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Amanda Lee

Resource in tight demand in some areas, overvalued in others
When billionaire Li Ka-shing announced in May this year that Hutchison Whampoa and Cheung Kong (Holdings) would invest in the water industry, he was not the first to jump on the water supply shortage bandwagon.
Many funds that invest in companies which have businesses in raw water collection, water treatment and production, water and waste water transmission and distribution networks, and waste water treatment have been launched in the past few years.
The demand for stocks that operate in the water sector is so strong that some of the companies are overvalued, according to analysts.
'There aren't that many large pure players that are operating in the water sector, instead you tend to see smaller players,' said Zurich-based analyst of socially responsible investments Christoph Hugi at UBS.
'Recently, due to the pressure from funds to invest in the water theme, the valuation of this sector has gone up. Even though we have now seen a correction, the valuation is still relatively high.'
Investors continue to subscribe to the long-term growth of the global water industry. A report published by Credit Suisse noted that the global water market was US$190 billion in revenue in 2005 and was expected to grow to US$342 billion by 2010.
Asia is expected to be the driving force. The region was estimated to grow at a rate of 20 per cent from 2005 to 2010, and its market share in the world's water market was expected to grow from 25.5 per cent in 2005 to 35.5 per cent in 2010.
Banks such as Credit Suisse believe that China presents the most significant growth opportunities.
According to Jiao Yong,  vice-minister of China's Ministry of Water Resources, China's total water shortage is about 40 billion cubic metres - 7.1 per cent of its total 2005 water consumption.
Two-thirds of China's 660 cities are facing water shortage problems. The Ministry of Water Resources said that 64 per cent of ground drinking water was severely polluted, and 54 per cent of China's seven major bodies of water were unsuitable for drinking.
The government estimated that to address its water shortage problem, build sewage pipes, new waste treatment and supply facilities, the total investment would be  1 trillion yuan (HK$1.14 trillion) from 2006 to 2010.
This, according to Credit Suisse, compares with the  1.1 trillion yuan budgeted for the 11th five-year plan power grid spending.
Seven to nine Chinese cities have, since 2004, sold part of their shares in the municipal water companies to investors every year.
China Yangtze Three Gorges Project, developer of the world's largest hydropower project and parent of mainland-listed China Yangtze Power, had talks with the state-owned China Water Investment Group over a possible takeover.
The deal was said to be a central government plan to improve efficiency by having a smaller number of state-owned companies.
In July, Hong Kong-listed privately owned utility China Water Affairs Group  reported a total net profit of HK$427.24 million in the fiscal year to March from HK$63.37 million a year ago.
Mr Hugi said investing in utilities might not be the best option given that water tariffs in most parts of the world were still way too low.
And in many countries, including China, utilities are not free to adjust their tariffs without regulatory approval.
China Water Affairs chairman Duan Chuanliang  said that the group was allowed to increase tariffs on seven projects last year.
Turnover of water supply went up by 331 per cent to HK$240.3 million, or 31.39 per cent of the group's total of HK$765.53 million. The group's turnover stood at HK$134.73 million previously.
Sino-French NWS Holdings, the infrastructure and service flagship of New World Development operates 21 water plants in the mainland and was expected by analysts to have a 17 per cent growth in profit each year for the next three years.
Mark Po, an analyst at UOB Kay Hian,  said that earnings of companies such as NWS were suffering from a rise in operating costs. 'NWS runs a stable business, but now, like other infrastructure companies, the earnings are not as good as they could be.'
Investing in technology providers might offer a better return in comparison. 'The water sector is a defensive sector. We believe the growth will be healthy with the help of some breakthrough technology. But it is unlikely to be explosive,' Mr Hugi said.



Water stocks a draw but price pressure a bit high