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As the fourth-largest water user in the world, with average annual water consumption of 2.8 trillion cubic meters, China's natural water sources are heavily polluted and much of the country's water supply is not safe for everyday use due to rapid urbanization and industrialization.

In 2008, around 200 million tons of waste was discharged into China's rivers and lakes. As a result, 100 of China's major cities are facing severe water shortages including Beijing, the country’s capital. And when you consider that the country's population will likely reach 1.6 billion people by the mid-21st century, it's easy to see why the amount of fresh, potable water is likely to decrease dramatically, further exacerbating China's water shortages.

With hundreds of thousands of Chinese impacted by the lack of clean water and some of China's cities lacking wastewater treatment facilities, the Chinese government at all levels has started throwing money at the problem. As of 2009, around $200 billion is spent each year at tackling the country's water pollution and water shortage problems. Much of this money is being used to enact stricter environmental standards as well as fund water treatment projects to provide its citizens with clean, purified water.

In the new 12th five year program, the government announced that environment protection is one of the top industries that will receive huge government support. The huge potential market presents Tri-Tech (TRIT) as a great investment opportunity.

Based in Beijing, Tri-Tech has two primary lines of business: Waste water and tail gas treatment and water resource management.

As a solution and services company, TRIT’s business model is to provide water resource management, designing systems for natural waterways. Using remote terminals, the clients use TRIT’s systems to monitor water levels for drought and flood control, as well as groundwater quality by collecting data such as rainfall measurement, early warnings for watershed flood hazards and ground water levels.

In regards to its water management business, Tri-Tech designs and implements water treatment systems that help local and regional governments electronically control and monitor their water resources.

So actually, TRIT’s final products include computer software, information management systems, enterprise resource planning and processing systems. In addition, TRIT also provides hardware such as sensors, controllers and data acquisition equipment.

These technologies are particularly helpful for many of China's water problems. In fact, it provides data that can help with irrigation and agricultural water conservation, as well as the annual drought in Northern China and annual flooding in Southern China.

In my very first post at Seeking Alpha, I discussed potential investment opportunities in water. Until now, I am still interested in this investment thesis and continue to believe that the solution provider can capture most of the value on the value chain. Please bear in mind that as a service and solution provider, Tri-Tech doesn't need to maintain huge inventories or fixed costs like manufacturing facilities. That means, compared to other water treatment equipment manufacturers, the solution consulting company enjoys much higher margins and barrier to entry.

Right now, the company is still very small - around an $80 million market cap - but it is growing very fast. Its 2007 revenue was $4.7 million, while 2008 revenue jumped to $8.4 million, and first 3 quarter revenue reached a total of $29 million. Like most small cap Chinese companies, the company has almost no debt and $29 million cash.

I personally had a chance talking to Mr. Phil Fan, founder and co-president of TRIT, several times last year. I was very impressed by his knowledge and expertise in water treatment field.

As a civil engineer before going to business school, I respect Phil’s strong career track record at several well known global engineering consulting firms such as Black and Veatch, Parsons Brinckerhoff, Inc. and Chastain-Skillman, Inc. (If you are not familiar with these names, just go to ENR.com to check the ranking of global engineering firms.) Furthermore, Phil received a master’s degree in civil engineering from Louisiana State University and has been a registered professional engineer in the United States since 2001.

As a small company, TRIT now focuses on municipal level projects and grows this company patiently and steadily. The share price dropped sharply after 3Q earnings only because of lowered guidance. However, the sell off in November was unreasonable if you think about the 244% revenue growth and 109% income growth. What’s more, the lowered 2010 guidence is due to the project delay, but these projects will be delivered in 1Q2011. So I believe right now, it is a good entry point.

Disclosure: I am long TRIT.