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Water-Stocks.com Follows the Money in the Water Industry as Global Shortages, Aging Equipment, Global Warming and Pollution Drive Investments in Infrastructure and Water Purification

China’s Spending of $125 billion Towards Improving Water Quality Over Next Five Years Opens Market to Foreign Investment

By Ann-Marie Fleming, www.Water-Stocks.com
December 2006

Global water shortages, aging equipment and continued contamination from pollution and global warming continue to drive investments into infrastructure and water purification. Water sector participants such as WaterBank of America (USA) Inc. (OTCBB: WBKA), a manufacturer of hygienic ice cubes and bottled water and Hendrx Corp (OTCBB: HDRX) , an established manufacturer of atmospheric water generators, are looking to benefit from the market drivers leading to long term growth for the water business.

Globally the water industry has been estimated as a $400 billion market with signs of long term growth ahead, especially with countries such as China continuing to drive the market as they focus on alleviating many of the region’s water issues such as shortages and contamination from pollution associated with accelerated economic growth. China plans to spend $125 billion on water treatment and recycling over the next five years opening its door to foreign investment and participation in their water market.

Hendrx Corp, (OTCBB: HDRX), a water technology company focused on water generation, filtration, ionization, and purification devices, has targeted their efforts to address many of the needs of developing countries such as China. George Solymar, Chief Executive Officer of Hendrx describes, “The main reason China’s needs have escalated is a result of concentration in population, industry and agriculture. This concentration is to the point where the natural water supply has been overstressed and can no longer accommodate the growth without drastically impacting the environment. As a result, global solutions have to be found to minimize the impact on the environment.”

WaterBank of America’s (OTCBB: WBKA) Chief Operating Officer, Stu Levitan adds, “With all the warnings issued to travelers and citizens with respect to water and ice consumption in China and elsewhere, our secured, ready to freeze ice cubes, ICEROCKS, is a natural complement to all the measures being taken to upgrade China’s water resources. We predict ice consumption from a safe, secure package will be the norm rather than the exception in the near future.”

According to Neil Berlant, Water Group Managing Director and First Vice President at The Seidler Companies, “The capital that is going into the water business is going primarily into two areas; infrastructure and water quality. Infrastructure in general, which is the ever growing demand for pumps, filters, membranes, pipes, etc is driven by the natural deterioration of the infrastructure, which is very old and that process is accelerating. This is coupled with a growing need for higher quality water and more treatment.”

In terms of stock market performance, many of the large water stocks, in particular within the water utilities group, have experienced significant price appreciation since the beginning of the year. Companies such as: SJW Corp has seen its stock price rise over 50%; American States Water Co. has realized an increase of $5.50 per share or 17%; Consolidated Water Co. Ltd. has seen a 18% stock price increase, and United Utilities is up almost 27% since January.

Demand is driven by both the enormity and the increasing need to accommodate the natural deterioration of the existing water systems. The United States currently has infrastructure in operation that in some cases is over 150 fifty years old. “In the aggregate the estimates to replace the aging infrastructure within the United States represents as much as $1 trillion over the next twenty years. It is an enormous sum of money and it is replacement items that have to be done. That is the backdrop for the enormous amount of growth that’s going to be moving forward over the next decade,” describes Berlant.

Bill Brennan, President & Managing Partner, AquaTerra Investment Management describes consolidation as a key strategy to help address the high costs that accompany repairing and replacing aging infrastructure and equipment. “As the costs associated with treating and distributing water continue to escalate, systems of all sizes are under pressure to maximize efficiency in order to remain financially viable. Particularly hard hit are small systems, which often lack the financial resources to implement expensive new treatment methods necessary to comply with more stringent water quality standards and to upgrade decaying infrastructure. Larger systems not only possess the greater financial resources required to make these upfront investments, but are also able to spread fixed costs over a greater revenue base. Evidencing the clear benefits of scale, roughly 35% of very small systems operate at a loss while about 90% of very large systems are profitable.”

Recent acquisition activity supports the advantages that consolidation offers. Patrick O’Keefe, CEO of Watts Water Technologies recently stated that $55,573,000 or 24% of the Company’s sales increase in the third quarter was achieved primarily through their acquisitions of Core Industries Inc., Dormont Manufacturing Company and ATS Expansion Group. Watts Water Technologies’ stock price has appreciated approximately 35% since the beginning of the year up over $10.00 with its recent close of $41.90.

U.K. water utility AWG Plc recently announced that it will be acquired by a group of pension funds from Australia and Canada in addition to 3i Group Plc, a world leader in private equity and venture capital, in a deal worth approximately $4.12 billion. Thames Water, owned by German utility RWE AG, is being sold to Kemble Water Limited, a consortium led by Macquarie’s European Infrastructure Funds for close to $14.84 billion.

As Neil Berlant explains, “Water utilities are attractive because there is a highly reliable flow of business. However, the water utilities are the ones that ultimately are going to have to spend an enormous sum of money to upgrade their facilities to be in compliance with a variety of federal and state regulations and none of what they will be spending their money on goes to add revenues. For the water utilities that are progressive that have gone into or are planning to enter businesses that fall outside of the matrix of a traditional water utility, going beyond strictly delivering the water, and provide drinking water systems such as point-of-use and other kinds of ancillary services, these companies can still make a great deal of money and can still be attractive.”

In addition to the deteriorating infrastructure and need for replacement investments, there is also a growing demand for a higher quality of water. There is an escalating necessity for a level of water quality that can accommodate the increasingly precise water treatment needs encompassing new systems, as well as the rising purity requirements within electronics manufacturing, food processing, as well as power generation, which is the single largest consumer of high purity water in the country.

According to BCC Research, the US market for municipal drinking water treatment technologies such as membrane filtration, ozone disinfection, and UV radiation, will experience 10.7% growth by 2011 increasing from its current market size of $1.3 billion to $2.1 billion. Of the membrane treatment technologies, BCC predicts that UV disinfection will see the greatest growth as its market expands from $29.2 million to $149 million by 2011, an increase of 38.6%.

Ann-Marie Fleming
Ann-Marie Fleming completed her MBA in the United States, where she attended Webster University. She also holds an Honors B.A from the University of Toronto. She has over sixteen years of experience within the financial industry to include retail banking and brokerage, investment banking, and mortgage brokerage within the United States and Canada, with a firm background in corporate research.

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