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Acquamarine Power gets funding – Atlantis Resources charging ahead?

Acquamarine Power, an Edinburgh based business, received another £11m in funding. One of its Investors, Scottish and Southern Energy wrote an investment case study that is worth taking a look at. Some details on the technology concept can be found here. Another key investor is Edinburgh based Sigma Capital Group.

The Press release can be found on Clean Edge’s website.

A company to watch is Atlantis Resources, Singapore and London HQs. They are backed by Morgan Stanley. The company is targeting China and India. From an investment perspective it is worth following their progress we think. The firm presented at the Offshore Engineering Society. Earlier in 2010, Atlantis raised $14m with Statkraft leading the round and Morgan Stanley upping on their existing investment. We wrote about Stafkraft’s Osmotic Energy Plant in the past. From where we sit, we believe that Statkraft has the background and capabilities to see through the risks associated with investments in this segment. Thus worth noting what they are up to.

The NY Times Green Blog recently wrote an update blog on the outlook for Tidal Power. Although the author is not making any judgments it follows the European Energy Association suggestion that Tidal Power could yield 5x current global electricity needs.

We think that the concept is intriguing but returns are still a long way off.

Water Purification IPO landscape

HaloSource‘s $80m IPO on London’s AIM market marks another interesting listing. Origo Partners and Masdar Clean Tech Fund are among some VC funds that were able to orchestrate a nice (partial) exit in this difficult economic period. Net proceed raised are some £28.9m. Other selling shareholder include Unilever Swiss Holdings AG, Britannia Holdings Ltd, and Washington Research Foundation.

We like to look back on the thesis for the water industry in general and with regards to Water Treatment and Purification in particular. Arthur D Little published a report back in 2008 title ‘The Water margin: How strategic management of water can grow business value‘.

ADL’s report cites Foster’s brewery in Australia. Foster’s embarked on a programme to minimize water consumption per unit of output without compromising quality. ‘Foster’s Yatala Brewery, the most water efficient brewery in the world, uses just over 2 litres of water for every litre of beer which is less than half the international standard of 5 litres.’ Moreover, the brewery doubled its capacity but water consumption only increased by 10-15%. The key observation that is drawn is that ‘water management needs to be embedded throughout the organization. This may require behavioural change, process innovation, systems innovation, skills development and more.’

We agree and would add that any change is difficult and the cultural backdrop important. Australian’s have learned to adopt to their natural water supply levels whereas many Western Europeans and Americans are still ignorant and lavishly use water. As this example shows, corporates do worry about water efficiency and addressing it itself leads to a competitive advantage. Whilst the West is concerned with efficiency, the company HaloSource is concerned about getting clean water to people in the first place.

Thus HaloSource addresses different markets. Markets that notoriously are challenged to get access to safe and clean drinking water. We note that the firm’s revenue mix is somewhat concentrated and water clarification is currently the firms core product accounting for some 87% (YE2008) of group revenues. Core clients are Eureka Forbes and Pool Corp, which represent 28% of group revenues.

The latter firm mainly operates in the seasonal swimming pool business whereas Eureka enhances the life of many poorer communities especially in India. We consider Eureka be a risk factor as product substitutes are ample. The question is whether there will be any margin pressure on HaloSource going forward. Euraka is owned by Shapoorji Pallonji Group. Pool Corp. business is very seasonal and we could not make out whether HaloSource is hedging this business with derivatives to reduce the likely volatility in revenues.

To date, HaloSource has accumulated operating losses of $46m whilst revenue are growing at a reasonable rate. With 2009 gross profit of around $5.8m there is likely to be a significant J-curve before HaloSource will ever be profitable. The business risk is still significant as the order books is still relatively dependent on a few core buyers. Should anyone switch product this could materially affect the performance of HaloSource.

To conclude, HaloSource is a company worth watching. We have seen big corporates buying up assets in this space and HaloSource may become a target for one larger player if it can proof to be profitable in medium term. Previously we reported on Zenon which was snapped up by GE for a reported $650m. Other players that are active in this market are Dow Chemical and 3M.

