Sanitation Industry II: Marketization of Sanitation Services Is Deepened, And Intelligent Sanitation Systems Build A Moat

The increase in the amount of waste per capita promotes the endogenous growth of environmental sanitation demand. According to statistics, in 2016, the per capita domestic waste production in the United States reached 2.24kg; and Japan, which focuses on resource recycling, has also reached 0.95 kg per capita domestic waste production in 2016. However, China's per capita daily domestic waste production in 2016 was 0.43 kg. With the development of China's social economy and the increasing living standards of the people, the output of domestic waste per capita will also continue to increase, driving the increase in environmental sanitation requirements in terms of garbage collection, cleaning, and transportation.

The acceleration of urbanization has led to an increase in demand for sanitation. According to data from the National Bureau of Statistics, the urbanization rate of China's permanent population has continued to increase, from 36.2% in 2000 to 60.6% at the end of 2019. In 2017, the urbanization rate of the United States reached 82.06%, and the urbanization rates of the United Kingdom, France, and Japan were all above 80%. Therefore, compared with overseas developed countries, China's urbanization rate will continue to increase along with social and economic development, and people's quality requirements for environmental sanitation will continue to increase, driving the growth of environmental sanitation demand. Superimposed on the epidemic, the connotation of sanitation services continues to expand.

The Scale of the Sanitation Service Market Has Expanded, And Cleaning Accounted for the Largest Proportion

From 2015 to 2019, the scale of China's sanitation service market continued to expand, and the market size in 2019 was approximately 24.9 billion US dollars. The domestic sanitation service market is mainly divided into three parts, including road cleaning, garbage removal, and maintenance, the most important of which is road cleaning and cleaning, accounting for more than half, reaching 72%; followed by garbage removal, accounting for 16%.

The Degree of Marketization of Sanitation Services Has Deepened, And There Is Room for Growth

The strong expansion of large-scale environmental sanitation companies will gradually increase market concentration. With the introduction and promotion of the government's purchase of sanitation service policies and the PPP model, the sanitation market was gradually released after 2013, and the marketization of sanitation entered a stage of rapid development in 2016, especially the explosive growth of the sanitation market in 2017 and 2018. In 2018, the marketization rate was 57% and the marketization rate increased by 30% in two years.

Compared with mature overseas markets in the same period, the marketization rates of the sanitation service industry in the United States and Singapore have reached 81% and 100% respectively. Under the background of policy-driven and stricter environmental protection requirements, combined with the benchmarking of overseas mature market marketization rates, the marketization of environmental sanitation services is expected to reach about 80% by 2025 with its high efficiency and high-quality advantages. There is nearly 30% room for improvement.

In the Future, Market Competition Will Become More Intense, But the Increase in Industry Concentration Will Encounter Bottlenecks

From 2013 to 2019, the marketization of environmental sanitation was in the first half, and a large number of environmental sanitation projects were quickly released from business departments to enterprises. Small and medium-sized sanitation companies sprung in rapidly. At this time, the industry concentration is very scattered. With the deepening of the marketization of environmental sanitation year by year, it is expected that the marketization rate of sanitation in 2019 will increase to more than 70%. We judge that marketization of sanitation in 2020 will enter the second half. Entering the second half of environmental sanitation marketization, industry competition has intensified, industry mergers have been frequent, large enterprises have expanded strongly, industry concentration has increased, and the industry has entered a stage of intensive and large-scale development, leaving small and medium-sized sanitation companies with less and less living space.

The sanitation market in China is dominated by cleaning, different from the market structure of environmental sanitation service in developed countries. The marketization of cleaning and transportation is often tied to front-end cleaning. Therefore, China's sanitation companies rely on a large number of sanitation workers. In the cost structure, labor costs account for more than 60%, and the per capita income is usually only 45,000 to 55,000 people per person. The labor-intensive nature of cleaning operations makes it difficult for China's sanitation companies to expand, and the current market concentration is scattered.

At present, China's sanitation informatization and intelligent construction is in its infancy, but with the increase in investment in smart sanitation and the advancement of 5g information technology, the degree of sanitation intelligence will continue to increase. Refined management and the establishment of a top-level intelligent sanitation platform will be the key for China's leading sanitation companies to generate economies of scale and increase per capita output.

We believe that the core competitiveness of sanitation companies lies in their operational capabilities and expansion capabilities. In the short term, with the development trend of sanitation integration, companies with strong government resources tend to be able to obtain sanitation integration projects ranging from garbage cleaning to collection and transfer, with longer contract periods and deeper binding with local governments. In the long term, companies with sophisticated management and advantages in environmental sanitation information platforms are expected to escape the siege, widen the gap with SMEs in per capita output, gradually integrate the sanitation service industry, and grow into the industry leader. At present, due to the difference in the quality of the stock sanitation project reserve and the management experience of the running-in period, there is a certain gap in the net profit rate among listed companies. More attention should be paid to whether companies can bring economies of scale through smart sanitation and other means to build a long-term competitive moat.