Pick and mix: Asian water stocks in 2005

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China's privatisation drive in water and wastewater has been a boon to regional water stocks.

Last year saw the public listing of a number of Asian water companies: Asia Water Technology (Asia Water) was launched on the Singapore exchange, while the Manila Water Company was listed in the Philippines. The companies are very different in ownership, strategy and style but both are managing to prosper in the large but difficult Asian water and wastewater markets.

China remains the key driver for growth with most of the top stock picks active in that market. The few exceptions are regional concessionaires Manila Water, Puncak Niaga and Ranhill Utilities, all of which depend on their home markets for a steady revenue stream while they eye up deals elsewhere in the region.

Singapore’s water-only companies have had their ups and downs in 2005. For Asia Water, which operates in the Chinese market mainly through its subsidiary Wuhan Kaidi, the first nine months of trading have gone well. Since its IPO in March, the shares climbed 45% above the issue price, although they fell back again towards the end of the year. The company is reaping the rewards from its successful launch into large-scale municipal provision in mainland China in 2004.

End-of-year performance was very strong for Darco, which scored major new deals in one of its core markets – Taiwan – and in mainland China. The announcement of the two municipal design-build deals in Taiwan, together worth US$70m, and a project in Chu Bei City, China, led to a surge in trading volumes and lifted the stock up 80% in the course of a couple of weeks in December. Analysts agree that Darco’s order book looks impressive and are rating the stock strongly.

Dayen’s year has been mixed. The company is trying to break away from its reliance on public contracts in Singapore, and launched itself into the membrane bio-reactor business in 2005. However, investors are not yet convinced that the company will be able to deliver, despite steady revenue growth.

Hyflux has had a good year overall, albeit with towers and troughs. The stock peaked in July and again – at a lower level – in September when the SingSpring Tuas desalination plant was commissioned amidst much pomp and ceremony. Local analysts have been downgrading the stock but US fund Matthews International Capital Management seems to take a different view of its long-term prospects: it recently became a substantial shareholder, with more than 5% of the stock. The prospect of a S$700 million ($428 million) mega- project in Harbin is supporting the share price for now. Bio-Treat, meanwhile, had an excellent second half. The company’s main interests are in Guangzhou in southern China, where it built and operates six wastewater treatment plants.

Analysts are most excited about Malaysia’s Salcon Bhd and Singapore-listed Sinomem Technology and United Envirotech. Salcon’s Chinese investments, in Chenggong, Linyi and Changle County are expected to start generating income in 2006. The company is also braving the Vietnamese market, where last year it signed MOUs for additional projects. Sinomem Technology is also a strong buy, based on the company’s aggressive downstream expansion plans, although some investors are critical of the company’s sales strategy, which is focused on pharmaceuticals companies.

United Envirotech, another tech company with operations on the mainland, is singled out by analysts as the first of the Singapore water players to generate recurrent income from wastewater treatment in mainland China. In 2005, the company strengthened its position with a deal in Xintai (Shandong) and two projects for the China National Petroleum Corporation. The projects should start generating revenue for Envirotech in 2006.

Beijing Capital and the Shanghai Industrial Holdings/China Environmental Protection partnership are seen as the two strongest local players in the mainland water market, but is success in building market share reflected in rising share prices? Not necessarily. Despite a bevy of new projects for water and wastewater, Shanghai Industrial has underperformed the Hong Kong market along with other water investors such as China Everbright, CITIC Pacific (Veolia’s JV partner for several recent deals) and Interchina Holdings.

Tianjin Capital Environmental Protection is in the doldrums. Unlike many of its competitors, its investment strategy has been geared towards prioritising shareholder value over market share and TCEP has been investing carefully. However, the company reported a 35% plunge in net profit for the first half of 2005 when operations at the Jizhuangzi sewage wastewater plant had to be suspended. The stock took a beating in the second half of 2005 as a result and is rated ‘sell’ by analysts, a complete turn-around from 12 months ago when the stock was seen by many analysts as having the strongest underlying position in the market.

It is a different story for Beijing Capital, which has been on an upward trend in the last 6 months, outperforming the market and still getting ‘buy’ ratings from the analysts at the end of the year. Profits were up in 2005 and the company claims to be poised for an international listing. The group had planned to list on the HKSE in 2005 but their plans were still vague at the end of the year.

Over in Thailand, Eastern Water Resources (East Water) has been doing well, climbing along with the trend on the Bangkok exchange. The majority state-owned company is achieving steady growth in revenues and profits despite severe drought in the region it serves in 2005.

Manila Water is rated as a strong buy by analysts. Financial and operational performance was strong in 2005 and it has been rewarded with significant investor interest, as well as a nomination for GWI’s Company of the Year Water Award.

Malaysia’s water concession companies offer attractive investment prospects. Puncak Niaga, which holds a concession for the capital region, is rated as a strong buy by analysts, who expect an increase in tariffs due this month to boost revenues. Ranhill Utilities, which owns Johor concessionaire SAJ, is looking forward to a surge in revenues in the medium term from its projects on the Amata Nakorn industrial estate in Thailand, signed in October 2005. The stock looks like a bargain at the moment and is rated as a strong buy by analysts.