The Rude Awakening
Wall Street, New York
Tuesday, January 03, 2006 ------------------------- - The most valuable commodity threatening China's
continued growth,
- Two companies to watch as one billion people's thirst
is satiated and,
- What superhero powers would you bestow upon your
investment portfolio?
------------------------- Eric Fry, reporting from somewhere near Times Square… Over the weekend, your New York editor's 7-yewar old son,
Ethan, created a new cartoon superhero. "Daddy," he asked, "Do you remember when I told you I
wanted to make cartoons when I grow up?" "Of course I do," I replied, "You'd be great at it." "Well I started working on it this morning and I've made my
first few characters. Wanna see?" "Sure," I replied, "Who's that one?" "That's the mean old bus driver," Ethan said. "But here's
the main character. He's an alien skateboarder with
superpowers." "Cool! What can he do?" "Here's the list of powers I've got so far," said Ethan. "Wow! This is amazing!…He's got super speed,
'invizubiluty,' 'levotashon,' and hypnotic power?" "Yeah," Ethan smiled, "and look at these other powers." "OK, but what's this one, 'meat vision?'" "Oh, ya know…That's where he can look at a plate of food
and turn it into meat." "Great," I laughed, "That's a very unique power. No other
superhero can do that." Ethan's cartoon character also possessed "sweet vision,"
which seemed far more worthwhile. But it did not possess
"drinking water vision," which, as Chris Mayer explains
below, would be among the most valuable superpowers of
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By Chris Mayer A gallon of crude oil costs $1.45. A gallon of Evian costs
$11.91. This simple observation led one successful investor
to assert that oil is undervalued. We see things a little differently…Oil may be
undervalued, but NOT relative to drinking water. In fact,
the truth is exactly the opposite. For most of the world, clean drinking water is a far more
precious commodity than oil. While water largely covers this hardscrabble little planet
of ours, less than 3% of it is fresh water. And the
presence of pollution and disease has made much of that
water undrinkable. Unlike with oil, no amount of
technological wizardry can replace water. Water resource enthusiasts, such as money manager John
Dickerson, know these facts well. He is familiar with all
of water's charms - but the biggest is the simple scarcity
of clean water. There are few industrial countries in the world feeling
that scarcity more acutely than China. Its water needs are
more critical than its much ballyhooed power needs. I did
not fully appreciate this until I visited China myself and
talked to Chinese business people. Even Chinese officials -
prone to covering up or understating the extent of problems
- sound alarmist when it comes to water. One official recently said China's problem is "more serious
and urgent than [in] any other country in the world."
China's rapid industrialization has outpaced its water
infrastructure, which is on the verge of collapse. As
Minister of Water Resources Wang Shucheng noted, "The price
of China's economic boom is being paid in water." Two-
thirds of China's 600 largest cities don't have enough
water; half of these cities have polluted groundwater. Less
than 15% of China's population has safe drinking water from
tap. The recent spill in the Songhua River, widely covered
in the media, only worsens the problem. For further perspective, consider this: China has about as
much water as Canada, but a population 40 times as large.
On a per capita basis, China's water reserves are only
about one-quarter of the global average. Worse, the
distribution of people and water creates its own logistical
obstacles. Nearly half of China's population resides in the
northeastern provinces, where only 14% of the water
resources are located. These facts provide endless challenges for the Chinese.
Water shortages are a serious threat to China's booming
economy. It costs billions each year in lost output. Plus,
water efficiency in China is way behind that of developed
countries. As Dickerson says, for an equivalent amount of
work, "China uses approximately 7-15 times more water than
do developed countries, and with usable water supplies
steadily diminishing, will not their competitive position
also begin to erode?" The Christian Science Monitor in December 2004 contained a
provocative article suggesting that we could see a cartel
of water-exporting countries emerge over the next decade,
in a style not unlike the Organization of Petroleum
Exporting Countries. "Water is blue gold; it's terribly
precious," Maude Barlow, chairwoman of the Council of
Canadians, told the Monitor, "Not too far in the future,
we're going to see a move to surround and commodify the
world's fresh water. Just as they've divvied up the world's
oil, in the coming century, there's going to be a grab." Whether or not you choose to believe Barlow, it is clear
that the demand for clean water is real. In an attempt to
avert crisis, China plans to build hundreds of new water
treatment plants. But for now, bottled water is the
preferred choice - even among the Chinese, at least among
those who can afford it. When I was in China, bottled water
was nearly everywhere. As the Monitor points out,
consumption of bottled water nearly quadrupled between
1997-2002. So how to play it? There are several interesting companies
working on the water crisis in China. I'll run through two
of them below. These are not the only companies engaged in
solving China's water resource problems, but they were two
of the more interesting stories I found. The largest water
company in the world is Veolia Environnement, of France,
and, oddly enough, a spinoff of entertainment giant
Vivendi. Veolia has a 20-year deal to provide water to
Tianjin as well as a bundle of other water and waste
management contracts throughout China. Veolia currently
serves over 14 million residents in China. Another company is Watts Water Technologies, which has been
doing business in China since 1995. The company produced
valves used in China's Three Gorges Dam project on the
Yangtze River. In November, the company increased its
commitment to China by acquiring Changsha Valve Works.
According to Watts, Changsha is "a leading manufacturer of
large-diameter hydraulic-actuated butterfly valves for
thermopower and hydropower plants, water distribution
projects and water works projects in China. This
acquisition strengthens Watts' position in the fast-growing
water market." There are two problems here. First, neither company does
all that much business in China. Veolia's contracts bring
in only a small fraction of its more than $30 billion in
sales. Watt's China revenues represent only 3% of sales at
this point. This is a common drawback in looking at
publicly traded water companies (excluding micro-caps). If
you want more concentrated exposure to China's water
crisis, it seems impossible at this point. The other
problem is that none of these companies strike me as being
particularly cheap. Still, they remain interesting
companies to watch - we may get a chance to own them at
excellent prices down the road. And as the Chinese water
crisis unfolds, it may become clearer as to who and where
the winners in this struggle will be. One thing seems
certain: Clean drinking water will remain more precious
than oil - especially in China. [Joel's Note: It's a good thing Chris enjoys traveling so
much…good for his readers, that is. In his worldly
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opportunity. In the report below Chris has used his "super-
powers" to uncover a stellar little company you would do
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