Less than 10 countries possess 60% of the world’s water supply
Canada is the most water rich country and China is the least water rich
China has about 7% of the world’s fresh water but has c21% of the world’s population
Investment-wise there is no such thing as a water sector, and so companies fall across traditional sectors
Thesis
- No substitutes for water
- Broadly fixed supply on planet, so must optimize usage.
- Looking at historical data we can see that demand grows exponentially (per capita) with industrialization, urbanization and standardization.
- Demand tied to agriculture grows as “wealth” grows. For example, it takes 1,300 litres to grow 1kg of wheat but 15,000 litres for the feed/processing that goes into producing 1kg of beef
Trends
- Conservation & Efficiency
- Recycling and Reuse
- Technological solutions
- Consolidation, Privatization and Outsourcing
Breaking down the industry
- As noted above, a clearly defined “Water Sector” does not exist.
- Thus it appears easiest to break the industry down into the following sub-sectors, so that useful comparisons may be drawn:
2. Water Services & Industrial Stocks
3. ETFs
1. Utilities
- 80%+ of the population are served by municipally-owned and operated utility districts or by government agencies. Our Man, as a Brit, finds this very strange…given than 80%+ of the population is served by private companies in his homeland! Given the financial stress than many municipalities are under, there’s a reasonable probability that some of these water systems end up in private hands.
- Unlike in Energy, Water Utilities are a true natural resource as Water can’t be distributed widely.
- Publicly-traded are regulated businesses, with steady cash-flow generation and dividend increases (e.g. Aqua America has paid a dividend for the last 60 years, and increased it 20 times in the last 19 years).
- Clean Water Act and Safe Drinking Water Act increased standards. The EPA estimates that up to $70bn of ratable capex is required over the next 5 years.
- This capex would be included in the Utilities ratable asset base, allowing the firms to generate a guaranteed rate of return on their investments.
2. Water Service & Industrial Stocks
- Services stocks participate in the existing water system by providing services towards the collection, conveyance, treatment and monitoring/analysis of water and wastewater.
- Services companies generate their revenues from activities including: Flow Control Systems, Metering, Water Treatment, Irrigation and Ownership of Water Assets.
- The end-user for these companies will tend to be the Water Utilities.
- Industrial Stocks could potentially benefit from the increased capex in the Water Utility space. AWWA estimates that Utilities will need to spend $10-15bn a year (for the next 20years) to replace aging pipes and plants. The major beneficiary appears likely to be pipe stocks due to the substantial need for replacement (old pipes have a leakage rate of up to 50%) and the size of the pipe network (1mn miles, or 4x the National Highway System).
- With a number of major countries introducing legislation (e.g. China has budgeted $128bn for water infrastructure in its recent 5-year plan), large international players stand to also be beneficiaries.
3. ETFs
- There are 4 major water ETFs available; CGW (Claymore Global Water), FIW (First Trust ISE Water) and PIO (Powershares Global Water) and PHO (Powershares Water Resource).
- FIW and PHO are US-centric ETFs, whereas CGW and PIO are far more Global.
- PHO and FIW have a lot of overlap in names, but differences in the methodology (modified market cap weighted vs. modified equal-weighted) means that PHO has a greater bias towards smaller cap names. Finally, PHO is substantially larger ($1.4bn) than FIW ($50mn), which affects the spread and liquidity of the instruments.
- CGW and PIO both have <40% in the US, with the balance spread globally. Additionally, they both have a far higher allocation towards Utilities (c40% vs. 25-30% for the US focused ETFs).
Overall, Our Man expects ETFs to be the first step to gain some exposure to this theme and start a “Water” bucket in the portfolio.
Having owned AWK from long ago, only to have to taken over by the Brits, then thrust back on the market, I think that most of these water plays are over-priced, over-regulated, and subject to government interference / take-over.
ReplyDeleteHello there -- the US is a strange beast, with only 10% of its water systems in private hands (most are owned by local municipalities). The UK, in contrast, is almost 100% privately owned.
ReplyDeleteThat's part of the opportunity (municipalities which are struggling for cash, selling them/giving away) and the risk (water tends to be thought of as a right, unlike electricity/gas, and as something that's still largely government owned suffers from that).
That said, I do agree with you that they seem overpriced at the moment. Mind you, I'd say most things are..