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A Trio of Global Water Profit Picks
07/12/2013 7:00 am EST
Huge opportunities are emerging in the water infrastructure sector, particularly in emerging markets, says Benjamin Shepherd of Global Investment Strategist.
An estimated 2.5 billion people-more than a third of the global populationvare at risk for disease and death due to inadequate sanitation or lack of access to clean water. Given water's importance and its relative scarcity, it's a hugely important international investment theme.
According to a study by the World Health Organization, every $1 invested in water and sanitation generates an economic return of between $3 and $34. Not many investments generate that sort of return, and huge opportunities are emerging as spending ramps up.
Beijing Enterprises Water Group (Hong Kong: 371)
Beijing Enterprises, or BEWG, currently owns and operates more than 90 water supply and sewage treatment plants, with water treatment capacity of more than 10 million tons per day. It is also working to develop seawater desalination facilities to provide additional fresh water to Beijing.
Demand for drinking water and wastewater treatment services will grow apace in China as the country continues urbanizing. Only about half of the country's population lives in cities; in advanced economies, typically about 80% of the population can be found in urban centers.
As that population transition continues, demand for infrastructure will continue to grow and drive demand for water infrastructure. Beijing Enterprises Water Group remains a buy.
Companhia de Saneamento Basico (SBS)
Commonly known as SABESP, this is another water utility that operates in the Sao Paulo region of Brazil. SABESP has been treating wastewater and providing water to the country's biggest city since 1973. The company currently provides clean water to all of the municipalities it serves, and treats more than three-quarters of the sewage produced in the region.
Shares of SABESP have remained under pressure recently, largely due to political turmoil in Brazil. People have taken to the streets to protest their government's profligate spending.
While economic growth may be slowing in Brazil and its politics are in an uproar, the country has had more than a decade of exponential growth. The country clearly has the capacity for further growth, and the need for water infrastructure is clear. Companhia de Saneamento Basico remains a buy.
Kurita Water Industries (Tokyo: 6370)
Japanese company Kurita Water Industries is another interesting play on water infrastructure. What's more, the company isn't leveraged to any single region or country.
Providing a host of water treatment products and technologies, desalination equipment, and high-purity water production systems, Kurita has been benefiting from booming emerging-market orders, now accounting for 17% of total sales.
The company also has gotten a boost from the Asian electronics industry, which requires ultra-pure water for its production processes. Largely thanks to those two drivers, the company's net sales have grown from Y146.8 billion in 2004 to Y180.1 billion today.
Over the long term, management sees its greatest opportunity in the emerging markets, which it anticipates will account for about a third of revenues over the next few years.
The company's recurring chemical and services revenues provides a consistency in earnings, which will allow the company to continue dividend increases. The company has boosted its payout each year for more than a decade. Kurita Water Industries is buy.
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