Water Infrastructure

The industrialization of the emerging economies, the continuing urbanization process in Asia and higher levels of agricultural production have been drawing down water reserves much faster than they can be replenished. Credible studies have concluded that within the next two generations, water is expected to become the most important commodity in the world, easily surpassing oil.

India, China and Russia lead the way in water demand growth, with spending surging by 15.4 percent, 12.6 percent and 16.7 percent per year, respectively. Asia, on the whole, is responsible for 35.5 percent of this growth. It all adds up to a market projected to grow from USD200 billion now to some USD342 billion by 2010.

Source: GHD

Approximately a third of the world’s population lives in areas where water supplies are either stressed or scarce. The latter applies most to the Middle East. According to the United Nations, that number will nearly double to 64 percent of the global population sometime in the next 15 years as regions experience a combination of outright demand exceeding supply or significant water stress levels.

Agriculture is typically the largest consumer of water, with meat products being the most water intensive, vegetables being the least. As the world’s population continues to increase and more food must be produced, the need for water is becoming even more pressing.

At the same time, the supply of freshwater is relatively static. A fifth of water use is from ground sources that can’t be replenished quickly. More importantly, 97.5 percent of the earth’s water is saltwater. The rest is freshwater, but glaciers and permafrost account for 69.5 percent of that amount.
India and China, because of their respective population sizes and strong economic growth, also have a lot of problems to deal with regarding the use and supply of water.

For India, the majority of its water needs are met by groundwater. This has led to rapidly declining water tables and depleted aquifers, which often suffer from contamination.

In China, the Chinese Institute of Water Resources has calculated that 80 percent of the country’s wastewater is released without any form of treatment, polluting 90 percent of urban waters and 70 percent of rivers.

China offers by far the best opportunity in water investing, not only because of its strong economic growth and extremely deteriorated water quality, but also because the country has well-conceived plans to deal with the problem.

Per capita water consumption in China was 220 liters per day in 2006. In contrast, economically advanced countries such as Japan and the US consume 268 and 305 liters per day, respectively. The potential for greater consumption isn’t difficult to see as the Chinese continue to modernize their economy and improve their living conditions.

Because of misuse of its water resources, in a normal year the total water shortage in China is about 40 billion cubic meters. About two-thirds of China’s cities face water shortage problems, including big cities such as Beijing and Shanghai.

China is still discharging more than 70 billion cubic meters of wastewater per year, with industrial wastewater making up 60 percent of this total. Wastewater treatment plants are currently able to treat around 40 percent of it, while the rest finds its way into lakes and rivers untreated.

The Chinese have realized the importance of water to the sustainability of their economic transformation and, therefore, are spending around USD135 billion to invest in waste treatment and supply facilities. All cities in China are now required by the government to construct wastewater treatment facilities, in an effort to further reduce the untreated daily volume. 

China has started allowing private companies to invest through acquisitions of water assets. The idea is new technologies and better management practices will improve quality. In order to make the proposition more appealing, tariff increases are being planned. And the government has a lot of room to maneuver, as China has some of the lowest water rates in the world.

Source: Food and Agriculture Organization of the United Nations

Hyflux Water Trust (OTC: HXWTF) offers good exposure to the water infrastructure theme in China as well as other fast-growing emerging markets. It’s the first pure-play water trust to be listed in Asia.

The trust has been instituted with a mandate to primarily invest in water-related infrastructure assets, including water treatment plants, wastewater recycling plants, water recycling plants and desalination plants.

The dispersion of the initial portfolio across the water chain offers a diversification element, as does the exposure that the trust’s parent company, Hyflux, has in India, the Middle East and North Africa. Hyflux Water Trust should be receiving more of these assets as part of its portfolio, thus offering more growth opportunities.

The trust’s initial portfolio (capacity of 445,000 cubic meters per day) consists of assets located in key industrial areas of five high-growth provinces in China (Jiangsu, Hebei, Tianjin, Zheijang and Liaoning) that offer higher utilization rates and thus potential increases in annual tariff receipts.

Hyflux Water Trust is an even more attractive investment in today’s market environment because it offers solid growth coupled with a sustainable and predictable income stream through its 7 percent dividend yield. Hyflux will continue to add projects as it gets them up and running.

Hyflux, the parent company of the trust, is one of the most dynamic water companies in Asia, with a lot of recognition in the industry. The company has four core businesses.

Its water business includes seawater desalination, raw water purification, wastewater cleaning, water recycling, water reclamation and ultra-pure water production for municipal and industrial clients.

The industrial business includes separation, concentration and purification treatments for manufacturing process streams. The structured project division includes privately financed projects either as build-own-operate (BOO) or build-own-transfer (BOT) schemes.

Finally, its consumer division includes air-to-water and home filtration products, including faucet and under-sink filters for the consumer. The company is well known for its membrane technologies. Its membrane and materials research center in Singapore is the largest in Asia outside of Japan.

Given the company’s strategic positioning in high-growth areas, it should be relatively easy for it to supply Hyflux Water Trust with more solid projects because water reuse remains a solidly growing business. Globally, capacity is forecasted to increase to around 33.7 million cubic meters per day in 2010 and to 54.5 million cubic meters per day in 2015. A fifth of this capacity is expected to be in China.

Hyflux Water Trust is a good way to capture the growth as well as a steady stream of payments. Hyflux Water Trust, a new addition to the New World 3.0 Portfolio, is a buy at current prices.

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