The hidden way to profit from the China boom
The world’s second-largest economy may soon face chronic water shortages, presenting opportunities for firms that purify, filter and supply this natural resource.
China’s economic boom is threatened by its inability to produce all the water it needs, and a growing number of industry professionals are saying this presents a massive opportunity for investors.
According to a recent report for HSBC Global Research – titled No water, no power
– current industrial expansion plans are simply unachievable without improvements in water efficiency.
China plans to add more power than the current total capacity of the US, the UK and Australia by 2030, the report says, and cannot achieve this without significant
Abbie Llewellyn-Waters (pictured)
, assistant fund manager on the Jupiter environmental and responsible investment team, said: "The fact that 45 per cent of GDP is produced in water-scarce provinces is the key point that stands out for us and proves this is a key structural issue that needs to be addressed."
The Chinese government has already recognised the problems its increasing demand for water will create, setting tough water quotas and pollution-reduction targets.
The authors of the HSBC report suggest policymakers will also impose water efficiency targets, which would give companies servicing the problem a massive boost.
"Stricter energy efficiency targets have already been imposed on the industrial sector since they missed 2011 targets. We think industrial water targets could follow suit."
"Marginal water efficiency gains in the power sector will likely be harder to achieve since many smaller, inefficient plants have already been shut down," the report concludes.
Llewellyn-Waters added: "There has to be a policy response. It’s a huge structural issue, so they have no choice but to promote efficient processes in the future."
The shortages will particularly effect power generation, heavy industry and coal mining, with 47 per cent of coal reserves located in one of the 11 regions of China classified as water-scarce – those that produce less than 1,000m3
per capita per annum.
The industrial sector is doubly exposed since it uses well over 80 per cent of all the electricity consumed in the country.
Llewellyn-Waters explains that companies that provide chemical treatment and purification services are one option for investors looking to benefit from this theme.
She cites Pall Corporation, a top 10-holding for the Jupiter Ecology fund, as an example.
The company makes products that help with the reduction and re-use of water and Asia is responsible for 30 per cent of its revenues.
According to data from FE Analytics,
it is also a top-10 holding for offshore Jupiter Climate Change Solutions
and for the Allianz Global Eco Trends
Xylem is another company the Jupiter team likes in the sector; the US-domiciled stock provides equipment and services that control the collection, distribution and use of water and its return to the environment.
Kurita Water Industries, another water purification firm, recently cited the Chinese power sector as key to its future growth strategy, although Asia so far accounts for only 10 to 15 per cent of its revenues.
The theme of water scarcity is not exclusive to China, and Llewellyn-Waters notes that Pure Technologies – a company that uses acoustic sensor technology to monitor physical infrastructure for pinhole leaks – is well-placed to benefit from aging infrastructure in the West.
The authors of the HSBC report point out that this is not only an opportunity for investors but also a threat.
Investors should quiz all their holdings operating in, sourcing from, and even selling to China about these matters, the report says, as there is a real risk of water shortages that could have a calamitous effect on future growth.