“Cash In on China’s $608 Billion ‘Dragon’s Thirst’” (Chris Mayer)

By gumshoe, August 25, 2011

Here’s the latest pitch from Chris Mayer for his Mayer’s Special Situations newsletter:

“It’s the ONE resource more precious than oil, natural gas or gold. Without it, China’s growth — and the world’s — will likely come to a screeching halt.

“Read on to discover the ONE tiny penny stock that has the breakthrough technology that could quench the ‘Dragon’s Thirst’…”

You’ve probably already guessed what that “one resource” is, yes? Just in case you don’t believe the hype, Mayer also includes a quote from Forbes right up at the top of his ad:

“[The Dragon’s Thirst] promises to be to the 21st century what oil was to the 20th century: the precious commodity that determines the wealth of nations.”

And yes, the dissembling with the mysterious “dragon’s thirst” language lasts only a few paragraphs — Mayer does tell us that he is, as you suspected, talking about water. And if there’s one thing that we’ve had hammered into our brains at least since the runup to the Beijing Olympics, even by the mainstream media, it’s that China’s water situation stinks. Their groundwater is heavily polluted, much of the north is an encroaching desert, people are moving to cities and demanding more and cleaner water, industrial and agricultural demand (and pollution) is out of hand and expected to only grow as employment and food production are key to preventing unrest… ths list goes on, and Mayer spends several pages giving examples and data points to buttress his argument.

But you’ve probably heard much of it already — China desperately needs more water treatment capacity, among other things, and it’s willing to pay for it. That’s where our “cash in” moment is supposed to arrive:

“According to China Daily, that’s why they recently allocated a massive $608 billion to upcoming water projects. “

And just to give a bit more of the lead-in to get you excited, here’s a taste of Mayer’s spiel:

“Water pollution is so bad in China that it sickens 190 million and causes 60,000 premature deaths every year.

“If ignored, this water pollution problem could lead to soaring health-care costs, lost productivity, unemployment and huge declines in agricultural production.

“And without a healthy, productive working population China’s future prosperity and growth will suffer.

“That’s why the companies that offer solutions to China’s water pollution nightmare… like the booming Asian-based company I recently uncovered… are poised to make a windfall of cash… as are a few lucky wealth builders.”

Sounds pretty good, right? We’ve certainly seen pitches for stocks that play off of demand for water before — it is, after all, an easy sell: we all know that water is the one essential ingredient for life, and that with a growing population and a more polluted world, the shortage of clean water should mean — if it’s anything like a free market — that water should get more valuable. And when things get more valuable, the people who own them, or who can help you create them or move them or service them, make more money.

Of course, water is also a special case — governments and populations are often willing to let water-related companies make good profits, particularly when that profit motive helps to build new treatment technologies, or new pipelines, or improve services … but when real shortages happen you’d have to think that there’s a limit. If Los Angeles runs dry, one imagines that California won’t let farmers charge the market rate for their water rights, because the seller’s idea of the market rate for water in a drought looks a lot like gouging and profiteering from the perspective of a thirsty populace.

But that may be just my personal peccadillo — something that has made me cautious about buying companies who rely on the value of their “water rights” and more interested in companies with water-related products or technologies. What we want to find out today is which water stock Chris Mayer is recommending now to profit from China’s huge spend on water treatment. How about some clues?

“This company is the NEW Microsoft of Water Technology… where you might have the opportunity to turn $50,000 into $950,000 with just this ONE penny stock.”

Sounds pretty profitable, no? Here are some more details:

“The bottom line is that this fast-growing Asian-based penny stock I just uncovered is on track to becoming the next breakthrough water technology company to score big gains.

“You could see gains of 1,900%… or more… with this tiny Asian water company with its breakthrough patented clean water technology….

“… priced under $2 a share….

“This company has created a proprietary clean water ultrafiltration technology that is poised for explosive growth in China and the rest of the world.

“An award winning technology that selectively remove things such as chemicals and particles from water… making the water ultrapure.”

Hmmm … this one’s starting to sound pretty familiar. Let’s sniff out a few more details from the pitch:

“Already, this rapidly expanding company has secured over $800 million worth of projects in the first quarter of this year.

“Their full-year 2010 revenue and profits both hit record levels… a result of the explosive growth this tiny penny stock is experiencing in China and around the world.

“And also a reflection of the high praise this little-known company is receiving in the water industry…

“Winning prestigious awards for its proprietary water treatment technology, its top management and its continuous innovation….

“you don’t have to send your money out of the U.S. to invest in this tiny Asian-based penny stock… you can do it easily right through a local broker in 3 minutes.”

And finally, a few more hints about the company’s products and management:

“… this innovative water treatment company has an incredible range of award-winning membrane filtration products and applications – for industrial and consumer use – that can be easily adapted to different water treatment needs throughout the world.

“The company’s leader recently won a prestigious award for Entrepreneur of the Year.

“With such a driven leader heading the company’s R&D department, this innovative company developed a proprietary ultrafine membrane filter that outshines all its competitors.

“And it did it in-house.

“Allowing it to retain better control of the raw materials, manufacturing costs and quality of the product…”

Well, we won’t really need to put the Thinkolator into high gear for this one … though of course we’ll quickly process those clues to double-check.

Yep, as suspected, this is a company we’ve covered several times in the past: the Singapore membrane technology firm Hyflux (600 in Singapore, HYFXF on the pink sheets. FYI, there’s also a pink sheets ADR that represents 20 Singapore shares, HYFXY — but volume is much lower and it doesn’t trade everyday as HYFXF usually does).

