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How You Can Profit From China's Water Cleanup? - By Tom Dyson

Singapore is an island at the southern tip of Malaysia. It separated from Malaysia in 1965. Singapore has no rivers or lakes. After the separation, the city was growing fast and needed water. So Singapore signed two water treaties with Malaysia... and started importing its water through three large pipes.

One of those water treaties expires in 2011. And the second treaty expires in 2061. Singapore wants to extend these treaties to ensure its water security beyond 2061, but Malaysia wants to raise the price of water by a factor of 20.

The water dispute has been a problem since Singapore's independence. In order to maintain this independence, Singapore looked for other sources of water. It built the world's largest and most efficient seawater desalination plant. It developed techniques for reusing wastewater multiple times... And it turned three quarters of its land into rain catchment areas.

As a byproduct of this drive for self-sufficiency, Singapore formed the world's most advanced water management industry...

China is the most polluted country in the world. Seventy percent of China's rivers and lakes are polluted, and half of its cities have contaminated groundwater. In yesterday's column, I explained how China has changed its approach to pollution.

The Chinese have recognized environmental damage is costing China roughly 10% of the country's gross domestic product... or more than $200 billion a year. They've pledged to spend up to $125 billion investing in a massive cleanup... This includes the construction of over 10,000 wastewater treatment plants.

The Singapore water industry is my favorite way to profit from China's drive to clean up its water. Singapore's water companies all derive the bulk of their revenues and profits from China.

Take Hyflux for example.

Hyflux is the biggest name in the Singapore water industry. It makes water treatment systems that turn sewage and seawater into drinking water. Hyflux has built Asia's largest desalination plant. It has won billions of dollars worth of contracts to build wastewater treatment systems in China, Southeast Asia, the Middle East, and Africa. And it makes consumer products like home water filters.

Hyflux derives 81% of its revenues from China.

Hyflux Water Trust (HWT) is another interesting China water play...

Hyflux builds wastewater treatment systems. But it doesn't want to operate them once they're built. They tie up capital and stop it from expanding its construction business. Hyflux prefers to move them off its balance sheet.

So last year, Hyflux spun off 13 of its Chinese wastewater treatment plants into a separate investment vehicle named Hyflux Water Trust. Wastewater treatment plants are high-yield investments. They're very safe and they generate steady cash flows. HWT pays an 8% dividend yield.

Hyflux and Hyflux Water Trust are excellent businesses in a growing sector. But there are half a dozen other Singapore water companies you should know about, too. Most of them are fairly cheap. Asian stock markets have fallen this year and taken the stock prices of these water companies with them.

These water companies are all listed on the Singapore stock exchange... but they do the majority of their business in China:

CompanyMarket Cap (US$ millions)Price-to-EarningsPrice-to-Book
Epure International$73521x3.12x
Bio-Treat$2454x0.58x
Sinomem$2675x1.35x
Asia Water Technology$515x0.65x
Hyflux$1,43938x5.88x
Hyflux Water Trust$19343xn/a
Dayen Environment$30no profits1.24x
Asia Environment Holdings$1919x1.29x

In sum, Singapore is a world leader in the water business... and its water companies do most of their business in China. These companies will benefit from China's massive efforts to clean up its water.

By Tom Dyson, Daily Wealth