Check on China: A water play
Mark Twain used to have a saying about the quest for water sources during the pioneer days of the Wild West: “Whisky is for drinking while water is for fighting over!” In the case of China, though, the writer’s adage could now easily be: “Water is for investing.”
China is spending billions to prevent a water shortage crisis brought on by its scarce natural endowment, with the deficiencies made worse by its phenomenal economic growth and terrible pollution. While it ranks sixth in the world in terms of total water resources (with around 2,805 billion cubic meters), China’s per capita water resources are only 28% of the world’s average and among the lowest 13 countries in the world.
The shortages are even more overwhelming when considering how much is actually usable.
According to the Chinese Ministry of Water Resources, only slightly more than a third of the 2,805 billion cubic meters of water are utilizable. In fact, 400 of China's more than 600 cities lack water, 110 of which are in particularly short supply. Pollution has made the situation worse, with close to two thirds of China’s drinking ground water quality severely contaminated. Considering that Chinese water consumption is growing at around 10% a year, the country definitely has staggering water problems.
To address these challenges, the Chinese government is going on a major water spending spree. Between 2006 and 2010, it plans to spend around RMB 1,000 (US$133 billion) to build sewage pipes and new waste treatment and water supply facilities. The result, of course, are major investment opportunities.
There are already a flood of firms trying to capture the demand with over 100 domestic and foreign companies currently in the water fray. As with everything in China, the water sector is not for the faint-hearted. Despite the money pouring in, only certain parts of the water value chain make money.
A major barrier for industry are the low water tariffs. The average Chinese water tariff is around $0.27 a liter, substantially lower than the United States, which stands at US$0.92, and England at US$1.91 a liter.
As a result, many water supply projects do not earn enough revenue to be financially solvent; the root of the problem in China being that the country’s government has been reluctant to raise water fees to cost-effective levels for fear of igniting protests and social unrest from local residents.
Aside from low water tariffs being a hurdle, another obstacle is waste-water treatment. Again, the problem is collecting the adequate fees to pay for the treatment plants—most cities don’t operate the constructed facilities because of high power costs. In fact, about half of the countries 1,000 waste treatment facilities operate at below 30% capacity.
In essence, just because China is pumping money into the sector does not mean profits are just flowing out.
The key, of course, is to capture the money-making value chain. A good question to ask is where is it and why is it there? Your answer would be that it lies in efficiency improvements in the water-supply plants, transmission and distribution. It falls within these three areas because of the need. The average water-wastage rate in Chinese cities is around 17%, with highs reaching 50%. The levels are far above the Chinese government’s goal of 8%. To reduce these losses, there will be increased spending on new pipes and control systems – that’s where the profits will be made. Those who want to venture into the water capacity and waste-water treatment sectors should focus on firms that serve industrial customers rather than municipal ones, because private patrons are more likely to pay.
These numbers should be able to guide your investments to the many firms that are trying to capture the money in China’s water industry. Among the U.S.-listed players, the choices are Watts Water Technologies, Inc. (NYSE: WTS), a North Andover, Mass. firm, and the larger-cap Veolia Environnement (NYSE: VE), a French company. The Singaporean Exchange is also home to at least eight listed companies in the segment, including Hyflux Ltd. (SIN: 600) and Bio-Treat Technology Ltd. (SIN: B22).
Bottom line: The key is to use the same precautions investing in China’s water markets as you would when you drink the water—follow the source and make sure it is clean.
