Duoyuan Global Water: 'Liquid,' With Good Potential

My stock idea today takes its cue from water. Good old H2O. Water is a daily requirement of all living things, and the earth has a limited supply. So as the world’s population increases, proper management of water resources becomes increasingly critical. And where are both the population and the use of water increasing especially fast? China.

So my idea today is a very young stock, which came public on June 24 and just earned a spot in Cabot Top Ten Report. It’s Duoyuan Global Water (DGW), and here’s what editor Michael Cintolo wrote:

Duoyuan Water is a leading Chinese manufacturer of water treatment equipment and we feel very comfortable predicting that this company, if properly managed, will go far. And we think it will be properly managed, considering that the company has complied with the ISO9001 Quality Certification since 1996 and the ISO 14001 Environmental Certification since 1999 and also implemented Six Sigma methodologies.

The company’s products run the gamut from grit-removing sewage treatment systems to municipal drinking water systems to corrosion-inhibiting processors for industrial use to water purification systems for use by the medical and pharmaceutical industries. In addition, Duoyuan owns and operates a postdoctoral scientific research center, five professional research institutions and several comprehensive R&D laboratories. It’s the only company in the industry to own a thallophytic laboratory, which boasts the most advanced dynamic simulation laboratory equipment available.

Finally, Duoyuan owns dozens of patents with proprietary intellectual property rights in the fields of sludge concentration, sludge dewatering and sludge drying. The company’s revenues grew 55% in 2007 and 49% in 2008, and growth appears to be slowing this year as well, not surprising because of the global economy. But the future is bright, and as this one-month-old stock becomes better known we expect to see institutional sponsorship grow.

When that was written a week ago, the stock was trading at 27, and we gave the stock a recommended buy range of 25 to 27. It spent the next three days treading water at 27, and then burst out to new highs on Friday, topping 31 before pulling back a bit. So short-term, it’s a bit extended, but long-term it has a bright future. I suggest you watch it a while and try to buy after the next pause or pullback.

Comments

[Mad Hedge F...:]

Keep up the focus on this. If you think that the upcoming energy shortage is going to be bad, it will pale in comparison to the next water crisis, so investment in fresh water infrastructure is going to be a recurring long term investment theme. (See my earlier efforts to get you into the water space at www.madhedgefundtrader...). One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights. Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world’s population, up to 90% of the fresh water is already polluted, some irretrievably so. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years. Aquifers in the US, which took nature millennia to create, are approaching exhaustion. While membrane osmosis technologies exist to convert sea water into fresh, they use ten times more energy than current treatment processes, a real problem if you don’t have any, and will easily double the end cost to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the US stimulus package will be similarly spent. It says a lot that when I went to the UC Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds! At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which has appreciated by 32% since I first brought it up. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world’s greatest per capita water resources? Siberia, which could become a major exporter to China in the decades to come.

Jul 30 12:52 PM

[CoinMiner:]

The quality of chinese water quality monitoring systems and components must come a LOOOONNNG way to match quality of the US and German manufactured products. I suppose their product is sufficient for their uses and their growth will expand commensurately with internal demand. However, once they meet national market saturation is see growth very limited against better equipped manufacturers.

Aug 03 01:56 PM

[Matthew Stone:]

I disagree Duoyuan are of course still a fairly small company relative to the likes of Suez or Vivendi but they have a bright future ahead. Looking at their manufacturing and research departments Duoyuan know they have a way to go to meet the standards of simlar American or indeed European companies. However this is the reason for their flotation (which raised them $137 million they also have minimal debt) this money is to be used to improve these area's and possibly acquire other companies. Which could provide the expertise they need overall Duoyuan is a very strong company.

On Aug 03 01:56 PM CoinMiner wrote:

> The quality of chinese water quality monitoring systems and components
> must come a LOOOONNNG way to match quality of the US and German manufactured
> products. I suppose their product is sufficient for their uses and
> their growth will expand commensurately with internal demand. However,
> once they meet national market saturation is see growth very limited
> against better equipped manufacturers.

Aug 05 06:43 AM