Rising Water Demand in China Will Lift Investors’ Boats

China’s Ministry of Water Resources recently reported that 260 million people in the country have limited access to safe drinking water. It estimates that China’s water shortage amounts to 40 trillion cubic meters per year. Meanwhile, China’s population is expected to top 1.4 billion in the next 10 years.

The ministry also estimates that China’s water demand increased at a compound annual growth rate of 1 percent to 2 percent during the last five years and will reach 711 billion tons per year in the next 10 years.

China’s average per capita water capacity is 2,100 cubic meters, relatively low compared to the rest of the world. At the same time, the country’s efficiency of water usage ranks as one of the worst in the world. The upshot: China will scramble for usable water during the next two decades.

Consequently, water-related investments are among the pillars in China’s latest five-year economic plan. The country’s policymakers name “energy saving and environment protection” as a priority, a category that includes waste recycling, clean coal and utilization of seawater

According to guidelines set by the five-year plan, the government plans to invest USD460 billion in environmental protection-related projects to support its goal of 15 percent to 20 percent annual growth in this area.

Sewage and water treatment industries are earmarked for special attention. Sewage treatment capacity is targeted to increase annually by 15 million tons per day, while all cities and counties are slated to have 100 percent sewage treatment capacity. China is the world’s largest sewage treatment market, with a sewage discharge volume of 59 billion tons per year, almost triple that of the US.

The Commercialization of Water

Although water laws and regulations have been on the books in China for a decade, only recently have authorities moved to strengthen and improve the regulatory framework. The new policies emphasize the government’s commitment to tougher enforcement as well as a faster commercialization of its water industry—a big opportunity for investors.

China’s State Council set the goal of limiting the country’s annual total water consumption to less than 700 billion cubic meters by 2030. China also seeks to limit the scale of water exploitation, improve the efficiency of water usage and curb water pollution.

China consumes far less water per capita than many bigger or similarly sized economies (see chart below). This should change as increased use of recycling and water treatment combined with new infrastructure allows easier water access. In an effort to rationalize consumption, the government has been steadily increasing tariffs for more than five years, but there’s still room for substantial increases as incomes strengthen and the domestic water industry modernizes.

China’s water infrastructure system is currently plagued by underdeveloped pipeline networks, low sewage treatment capacity and ineffective pricing mechanisms. Addressing these needs will be critical to sustaining China’s economic development.

The latter is very important for China, because many industries in the country (e.g., textiles, steel, and paper-product manufacture) consume a considerable amount of water in their operations. The government has implemented mandates for newly built water-consuming projects to use recycled water or desalinated seawater during production; these entities must first receive official review and approval to operate.

Water also is critical to the production of energy. China makes significant use of hydropower, and although hydropower doesn’t directly degrade water conditions, it does depend on steady, strong flow. China’s hydropower industry already is feeling the effects of decreased water flow, as climate change results in less rain and lower river levels.

The central government’s commitment to modernize the country’s water industry means that investors can reap solid profits from this sector for years to come.


Source: United Nations

 

The GIS portfolio’s direct exposure to the water theme in China is through the Beijing Enterprises Water Group, or BEWG (Hong Kong: 371).

BEWG owns and operates over 90 water supply plants and water sewage treatment plants in Beijing and several provinces, with actual water treatment capacity of over 10 million tons per day.

The company is led by one of the industry’s most respected management teams; BEWG’s chief executive Hu Xiaoyong was the founder of wastewater treatment company Zhong Ke Cheng Environmental Group (ZKC). Beijing Enterprises Water Group recently purchased ZKC to enter the wastewater market. Through its acquisition of ZKC, BEWG picked up 13 wastewater treatment plants with a daily capacity of 900,000 tons.

The firm boasts strong government ties. Its chairman and executive director, Zhang Honghai, worked for the Beijing municipal government for many years. The company is a subsidiary of Beijing Enterprises Holdings Limited (HK: 0392), and the ultimate shareholder is Beijing Enterprises Group Company Limited, the biggest state-owned company in Beijing.

BEWG has developed a proprietary technology that reduces electricity costs during the sewage treatment process. Analysts estimate that this technology saves BEWG-designed sewage treatment plants 10 percent on electricity expenses.

Our view is that the industry will eventually consolidate, a scenario that has occurred in many Chinese industries. The wastewater treatment industry is relatively fragmented, with the top 10 companies controlling only 26 percent of the market’s capacity, which means a merger and acquisition phase may start sooner than many investors expect.

Beijing Enterprises Water Group is a buy up to HKD3

 

 

 

 

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