“China’s Water Treatment ‘Little Engine That Could’”

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Today I thought I’d sniff around a recent Elliot Gue ad, this time for the venerable Personal Finance newsletter — I’ve been thinking some about water investments recently, in part because I just sold shares in the Chinese water trust I owned (Hyflux Water Trust, which seems likely to be taken over at near the current price) and have been wondering how to replace that water exposure in my portfolio.

There’s certainly ample space for questioning the investment thesis for water — it is, among all natural resources, the one that is most necessary to life and most likely to be nationalized or heavily regulated at any time, among other political challenges, and for those of us in the US for whom water is almost uniformly super-cheap, it’s hard to envision a world where clean water flowing from your tap isn’t a universal birthright.

But there is, also certainly, a growing awareness that clean fresh water may be the source of much of the world’s conflict in the 21st century — the population grows, pressure on agriculture increases, urbanization demands more water and more water processing capabilities, and much of the industrializing world is going through the process of discovering just how hard it is to clean a water supply that you’ve polluted beyond recognition. So water investments are almost always of some interest to me, and to many of my readers.

Which is all by way of telling you that we’re looking at a Chinese water treatment company today — but the photos of Chinese pollution and tales of population growth in China already have investors attuned to investing in that sector, so the companies that are targeting the market have been sprouting from fertile ground over the past couple years. Which one is it that Elliott Gue thinks we should buy?

Let’s look at the clues from the ad:

“The crisis that could doom us all is the world’s shrinking water supply.

“Four continents are already running dry. But right now all eyes are on China, where 20% of the world’s population has only 7% of its water….

“Hundreds of water treatment companies are knocking on China’s door. But there’s one company that’s on a tear, and you’re going to want to own it before its stock takes off higher.

“They bolted out of nowhere several years ago as a subsidiary of a multi-billion-dollar company that is also growing by leaps and bounds, with a 171% jump in revenue since 2006, to $15 billion!

“From Unknown to Full-Blown Profits.

“Though they’re barely known outside Asia, this ‘little engine that could’ walked away with more Chinese contract wins than any competitor in 2009. Even more impressive when you consider their competitors include Dow Chemical, Bayer Technology, ITT, Siemens and a host of others.

“When the recession hit China in 2007, the company didn’t just sit on their hands. They got busy using their cash to buy up small regional players throughout the country. Now they have the inside track for the growing number of province-level contracts being issued.

“They’ve got lots of room to grow, too. China’s water treatment upgrades have barely started, and there’s billions of dollars in work yet to be awarded. At the pace this company is growing, they could double their contracts in a year.

“Not only that, they have long-term operations contracts for many of the facilities they build, which means steady cash flow to fund even more growth.

“Plus they’re expanding beyond China, and starting right at the top. They just won a $2 billion contract to develop 19 wastewater treatment plants in South Asia!

“With their fast-increasing number of facility construction contracts, savvy competitor buyouts, wide regional presence and long-term operations for strong cash flow, you could double your money in 12 months and triple it in 24.”

Sounds pretty interesting, no? Well, in case you don’t feel like signing up for a subscription to Personal Finance today, let me toss all that info into the mighty, mighty Thinkolator … just a moment now …

Well, we’re getting come conflicting readouts. My first impulse is that this must be Beijing Enterprises Water Group … hmmm, which is odd, because this is one that would be tough for most US investors to buy, but Personal Finance is a very inexpensive, mainstream US newsletter.

So I’ll leave out some potential that I’m wrong on this one just for that reason, but most of the clues do match perfectly. Beijing Enterprises is a big state-run utility group, basically a partial privatization of a bunch of Beijing municipal services … and they spun off part ownership of their water company, which became Beijing Enterprises Water Group, which is listed in Hong Kong at ticker 371.

They did win more Chinese water treatment contracts in 2009 than anyone else, they do have a wide presence in China, they did just win a $2 billion contract to develop 19 wastewater treatment plants in Malaysia, which is indeed in South Asia.

So why the hesitancy? Well, aside from the fact that it’s an odd choice for a mainstream US newsletter, since you have to buy in Hong Kong to get direct exposure to this company, there’s also the little fact that the other numerical clue is not a match — they are the subsidiary of a multi-billion dollar company (Beijing Enterprises Holding co), but that company posted revenue of about HK$24 billion in 2009, which is more like US$3 billion. And the water group had lower revenue than that, at about HK$1.7 billion.

Which means, either the Thinkolator is on the fritz or this is a different company. So who else could it be?

