“Multiply Your Money by Solving China’s Water Problem”

by Travis Johnson, Stock Gumshoe | June 6, 2008 2:55 pm

Well, I promised that I would catch up and get you the rest of the Asian Growth Stocks[1] teaser companies … this is the one I looked at a couple days ago, a paper mailing from Bryan Tycango that teased three stocks.

The first one was a stock I’d never heard of … Travelsky. Let’s see if he’s going to share brand new stuff for the other two as well.

The next stock is water[2]-related, as you might guess from the headline above. Tycango describes it as “a small company that could multiply your money 9-fold in 5 years by solving China[3]’s worsening water pollution.

So yes, we can confirm that it’s not just analysts who make up numbers — newsletter editors do it, too. Was there a focus group that decided that “9-fold” was more believable than tenfold? Who knows.

Anyhoo, on we proceed, shoes of gum on our feet, sneaking up on our quarry …

Tycango tells us that 70% of China’s waterways are polluted, and 90% of it’s groundwater, and diarrhea and cholera are constant threats.

So how do we solve that?

“… this company has patented state-of-the-art technology for turning polluted water — even filthy, smelly water — into pure, sweet drinking water … over the past 2 years, they’ve built 24 water purification plants in China — each purifying at least 29 million gallons of water a day.”

Nice, specific clue. Something to chew on.

We’re also told that they have $810 million in contracts “in the kitty” — which a boring old analyst would call the “backlog.”

And that their ssales last year were $137 million. So pretty tiny, though Tycango describes that as meaning that “enormous growth is already built in” because of that “kitty.” Good kitty.

We’re told that Saudi Arabia, Singapore[4], Dubai, and Algeria[5] are also buying this country’s water purification plants.

That, plus they’re apparently “carving out an important niche in another huge market — recycling used motor oil[6] and vegetable oil.”

Apparently, China, the Philippines, Vietnam[7], Singapore, and Saudi Arabia have installed these oil purification plants.

And the price? The shares are “still under $3” — Tycango expects a double or a triple and a continued march to $20+ as sales explode.

So what is it?

Well, old friends, the Thinkolator hates to disappoint … but we’ve seen this quarry before. This is Hyflux, introduced to us by Roger Conrad[8] back in early April.

The shares have moved up 10 or 15% since then, at the time they were around $2.25 and they’re currently at $2.58 (US — in Singapore dollars they’re up to 3.41). They trade primarily on the Singapore exchange at ticker 600, but also have some action on the pink sheets at HYFXF.

This is usually thought of as primarily an R&D company, but they’ve been coming into their own and winning some big contracts — the biggest was one they just confirmed last month for a big desalination plant in Algeria. The vast majority of their business has been in China, where they’ve developed a large number of water treatment plants (most of which have been spun out into an income trust, Hyflux Water Trust, which I own shares of).

The oil recycling stuff does exist and may be promising, but the letter overstates it a bit — as with many of Hyflux’s projects, most of them are just now in the early stages, relatively few are actually built or operating as far as I can tell.

So what’s not to like? Well, it ain’t cheap. They have freed up capital by getting their Chinese water plants off their books, and they’ve given the Trust the right of first refusal to buy any of their future water plants, so Hyflux itself clearly wants to provide technology and build plants, not own and operate them. The main technology they provide is the membrane, which is the key part of most water purification technologies — and it’s not unique to Hyflux, most other big water companies produce membranes and I have no expertise to share with you about who has the best product. It is a big, competitive business, going up against monsters like Veolia Environnement and GE, so it was probably a nice surprise for investors that they really got that Algeria deal (there was some uncertainty for a while — apparently word got out before it was “final.”

Is it worth your money? They are growing very fast, and it’s clearly an important business with high demand for their products around the world. They’re also fairly expensive, so it’s another scenario where you need to judge how much you want to pay for growth. My guess is that their growth will continue to be very solid, and that they will get their (small) share of the growing world water business, but my guess could be wrong. I personally liked the idea of the company when I heard about them a few months ago, but chose to invest instead in their new Hyflux Water Trust (D7TU in Singapore, HXWTF on the pink sheets — be careful on the pinks if this appeals to you, it only trades a couple thousand dollars a day). I liked the ownership of water plants, with the steady and growing income (since the Trust can buy more plants, and can lever up significantly if opportunity presents itself) … but certainly the trust is unlikely to see the same growth as the parent.

So that’s our little water warrior … any takers?

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