According to Bloomberg, Hyflux currently trades at a trailing PE of about 22, and it has often been touted as a growth machine largely because of the huge regional demand for water treatment — not just from China, but locally in Singapore and throughout Southeast Asia, and in the Middle East, where Hyflux has shown some progress in building a business. It may be technically a “penny stock” if you go by the single-digit share price, but it’s not a particularly small company — they have a market cap of over a billion dollars, and Hyflux is reportedly the largest water-related company in Singapore, a country with a bit of a focus on that sector. They also pay a dividend of about 2.5%, which sounds decent for a growth-oriented company but is a bit on the low side for their sector and country.

It seems that the promised growth, however, has been slow to appear — or at least, slow to impact the share price. If we ignore the several months of cratering during the global financial crisis, Hyflux has seen its share price essentially bounce around from S$1.70 to S$2.30 over the past five years based both on broad market sentiment and on incremental good and bad surprises in their numbers — though it’s perhaps worth noting that the strength of the Singapore dollar, particularly over the past year, makes the performance look better for US investors.

Regardless of how you read the last several years of Hyflux performance, it’s clear that they’re in a downtrend lately — the stock is now making new 52-week lows below S$1.70 (that’s about US$1.40 — last close in Singapore was S$1.68, which means the fair value was US$1.38, last trade on the pink sheets was a slight premium to that at $1.40).

Why? Well, lots of Singapore stocks (and stocks everywhere) have been falling this month, but Hyflux also has a specific reason: their first half income numbers were released on August 5, and they came in 35% below last year’s earnings (and that was after the first quarter had shown year-over-year growth, so the second quarter must have been really a dip). Not what you typically like to see in a pretty expensive growth company (in case you feel bad for missing that, you’re not alone — Citigroup initiated coverage at a “buy” and put their price target at S$2.74 just a couple weeks before that disappointing earnings release).

You can see their presentation about the earnings release here, they have paid down debt through the issuance of preferred shares, and they’ve booked a strong backlog of new business, though they also have seen some setbacks — particularly in the Middle East and North Africa, where new projects have not come on as quickly as they might have hoped to follow on the huge project win they got in Algeria a couple years ago and which hit their revenues last year (thanks to the Arab spring and some economic weakness, we’re told) — coincidentally, there was a fire at their massive Algerian plant under construction, too, and that is going to push off completion by more than six months (it had been expected to be done this month). One of their big project wins is a major desalination plant in Singapore, so their home country and China are providing the lion’s share of revenues and are also expected to provide the near-term growth.

And in case you’re double-checking those clues — yes, CEO and founder Olivia Lum did indeed win a major world prize, she was named Ernst & Young’s “World Entrepreneur of the Year” a couple months ago, and she’s widely renowned for creating Hyflux on a shoestring 22 years ago and building it into a major innovative corporation — not too different from the plaudits we rain down on Silicon Valley garage startups who make it in the US.

And their core product is indeed high-tech membranes — used for both desalination and for wastewater treatment.

In case that inspires further research on your part, do note that since they’re listed in Singapore the big financial aggregator sites (like Yahoo Finance) are not going to be very helpful — best to go straight to the Hyflux website to get their reports and financials. I used to own Hyflux’s Water Trust, which was a dividend-focused trust that actually owned many of the plants they had built in China, but was forced out when that unit was sold to a Japanese company. I haven’t looked very closely at the parent’s numbers since then, so there may be something exciting (or terrifying) in those numbers that I’ve missed on my quick scan today.

And I’ll put the “this stock is fairly small and illiquid” warning out there as usual, particularly for those who buy on the pink sheets, though Mayer does it in his words as well — here’s what he says:

“You see, since Capital & Crisis has one of the best records in the world, it has attracted a large number of eager members. Over 22,000 and climbing…

“And the tiny water exploration company who has the inroads into China’s $608 billion windfall is trading well under $2 per share… which makes it a tiny penny stock…

“A stock which only has a relatively small number of shares trade each day…

“This makes the stock fairly illiquid.

“If we told 22,000people about a stock that small – frankly – all hell could bust loose.”

So that’s his excuse for why this pick has to be saved for his more expensive and exlusive newsletter — and that is a standard strategy from all of the big newsletter publishers, though some are better than others at limiting readership at their premium priced letters (it’s hard, after all, to turn away money). I will simply note that since your friendly neighborhood Gumshoe is revealing this for free there’s certainly the potential for this to reach more than Mayer’s 22,000 Capital and Crisis readers.

So don’t go crazy trying to buy it, if buying the stock is your goal — particularly if, like most of us, you can’t trade directly in Singapore where Hyflux is listed. And heck, it’s been moving down anyway, so unless you think you’ve got a keen eye for picking bottoms there may not be a rush. Check the price in Singapore, do your currency conversion, and use limit orders for whatever you think a fair price is for the US-traded shares on the pink sheets. It trades pretty much every day, but that doesn’t mean it trades at a fair price every time.

And yes, in case you sat through his whole ad, Mayer is also still teasing some of his past picks as “special reports” that you get with your subscription — I’ve written about many of these over the past year, you can click here to read my sleuthification of the “golden staircase” teaser, and here to see his “special situation” pick about Greenland’s hidden $1.3 trillion treasure.

So there you have it — one more play on Chinese water treatment for you, if you’ve an opinion about Hyflux that you’d like to share, or have other favorites in this space, feel free to let us know with a comment below. Thanks!