Well, as I said, the list of companies that are working to get a piece of the huge China water treatment business is a long one — there are several Singapore-based companies that are in line for that business, including the aforementioned Hyflux, Memstar Technology, Sembcorp (which just bought Cascal), and others … (Singapore is one of the global hotspots for water companies), but none of them is that big, either.

The big global water infrastructure and management companies are certainly far larger than that, firms like Veolia or Suez, and plenty of home-grown Chinese companies that are active in the water business, including Tianjin Capital (1065 in Hong Kong) and Duoyuan Global Water (DGW), which is more of a supplier to water treatment companies. So I’m stuck with Beijing Enterprises Water being the best solution I can think of.

If you do want to buy into Beijing Enterprises Water and can’t trade directly in Hong Kong, you could do so indirectly by buying the pink sheets-traded shares of the parent holding company, though in so doing you also are buying a natural gas distributor and a brewer, which may not be your intention, and it would certainly dilute any huge earnings power from the water treatment business. Beijing Enterprises Holdings has a home listing at 392 in Hong Kong and actually has two pink sheets listings, BJINY is an ADR that trades at 1:10 (meaning each pink sheets share represents 10 shares in Hong Kong), and BJINF is a 1:1 listing that’s not officially an ADR. Both are extremely low volume, though the ADR does at least trade a few shares on most days.

And for what it’s worth, Beijing Enterprises Water Group did make the shortlist for the 2010 Global Water Company of the Year Award (as did Cascal, just FYI).

So … a relatively unsatisfying foray into Chinese water treatment this time (you can’t know this, I suppose, but it has been almost physically painful to avoid the term “Chinese water torture” during this escapade), but perhaps interesting for folks who are looking for ways to profit from China’s massive water needs (and problems). I would only further note that we’re not the only ones who see a big business here, and the almost inevitable competition for big Chinese water treatment projects should lead to tighter margins (that is, after all, a big part of the reason for privatizing the business — to spur competition), so as Veolia and Suez and GE and Hyflux and Sembcorp all submit bids for water treatment projects, I wouldn’t be surprised to see the valuations for the local companies like Beijing Enterprises Water start to come in a bit (Beijing Enterprises Water Group trades at a trailing PE of about 40, Veolia and Sembcorp, though both are larger and more diversified, tend to trade around 10-12 times trailing earnings and pay a decent dividend).

So what’s your water of choice? Let us know with a comment below — or feel free to chime in if you think I’m off base in thinking this teaser stock is Beijing Enterprises Water, especially if you’ve got a better idea.

And Elliott had a few other ideas in this latest teaser ad, so I’ll keep digging and let you know if I find anything interesting. If you’ve ever subscribed to Personal Finance, I’m sure we’d all like to hear what you think — just click here to review it for your fellow investors. (Elliott Gue, just FYI, took over Personal Finance just a year or two ago — he also runs an MLP newsletter with Roger Conrad and edits the Energy Strategist, in case you’re interested in seeing subscriber reviews of his other work).

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17 Responses to “China’s Water Treatment ‘Little Engine That Could’”


  1. I just saw Elliot Gue speak at the MoneyShow a few days ago. He gave a lot of picks, although nothing having to do with water. Generally, he did not impress me, but for what it's worth here are most of them from my notes:

    Oil services firms- Weatherford (WFT) – expert on producing oil from oil fields; Schlumberger (SLB)
    Contract drillers: Buy Seadrill (SDRL) -former Norwegian co… most rigs are new built within last couple years… gov't may require new equipment for drillers, so SDRL will already have compliant rigs; short Diamond Offshore (DO)
    Equipment: Dresser-Rand (DRC) – makes and maintains compressors; new rigs will need to be more powerful. and Cameron (CAM) – makes blow-out preventers. Expect requirements for much bigger BOP's. BOP on horizon was 10 yrd old and built by Cameron, but BP was maintaining them.
    Producers: access to areas of growing production. Suncor (SU) – oil sands., EOG Resources (EOG) unconventional plays such as shale, Afren (AFR.L)& Tullow (TLW.L) leaders in offshore African market; bought up small discoveries from oil majors. Occidental (OXY) – excited about new large field in southern CA, Petrobras (PBR) -preferential access to largest fields in Brazil, plus small position in GOM.

