerable period of time. The demand for market-oriented services in the sewage treatment industry will gradually become prominent, and the industry will show a trend of resource integration and cross regional development. Driven by economies of scale, enterprises with good market reputation, financial strength, advanced technology and services will accelerate their expansion pace, and the concentration of the industry will gradually increase in the future.

3、 Analysis of the main business models in the sewage treatment industry

At present, the main business services in the industry can be divided into three types: construction period services, operation period services, and investment operation services. Among them, the most common and effective business models in the industry are:

1. Provide construction period services through the "Environmental Engineering EPC" model

The EPC mode of environmental engineering refers to the provision of services for the entire process or several stages of sewage treatment environmental engineering design, equipment procurement, engineering construction, installation and commissioning, trial operation (completion acceptance), etc., commissioned by the client in accordance with the contract, and fully responsible for the quality, safety, construction period, and cost of the construction project.

2. Provide operational services during the operation period through a "commissioned operation" model

The entrusted operation mode refers to the construction of sewage treatment facilities by customers, and after completion, entrusting enterprises to carry out specialized operations and pay a certain operating fee. Reduced customer operating costs while lowering the risk of upfront capital investment for the enterprise.

3. Investment and operation service model

The BOT model is a franchise agreement signed between an enterprise and the government or its authorized party, in which the enterprise establishes a new project company and, within the agreed period, the project company undertakes the investment, construction, and operation of sewage treatment facilities. During operation, the project company collects sewage treatment fees from the government to cover operating costs and obtain revenue. At the end of the franchise period, the project company will transfer the entire sewage treatment facility to the government free of charge.

The TOT model refers to the government or its authorized party transferring the franchise rights of the constructed sewage treatment facilities to enterprises for operation and management for a certain period of time. Enterprises collect sewage treatment fees from the government to cover operating costs and obtain benefits. At the end of the franchise period, the enterprise shall transfer the entire sewage treatment facility to the government department or its authorized party free of charge.

The PPP model refers to the establishment of a cooperative relationship between the government and enterprises, and the completion of sewage treatment projects through the use of BOT, TOT, BOO, commissioned operation and other operational methods. At present, the PPP model is a cooperative model actively promoted by national government departments, which improves the operational efficiency of sewage treatment projects, optimizes risk allocation, promotes innovation and fair competition by introducing social capital and establishing multiple optional operation modes.

4、 The favorable and unfavorable factors for the development of the sewage treatment industry

1. Favorable factors

(1) The support of national policies will effectively promote the development of the sewage treatment industry

The environmental protection industry is a policy guided industry, and policies are an important driving force for the development of the industry. With the increasingly serious environmental problems, the central and local governments at all levels are paying more attention to the development of the sewage treatment industry. In recent years, the government has issued numerous policies in the water treatment industry. The country's support for the environmental protection industry is gradually increasing, and the introduction of favorable policies such as capital investment and tax incentives will effectively promote the development of the sewage treatment industry.

(2) The economic development and urbanization process in our country provide vast market space for the sewage treatment industry

In the past thirty years, China's national economy has made rapid progress, and the growth rate of gross domestic product (GDP) has remained at a relatively high level. From the experience of developed countries, it can be seen that when the economy grows to a certain stage, governments at all levels tend to place greater emphasis on environmental protection than on economic growth. The country's increasing emphasis on environmental protection will benefit the entire environmental protection industry, including the sewage treatment industry.

(3) The increase in sewage treatment fee standards is conducive to enhancing the profitability of operating enterprises

At present, the sewage treatment fees in China are generally low and there are some cities and counties that have not collected sewage treatment fees. In January 2015, the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Housing and Urban Rural Development jointly issued a notice on the formulation and adjustment of sewage treatment fee standards and other related issues, stating that the fee standards should compensate for the operating costs of sewage treatment and sludge disposal facilities and make reasonable profits. Before the end of 2016, the charging standards for sewage treatment in urban areas should be adjusted to a minimum of 0.95 yuan per ton for residents and 1.40 yuan per ton for non residents; County towns and key towns should be adjusted to a minimum of 0.85 yuan per ton for residents and 1.2 yuan per ton for non residents. For those who have already reached the low fee standard but have not yet compensated for costs and made reasonable profits, the sewage treatment fee standard should be further increased in combination with the situation of pollution prevention and control. For cities, counties, and key towns that have not collected sewage treatment fees, they should be collected before the end of 2015. The increase in sewage treatment fees is expected to improve the profitability of sewage treatment operation enterprises and increase the motivation to take over sewage treatment operation projects.

(4) The exploration and promotion of diversified operating models are conducive to the further development of the industry

The Chinese government has successively issued notices such as the "Notice on Issuing Several Opinions on Promoting and Guiding Private Investment", the "Measures for the Administration of Municipal Public Utility Franchise Operations", and the "Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investment", which provide strong support for introducing the PPP model. Introducing the PPP model in the sewage treatment industry is beneficial for alleviating government financial pressure, improving operational systems, enhancing management levels, and promoting the upgrading of sewage treatment infrastructure. The promotion of PPP model provides more possibilities for business cooperation among enterprises in the industry, effectively promoting the expansion of business scale and benefiting the further development of the entire industry.

2. Adverse factors

(1) Multi head management in the industry

The sewage treatment industry involves many supervisory departments, and the Ministry of Environmental Protection is the supervisory department of China's environmental protection industry. Environmental protection departments at all levels are responsible for the unified supervision and management of environmental protection work; The Ministry of Housing and Urban Rural Development is responsible for the administrative management of sewage treatment project design and construction; The water resources department is responsible for reviewing the pollutant carrying capacity of water bodies near sewage treatment projects and proposing opinions on limiting the total amount of pollutant discharge; The National Development and Reform Commission is responsible for macro management and formulating industrial policies. Multi head management can lead to cross functional situations, and industry standards and fee standards cannot be unified among different departments, resulting in low efficiency in handling affairs.

