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!
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“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).