    Second trend: Master Limited Partnerships (MLPs) – favorite income-oriented group. High tax-protected yeilds and distribution growth potential. Favs: KMP and EPD (conservative)
    Growth: Targa Resources NGLS
    More aggressive: Navios Maritime NMM- dry bulk shipping currently depressed but has long term contracts; Linn Energy (LINE) -upstream LLC/ oil and gas production. Hedged commodity
    LGCY – legacy reserves.
    Tankers seem to be bottoming. Two nice: Knightsbridge tankers (VLCCF) and Nordic American Tankers (NAT) no debt.

    3rd Trend.
    Buy Coal, sell Solar and Alternatives. “Sell Green and Buy Brown”
    Like: BTU, BUCY (makes mining equip), Avoid US coal cos. PVG (Penn-Virginia – owner of coal reserves/ MLP).

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  2. Gue doesn't know what he's talking about. I spent this evening reading the Pew report concerning the DOD's commitment to develop green energy ; resources for use on the battlefield, bases, submarines, etc. As I write the DOD is R&D ing GREEN! There are hundreds of millions of dollars being granted for this purpose. Google: NACF and go to Brighter Energy. org The articles talked about a foam the soldiers are spraying on the tents they use. It renders the tents permanently immovable but insulates against heat. Anyone know the company that developed the foam? GREEN IS HERE TO STAY!

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  3. I forget to mention an ETF: CGW Claymore S&P Global Water Index ETF. Around $19.00/share last I checked. Also: California Water Service: CWT. Around $35./share.

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  4. Hmmm. The last "hot" Chinese water stock I bought was EPSGF which has become SGXXF Sound Global and I've had a tough time finding out much about it. Anyone familiar with it?

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  5. Sound Global has had trouble completing a dual listing. It wished to join the HK stock exchange. Now it is going to happen through an introduction. This has been a costly and unimpressive process, though I do not why it failed before. Through the intro, the company will not immediaytely be able to raise req’d funds.

    However their cash on BS is strong (2009), and they have a HK$600m cr. line from China Merchants, as well as a recent HK$885m CB. So expansion appears covered for now. Probably a reasonable investment for now, except………..

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  6. As Travis points out, there could be a margin issue. I do think it is some way off though. The gov. has committed US$450bn over the next 5 years to water treatment/supply.

    There are established multinationals, smaller Asian companies and domestic water companies, largely state-owned in the mix.

    Foremost C hina needs its water supply; but it would prefer to have it in the hands of domestic players, hence the recent surge in new companies. However state companies, even if listed, will not hold out for sustained margins; national service will come first.

    For now, there should be enough liquidity (!) and action to go around. Beware when it all seems too easy or rich.

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  7. Tri Tech Holding IncNASDAQ:TRIT$10.60 0.54 (5.37%) Bid 10.6Ask 10.
    Tri-Tech Holding Inc. (Tri-Tech) is a provider of integrated solutions for China's water environmental protection industry, including the water pollution remediation, software and engineering industries. The Company combines software and hardware to monitor and manage China's natural and municipal water resources. It provides two lines of service: Wastewater and Tail Gas Treatment, and Water Resource Management. Through its Wastewater and Tail Gas Treatment segment, the Company designs sewage treatment and odor control systems for municipal supplies. Through its Water Resource Management segment, the Company assists the government in monitoring natural waterways. It provides systems that combine technological solutions with hardware (sensors, supervisory control and data acquisition systems and mechatronics) to track water levels for drought and flood control, monitor groundwater quality and assist the government in planning its water resource use and management.

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  8. Haven't written much about Tri Tech, but I do like them — more of a software company than a pure “water treatment” firm, which means they should get substantially higher margins over time. Still very small, and I don't know what kind of market share they have or could hope for since I have no idea who else sells water monitoring systems.

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  9. I came to this page to research a Micro-Cap Reporter article, for which I subsequently did my own digging on the basis of a 2009 IPO that went from 16 to over 30, then dropped to 9 because of accounting issues with a loosely related company. Only Duoyuan Global Water (DGW) fits all the clues. (The title of the article was "China's Great Water Crisis Winner!")

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  10. Haven't written much about Tri Tech, but I do like them — more of a software company than a pure “water treatment” firm, which means they should get substantially higher margins over time. Still very small, and I don't know what kind of market share they have or could hope for since I have no idea who else sells water monitoring systems.

    Like(0)

  11. Haven't written much about Tri Tech, but I do like them — more of a software company than a pure “water treatment” firm, which means they should get substantially higher margins over time. Still very small, and I don't know what kind of market share they have or could hope for since I have no idea who else sells water monitoring systems.

    Like(0)

  12. Jerry, I read that same Micro-Cap Reporter article. So do you think that Duoyuan (DGW) is likely to skyrocket as touted?

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