Liquid Assets – Media Update

We just saw CNBC’s Liquid Assets – Big Business of Water (opens CNBC video, 42:43min). Although very US centric, the overall message is pointing in the right direction. The cost of water is simply too low. As Peter Gleick puts it: “An oil tanker filled up with oil may be worth $200m – $300m. The same tanker filled with water would be worth just $400’000 – $500’000.”

Another CNBC report looks at Water stocks. Debra Coy is giving her views (opens CNBC video: 04:00min). The discussion briefly touches on water rights also. Two companies mentioned are Cadiz Inc. and Pico Holdings.

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.

Chinese 12th 5-year plan – New Energy, New Energy Cars

Are the days counted for China’s top-down macro economic decisions and for its state-owned monopolies? The next 5-year plan proposed by the Chinese Government focuses its attention on new energy and clean-energy cars. According to China Daily the government intents to ‘speed up new energy development and promote clean and efficient use of traditional energy, develop hydroelectric and nuclear power, and increase strategic oil reserves’.

Alongside new materials, high-end manufacturing, next generation information technology, and biotech,  these industries form part of the “new magic 7” emerging strategic industries. (The old magic 7 consisted of national defence, telecom, electricity, oil, coal, airlines, and marine shipping.) It appears that the new magic 7 are more focused on bottom-up drivers and allow companies to use their ‘innovation’ process to drive capital allocations.

Ahead of the Chinese party conference, HSBC published a report titled ‘China’s next 5 year plan – what it means for equity markets‘ which investigates the new proposal in some detail. Specifically, the overall objective of the 12th five year plan (2011-2015) lies in the pro-rate increase in domestic demand to total demand and secondly, and as importantly, the overall reduction of the carbon footprint (CO2) by 40%-45% by 2020.

Source: HSBC, China's 12th 5-year plan, New Magic 7

Further, the proposal projects that urbanisation will march on. HSBC estimates that a further 200-300m people could be urbanized over the next 20 years. If the hukou or registration simplification process moves in line with this shift, the projection suggests that consumption should increase significantly. The caveat here is that the property market development should ensure that the property bubble itself can be contained and price movements are more gradual going forward.

More importantly, there appears to be a continued drive to allow private capital to compete in what once were state monopolies or controlled industries. This should be great news for China focused private equity funds. From our view, there are still many low hanging fruits to be harvested by the largest funds in the region, including John Zhao’s Hony Capital for example. The investment pace has slowed a little since 2007 but funds are still putting capital to work. We need to wait and see whether some assets were overpriced and IRRs for Investors will be meaningful. Our views is that funds that put money to work throughout business/ macro cycles will do well for the time being.

We also note the drive to reduce high pollution and high energy consuming industries. For one, any energy price subsidies should be reviewed to allow a ‘fairer’ market price. Regrettably we feel that this process will take longer than currently proposed. We see a risk that some local producers/ polluters input cost competitiveness may be at risk on the global stage. In particular, pharmaceutical, the glass and other high water/power consuming sectors could lose some of their appeal. Can the government afford this – yet?

Source: HSBC, China's 12th 5-year plan, Roadmap

Certainly, the governments objective to double or indeed triple per capita income can only be a welcomed target. With that, domestic consumption levels should raise dramatically allowing for more propensity to consume (let’s hope little will be used for gambling!). Overall, the plan is intriguing and we look forward to seeing particulars.

To sum up, the China Council for International Cooperation on Environment and Development (CCICED) suggests four scenarios for a low carbon economy until 2050. Although not that specific yet, it demonstrates the authorities focus on renewable energy and commitment to cleantech. The four scenarios proposed split into four categories: (i) BaU (business-as-usual) under high growth rate (BaU), (ii) Low Carbon Scenario under high growth rate (HCL), (iii) Enhanced Low Carbon Scenario under high growth rate (HELC), (iv) Low Carbon under high growth rate (LLC). See the link above for more details.

China’s Pathway Towards a Low Carbon Economy

China’s Pathway Towards a Low Carbon Economy