The Niandan river flows at the Kaleta hydroelectric dam, operated by China International Water & Electric Corp. (Photographer: Waldo Swiegers/Bloomberg)

Short Sellers Are Fleeing China's Biggest Water-Cleaning Firm

(Bloomberg) -- Once popular with short sellers, China’s biggest water-treatment company is basking in a clean-up of its own, with bearish investors fleeing in droves.

It’s a reminder of the power that Chinese government moves can have in determining winners and losers in the equity market. Little more than a year ago, short positions on Beijing Enterprises Water Group Ltd. soared. The attraction was a highly indebted company in an industry blighted by what analysts describe as opaque reporting standards.

One reason things haven’t panned out for bears: President Xi Jinping’s grand plan for a new metropolis southwest of Beijing is stoking optimism about a new wave of infrastructure, with Beijing Enterprises Water seen among the potential beneficiaries. Also helping: a government initiative to pull private-sector money into public projects, once discounted, is now gaining traction.

Short Sellers Are Fleeing China's Biggest Water-Cleaning Firm

The company’s stock has climbed more than 25 percent over the past year. Short interest has tumbled to just 2.4 percent of freely floated shares, from a peak of 19 percent last year, when it was among the most shorted stocks in Hong Kong, IHS Markit Ltd. data show.

The operator of hundreds of water supply plants and sewerage treatment stations is reinventing the way it finances itself to reduce net gearing, which reached a record 145 percent at the end of June. As well as issuing two perpetual bonds in the second half of last year, its investment arm issued 2.1 billion yuan ($304 million) of asset-backed notes on April 24 that won’t be included on the company’s balance sheet.

"The company is currently operating in good conditions and there is no need for investors to worry," a Beijing Enterprises Water investor-relations official said in an emailed response to questions. The firm has addressed "misunderstanding of our accounting standards," the official said.

Beijing Enterprises Water has embraced the government’s push for public-private partnerships, a plan unveiled in 2015 to lure more private money into infrastructure projects, while limiting the public debt needed to fund them. 

The company snagged 22 billion yuan worth of water environmental renovation projects in the first quarter of this year, in addition to the 16 billion yuan secured in 2016, according to Wallace Cheng, an analyst at Bocom International Securities Ltd. in Hong Kong. He expects them to land more in the future.

“The central government emphasized that the transportation, ecological, environmental and industrial sectors will have priority,” said Cheng. “It’s very likely that the company will be involved in these kind of environmental projects once the Xiongan development begins the tendering process,” he said, referring to Xi Jinping’s envisioned new metropolis. The firm has experience working on development of eastern Beijing’s Tongzhou district, Cheng said.

Not every analyst is convinced. Stagnant profit growth in the coming years from the firm’s treatment operations left Credit Suisse AG’s Trina Chen maintaining an underperform recommendation on the stock.

And some of the company’s peers have done poorly:

Short Sellers Are Fleeing China's Biggest Water-Cleaning Firm

Even so, the growth of the PPP model has potentially broad implications for infrastructure providers. There were 743 national PPP projects with investment valued at 1.86 trillion yuan at the end of 2016, Ministry of Finance data showed. The central government has budgeted 507.6 billion yuan of investment in PPPs for this year, Premier Li Keqiang said in March.

“PPP is finally taking shape,” Gene Ma, chief China economist at the Washingon-based Institute of International Finance, said at a May 9 forum in Tokyo. “It took a few years to get off the ground.”

Short Sellers Are Fleeing China's Biggest Water-Cleaning Firm

All but one of 27 analysts tracked by Bloomberg who cover Beijing Enterprises Water shares have a buy recommendation, making it the highest-rated among peers listed in the Bloomberg World Water Index, according to Bloomberg consensus analyst ratings.

“We expect the company will benefit from its good relationship with the government and see a breakthrough in PPP projects, which will boost its earnings growth,” said Yan Shi, a Shanghai-based analyst at UOB Kay Hian Holdings Ltd.