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

Elliott Gue's Chinese water company ID'd

By Travis Johnson, Stock Gumshoe, August 23, 2010

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 ope