How to profit from China's sewage
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Senior Writer
Eoin Gleeson Aug 22, 2008
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"Some people are worried about China and potential military confrontation. But it's losing the infrastructure race to China that we should be worried about," said Minnesota Democrat James Oberstar in Congress last month. He added: "It wasn't our Polaris missiles and atomic cannons that brought down the Soviet Union – we beat them economically. And [if we don't rebuild our infrastructure] we will lose all capacity to compete." Oberstar is right. America's ageing infrastructure – from its faltering electricity supply to its collapsing bridges – is in danger of hobbling any recovery it might muster over the next few years. But there is one area where China still has a long way to go to catch up with the US – water treatment.
Take what's happened at Lake Tai, China's third largest. One morning last spring, reports Tom Dyson on DailyWealth, millions of people in Jiangsu province awoke to find green sludge oozing from their taps. Industrial pollution from the nearby city of Wuxi had poisoned the lake to such an extent that algae completely covered it. For ten days, two million people living on its shores had no drinking water. A panic kicked off, sending the price of a two-gallon jug of bottled water from $1 to $6.50 overnight. It's far from a unique occurrence. More than 28% of China's water supply has been destroyed by industrial waste, says the nation's State Environmental Protection Administration (SEPA). The problem is thought to cost China more than $200bn a year.
The Chinese are trying to tackle the problem. In Wuxi, they have closed factories belonging to more than 2,800 firms since last spring, and sewage treatment plants are springing up across the country. Beijing has set out a five-year plan that requires 70% of Chinese cities to treat their wastewater by 2010. This is ambitious, to say the least. SEPA estimates that China will need to build 10,000 wastewater treatment plants to cover just half of its cities. As it stands, 278 of China's 662 cities have no sewage treatment at all. The plan will cost an estimated $125bn in total.
But how are the Chinese going to build $125bn worth of wastewater stations before 2010? David Fuller of Fullermoney says one must be realistic about such targets, especially in the face of a slowing economy and its impact on financing new projects. But he adds: "If China's development programme is only half completed on schedule, it would still be an impressive achievement." Faced with a mounting crisis and struggling to pull the necessary investment together in time, Beijing has been farming these massive projects out to foreign companies, say UBS analysts. And when it comes to water infrastructure, the best players in the business are in Singapore. As an island city, it found itself reliant on the Malaysian mainland to supply water as it developed, and had to build the world's most advanced water-management industry to maintain its independence. Dyson says it is Singaporean companies that will help sanitise Chinese cities, earning billions of dollars in contracts as they execute China's 11th five-year plan. We take a look at one Singapore-based company leading the Chinese water-treatment buildout in the box below.
A high-tech firm on the up
Of the Singapore companies that the Chinese are bringing in to clean up their wastewater, Bio-Treat Technology (SGX:BIOT) has been among the most active.
As UBS analysts point out, Bio-Treat specialises in using technology to treat polluted water to a level where it can be released safely into the environment.
As of March, the S$227m company had applied this technology to more than 500 wastewater treatment projects in China, including the first large-scale underground project in the country. Of its 15 other large-scale projects in China's premier cities, seven have been completed – generating S$28.6m a year.
In fact, the biggest challenge to the company is managing its high growth and sourcing financing.
But with cash to be generated from spinning off and listing some of its Chinese wastewater infrastructure projects separately – keep an eye out for this separate listing as Bio-Treat Water Trust in Singapore – it no longer needs to pursue a proposed rights issue, a prospect that has held down shares in recent years. At the moment, the company trades on a p/e of just four. Yet over the medium term, UBS expects Bio-Treat to achieve sustainable earnings growth of 12% per year.
Several brokers deal in Singapore stocks, including Barclays Stockbrokers (0845-601 7788).
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