Water – Where is the money?

Deutsche Bank’s piece on the Water sector (World Water Markets, pdf) presents an interesting read. Following on from our research Water Scarcity – An investment Opportunity, Deutsche Bank echoed some of our thoughts. In particular, two areas stand out.

First, the agriculture sector plays a vital part within the water value chain. We maintain our view that ‘water efficiency‘ remains the primary factor in extending the use of fresh water. Further, the challenge with respect to putting a price on water is discussed in the DB paper although no clear recommendations are being made how to overcome the conundrum.  We previously looked at tradeable water rights, Full Cost Recovery, and Polluter Pays Principle and suggested areas for thought how to establish a market mechanism.

Second, Deutsche Bank raises the issue of how to find credible investments in the water sector. KPMG, also, put out a research report that looked at private investments in water infrastructure (2008, pdf). Although the primary investment focus in both reports is on water infrastructure, we are not comfortable with the likely returns that may be earned in this space. Specifically, the requirement for sewage plants may be interesting but the returns to be earned will likely mimic utility and/or project finance like returns. The high up-front capex is something we normally shy away from. Rather, we look at the technology side of the investment theme and focus on efficiency plays. Deutsche agrees: “A large range of technologies is needed. The demand for efficient irrigation technologies, seawater desalination and sewage treatment facilities, technical equipment (e.g. pumps, compressors and fittings), filter systems or disinfection processes (e.g. using ozone or ultraviolet light) and efficient sanitation facilities will probably pick up sharply.”

Another area that we explored a while back are the business and management issues for companies based in India and China that lack access to fresh and/or clean water. For investors who like to look at the state of the Chinese Water sector and how to potentially participate, we recommend KPMG’s report ‘The Water Business in China – Looking below the Surface.’ In a nutshell, the report explores ways to participate in the urbanization and how to invest in Joint Ventures at the Municipal level. JPMorgan explored business risks associated with water access in their report ‘Watching Water – A Guide to Evaluating Corporate Risks in a Thirsty World‘ which extends our thoughts from our Water Scarcity piece above. We mentioned a glass and pharmaceutical company which admitted that they were accessing ground water deeper and deeper under ground every year. At which point, does this become a clear cost and business risk issue?

We note that Fidelity Investment Managers has put a note out on the their take on the water sector; better late than never one might say. There isn’t anything new or jaw-dropping in the report, Fidelity lists the usual investment ideas such as Veolia, Hyflux, Doosan Heavy Industries, Jain Irrigation Systems, General Electric, HaloSource (recently IPO‘ed) and RusHydro as potential investment targets. We previously eluded to the fact that although GE only generates a single digit portion of their group revenues from water, in absolute terms these revenues ($2.5bn+) still rank them as a Top 10 water investor and supply chain player in the world.

Update: A list of some water ETFs can be found here.

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