In the spring of 2019, the environmental protection industry welcomed two favorable tax reductions, and the policy dividends were abundant.

Following the announcement of a reduction in value-added tax in this year's government work report, the State Council executive meeting held on March 20th also clarified that "from January 1, 2019 to the end of 2021, third-party enterprises engaged in pollution prevention and control will be subject to a reduced corporate income tax rate of 15%". Officials involved in drafting and formulating relevant policies recently revealed to reporters that the official document may be released by the end of this month.

The State Council executive meeting held on March 20th clarified that from January 1, 2019 to the end of 2021, third-party enterprises engaged in pollution prevention and control will be subject to a reduced corporate income tax rate of 15%. People's Picture Network provides pictures

Intended to focus on cultivating and supporting the environmental protection industry

Who pollutes, who pays "promotes the development of third-party environmental pollution control enterprises

In 2014, the General Office of the State Council issued the "Opinions on Promoting Third Party Governance of Environmental Pollution", which proposed to "study and clarify tax preferential policies for third-party governance". In 2018, the "Opinions of the Central Committee of the Communist Party of China and the State Council on Strengthening Ecological Environment Protection and Resolutely Fighting the Battle of Pollution Prevention and Control" also mentioned that "we will study the implementation of income tax preferential policies for third-party enterprises engaged in pollution prevention and control, similar to high-tech enterprises".

Gao Xiaojing, Deputy Director of the Certification Center of the China Environmental Protection Industry Association (Beijing), stated that this policy is a concrete manifestation of implementing the requirements of the above-mentioned documents and an important measure to further encourage the development of third-party governance industries. This move will be beneficial in motivating third-party governance enterprises to increase their investment in technological research and development innovation.

Third party treatment of environmental pollution refers to the model in which polluters entrust environmental service companies to carry out pollution control by paying fees or according to contract agreements.

The implementation of third-party environmental pollution control is a future development trend, shifting from 'whoever pollutes, who controls' to' whoever pollutes, who pays'. With their professional and technical advantages, third-party control enterprises can reduce pollution control costs, improve pollution control effectiveness, and help fight the battle against pollution. Gao Xiaojing said that the introduction of this tax preferential policy not only focuses on promoting the development of third-party environmental pollution control enterprises, but also is a key manifestation of the country's cultivation and support of the environmental protection industry.

It is reported that currently, the country has implemented multiple tax preferential policies that are conducive to the development of the environmental protection industry. For example, the "three exemptions and three reductions" policy applies to income from projects engaged in "public sewage treatment" and "public garbage treatment", and the "enterprise income tax preferential policy for environmental protection special equipment" applies to enterprises that purchase and actually use environmental protection special equipment included in the "Catalogue of Enterprise Income Tax Preferential Policies for Environmental Protection Special Equipment". However, economic policies that directly provide tax incentives for environmental protection enterprises are still considered *.

Inclusive policies cover the entire industry

It is still uncertain whether it is a broad third-party governance enterprise or a third-party operation enterprise with independent legal personality for pollution control facilities

The reporter learned from various sources such as garbage incineration, sewage treatment, and hazardous waste disposal enterprises that many of their new projects are still within the preferential period of the "three exemptions and three reductions" income tax rate, and this tax reduction has little impact on their performance.

It is also reported that for a long time, the government has introduced relevant tax reduction measures for high-tech enterprises and small and micro profit enterprises, and small and medium-sized enterprises in the sandwich class have not been able to enjoy policy dividends.

In the Enterprise Income Tax Law of the People's Republic of China, the enterprise income tax for high-tech enterprises that require key support from the state is levied at a reduced rate of 15%. Among the 72 listed companies in the environmental protection sector currently sorted out by Tianfeng Securities, most of them have applied for high-tech enterprises and are still valid, and will be subject to a reduced corporate income tax rate of 15%.

For small and micro profit enterprises, the new policy is that from January 1, 2019 to December 31, 2021, the portion of the annual taxable income of small and micro profit enterprises that does not exceed 1 million yuan will be reduced by 25% and included in the taxable income, and the enterprise income tax will be paid at a rate of 20%; For the portion of annual taxable income exceeding 1 million yuan but not exceeding 3 million yuan, 50% shall be deducted from the taxable income and the enterprise income tax shall be paid at a rate of 20%.

Most environmental protection enterprises belong to small and medium-sized enterprises, with only a few enterprises obtaining the qualification of high-tech enterprises, and the vast majority of enterprises *, "an industry insider told reporters. This year's two tax cuts have basically covered all companies in the environmental protection sector. However, before the official document was issued, it was not yet determined whether the" third-party enterprises engaged in pollution prevention and control "mentioned at the State Council executive meeting referred to broad third-party governance enterprises or third-party operation enterprises with independent legal person qualifications for pollution control facilities. He believes that some large environmental protection companies operating in various regions should also enjoy this policy.

Downstream operating enterprises are expected to benefit centrally

Tax reduction benefits combined with expected relaxation of financing, environmental protection companies' valuations restored

The benefits released by the two tax cuts have also boosted the confidence of the financial and capital markets in the environmental protection sector. Many securities companies predict that environmental protection, as a typical policy driven industry, currently has clear policy guidance. The combination of tax cuts and financing is expected to relax, and listed companies in the environmental protection sector are also expected to make up for the gains. Since the beginning of the year, the Wind Environmental Protection Index has rebounded by 22%, underperforming the ChiNext board by 15%.

Analysts from the environmental protection department of Changjiang Securities Research Institute believe that the impact of the reduction in value-added tax rate is mainly on the engineering and equipment sector (monitoring/air/water engineering), while the operating businesses such as garbage incineration, sewage treatment, and hazardous waste disposal have benefited greatly from this reduction in income tax rate.

Overall, after excluding non third-party governance businesses, companies with significant operational and soil remediation ratios will benefit more. Among them, companies in the water operations sector will have greater performance elasticity. Analysts believe that, combined with the two tax cuts this year, listed companies such as Guozhen Environmental Protection, Dongjiang Environmental Protection, Gaoneng Environment, Hanlan Environment, Longjing Environmental Protection, etc. have greater comprehensive elasticity, basically between 5% and 12%.

Tianfeng Securities believes that 2019 will usher in the 2.0 era of industrial environmental protection. With strong policy promotion, emphasizing that polluting enterprises meet emission standards will further stimulate the demand for industrial pollution control.

The recovery of industrial enterprise profits and the formation of capital expenditures in environmental protection are inevitable choices. The net profit of the steel industry in 2018 exceeded 470 billion yuan, reaching a historical high level. Due to strict environmental protection production restrictions, steel companies have significantly increased their investment in environmental protection equipment and other aspects. Considering that some steel companies need to relocate and other reasons, the industry's capital expenditure level has significantly increased, rising from 32.1 billion yuan in the third quarter of 2017 to 41.6 billion yuan in the third quarter of 2018, a year-on-year increase of 30%.

Tianfeng Securities believes that the market space for third-party treatment of industrial pollution is vast. The market size of industrial waste gas treatment exceeds 100 billion yuan, and the potential for atmospheric treatment in the non electric sector is enormous. At present, the efficiency of governance equipment in the non electric industry is limited and the coverage rate is low. With the promotion of the second round of central ecological environment protection inspections and the continuous improvement of governance standards, the huge demand for new installations and renovations in the stock markets of segmented fields such as steel, cement, ceramics, bricks, and glass will accelerate in the next 3-5 years. The average cost of treating one ton of wastewater in industrial water treatment is increasing year by year, and the main source of space in the future will still come from the operating costs of treatment.