Cleaning Up on China's Thirst for Cleaner Water

08/24/2009 1:30 pm EST

Focus: STOCKS

Neil George

Editor-in-Chief, Income Publication and Products, Agora Financial

Neil George, editor of By George, picks the infrastructure suppliers riding the rising wave of spending.

The World Bank recently put out a report that argues that China's economy is being restrained by a lack of clean, fresh water. Shortages of fresh water, along with too much polluted water, restrict development and cost households, businesses, industries and even whole provinces billions upon billions amounting to more than 2.3% of China's GDP. That works out to more than $101 billion this year alone.

Local water authorities are watching the renminbi flowing through the water pipes and recognize that this resource needs to be priced accordingly to help fund major investment. Over the past year, on a national average, I've seen reports showing average water rates soaring some 40% to 48%, as city and provincial water authorities try to make up lost ground on water infrastructure investment and conservation efforts similar to those of other major industrialized nations.

The combination of needs and wants for cleaner water, as well as the increased funding from higher water rates, is creating one of the biggest potential bonanzas for investors.

Contract deals [are] beginning to come fast and frenzied for US, international and local companies. I'll start with an easy one with a familiar name—Calgon. Not quite the same as the commercials for the bubble baths, but rather that of Calgon Carbon (NYSE: CCC). This company is focusing on its activated carbon business that is demanded by filtration operations in and around China. And there's an added investment kicker: The carbon not only is crucial for water treatment, but it's also required in smokestack scrubbers to take out dangerous mercury emissions.

So look for a nice bit of new business coming [Calgon Carbon's] way back home in the US, as the EPA just lost a major case this year in a US Federal Appeals Court that will be bringing new regulations for mercury emissions on coal-fired power plants—which means bigger bucks for Calgon from Sheboygan to Shanghai.

Now let's move a bit further along to another major company that's based in the UK, but has operations around the world—Severn Trent (LSE: SVT; OTC: SVTRF). Severn Trent is a major water utility that pays a nice 7%-plus dividend. But beyond running its own water utilities and treatment operations it is also ramping up its business of working for other utilities and governments to build and supply cleaner water projects.

The Severn Trent Services company is booking bigger and bigger deals in China, including a major new one to build and supply a customized water treatment operation at the Nanjiao Water Plant, serving more than 3.3 million residents in the Zhejiang Province. And this is just the beginning for this one.

Now on to a Chinese company that has begun to enter the public market with its first stock issue in the US: the [Beijing-based] Duoyuan Global Water (NYSE: DGW). It is ramping up its water treatment supplies operations throughout China in rapid fashion, and from filters and membranes to chemical and other related supplies. Duoyuan is trying to capitalize on the big money flowing to the big needs of clean water.

I'm a bit more cautious on this one pending some further review of its financials, which are a bit out of synch with normal releases. That said, initially from my work so far, the numbers do substantiate its credibility—and thus Duoyuan is worth your look as well.

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