As noted in today’s issue, Beijing Enterprises Water Group, or BEWG (HK: 0371) is our favorite stock to gain exposure to China’s water industry. The company commands the leading position in the country’s water treatment industry, with business segments in sewage treatment, technical consulting, water supply service, and water works build-operate-transfer (BOT) projects.

Last year, the company underwent a restructuring phase during which it changed its business organization to increase its presence in higher-margin operations. As a result, revenues last year declined by 58 percent while at the same time earnings rose by 17 percent.

Sewage treatment profit margins are generally above 50 percent, which allowed BEWG to maintain solid profitability even while revenues as a whole fell. Revenues for sewage treatment also rose by more than 68 percent year over year. Revenues for consulting declined by 15 percent and those for water supply increased by 10 percent.

On the operational side, the company’s sewage treatment capacity has been steadily improving. Current daily operation capacity is nearly 3.8 million tons, an increase of almost 50 percent from more than 2.5 million tons in 2010.

The company also has been expanding geographically. Treatment capacity in southern and eastern regions grew by a whopping 90 percent and in remaining regions by more than 30 percent.

BEWG expects growth of its sewage treatment operations to contribute more than 40 percent of revenue this year. Sewage treatment, water supply and consulting confer extremely high profit margins for the company of up to 70 percent. As long as the company lands new projects in these sectors, profitability should remain solid.

The company’s revenue stream is occasionally erratic but the overall picture is one of steady growth and robust margins. So far this year, the company is on track for earnings growth between 20 percent and 30 percent.

The company has been expanding into foreign markets, too. Last year, it gained approval from Malaysia’s government to build an underground sewage treatment facility. The USD321 million facility will be located in the capital city of Kuala Lumpur and will be the country’s first underground sewage treatment plant. Scheduled for completion by July 2017, the project’s daily treatment capacity will be an estimated 320,175 tons.

Although there’s still plenty of available business in sewage treatment, growth in this sector will inevitably slow down as the country reaches its water-related goals. Consequently, management has been increasingly focusing on desalination and water engineering projects, where future growth is more assured. Beijing Enterprises Water Group is a buy up to HKD3 on the Hong Kong Stock Exchange.