(2) The construction of pipeline network lags behind

Wastewater treatment is a systematic project that goes through stages such as inflow, wastewater treatment, and drainage. In the sewage treatment process, it is necessary to construct a sewage treatment plant to meet its requirements, and to construct a pipeline network in the inlet and outlet stages. At present, the overall penetration rate of China's pipeline network is relatively low, and a large amount of sewage is directly discharged due to the lack of pipeline transportation, resulting in many sewage treatment plants not timely realizing environmental benefits after construction; The existing pipeline network also has varying degrees of aging problems, which may cause secondary pollution to the treated water. The lagging construction of pipeline networks will lead to problems such as direct discharge of sewage and secondary pollution of water use, which will affect the development of the sewage treatment industry.

(3) The degree of specialized operation is not high

Although the sewage treatment industry has achieved rapid development, the market-oriented operation time is relatively short, and the degree of market-oriented operation is still not high. Most companies in the industry have low personnel quality and lack advanced technology. Due to the lack of a well-established cost control and incentive mechanism, enterprises are unable to effectively control operating costs and ensure sewage treatment quality. At the same time, due to the generally low sewage treatment fee standards in China, the profit margin of sewage treatment enterprises is limited. Moreover, due to the characteristics of large initial capital investment and long capital recovery period in this industry, the survival pressure of enterprises in the industry is enormous, and they cannot invest a lot of funds in core issues such as personnel training and good configuration, technology research and development, and innovation. In the industry, the development of various enterprises is uneven, and the overall level of specialized operation is not high.

(4) Lack of supporting financing tools

The sewage treatment industry has the characteristics of large initial capital investment and long investment recovery cycle, thus placing high demands on the financial strength of enterprises in the industry. The main financing channel for most sewage treatment enterprises is still bank loans, which have high financing costs. At present, there is a lack of low return, long-term, and stable financial supporting tools in the industry that are suitable for the development of the industry to meet the funding needs of enterprises.

5、 Analysis of the Prospect of the Sewage Treatment Industry

(1) National policies are an important driving force for industry development

With the vigorous promotion of energy conservation, emission reduction, and ecological civilization construction in China, multiple laws, regulations, and policy documents related to water environment improvement have been introduced in recent years. The continuous release of favorable national policies is conducive to the further expansion of the construction scale and service scope of China's sewage treatment industry, and is an important driving force for the overall sustained and steady development of the industry.

(2) The sewage treatment market in small and medium-sized towns and rural areas provides new opportunities for the industry

In 2013, the Ministry of Environmental Protection of China issued the "Guidelines for the Construction and Investment of Rural Domestic Sewage Treatment Projects", which provided detailed planning guidance on the technologies and investment costs adopted in the construction of rural domestic sewage treatment projects. With the introduction of the concept of "beautiful countryside" and the implementation of ecological agriculture construction policies, the rural sewage treatment market will experience explosive growth. Against the backdrop of vigorously promoting sewage treatment nationwide, sewage treatment in rural areas is bound to become an important area of concern in the future and is expected to become a new growth point for the sewage treatment industry.

(3) The improvement of sewage treatment standards drives technological progress in the upgrading and transformation industry, and brings new profit growth points

Since the 1990s, the number and scale of sewage treatment plants have continued to grow, but there are no relevant laws and regulations that strictly regulate the quality of discharged water after treatment. At present, China's sewage discharge standards are generally lower compared to developed countries. According to the "Ten Measures for Water" and relevant regulations of the new Environmental Protection Law, the standards for sewage discharge have been raised. Under the increasingly strict regulatory situation, some sewage treatment plants have entered the stage of large-scale upgrading and transformation, upgrading their water quality from Level 2/Level 1 B to Level 1 A standard. If both existing sewage treatment plants and newly built sewage treatment plants achieve a drainage standard of Grade A during the 13th Five Year Plan period, and the average investment is calculated at 1000-1200 yuan/ton to upgrade the water quality from Grade B to Grade 1, the scale of the renovation market will exceed 150 billion yuan, and the annual compound growth rate will exceed 30%.

(4) Exploring new models will promote market-oriented reforms in the industry

Another development trend in China's sewage treatment industry is to vigorously promote third-party governance and encourage social capital to participate in pollution reduction and emission trading. On May 26, 2015, the Ministry of Finance and the Ministry of Environmental Protection jointly issued the "Implementation Opinions on Promoting Government and Social Capital Cooperation in the Field of Water Pollution Prevention and Control", which requires the promotion and use of the PPP model in the field of water pollution prevention and control. Local financial departments should coordinate the operation of special funds for water pollution prevention and control, and provide moderate policy support for PPP projects. At present, most of the existing market sewage treatment capacity in China is controlled by government controlled sewage treatment plants.

Meanwhile, the funds required for sewage treatment are closely related to government fiscal revenue and industrial enterprise revenue. If the PPP model is adopted to introduce private capital, the sewage treatment capacity held by local governments will gradually be released. This not only effectively helps the government deleverage, but also enhances the operational capacity of sewage treatment plants and the overall quality of sewage treatment. Recently, some provinces and cities in China have released PPP projects worth over 100 million yuan. For sewage treatment enterprises, the current concentration of China's sewage treatment market is relatively low, and the improvement of operational market space may effectively promote industry integration.