Singapore's Drive For Water Independence

Includes: DOW, GE, MTU, PIO, XYL
by: Peter Pham

Currently there are roughly 100 water-related firms operating in Singapore that have secured over 100 international contracts worth more than $7.2 billion.They employ approximately 11,000 people. Due to scarcity of fresh water in the region, Singapore and Malaysia have had several conflicts over it in the past, but currently have a 100-year agreement between them, set to expire in 2061, to supply water to the island nation.

This contract places Singapore's basic infrastructure in the hands of Malaysia, a situation it is uncomfortable with. Singapore's target is to achieve self sufficiency in fresh water before the said date. The country's water agency, the Public Utilities Board (PUB), believes that it is on track to accomplish this, possibly even by 2050.

Singapore and Malaysia are each other's biggest trading partners. But, while there is little danger of any form of disruption, the longer-term growth of southern mainland Malaysia will require Singapore to become more water independent, lest it become a political football in the future. Singapore's plan is good for all involved as it will need to maintain strong ties with the southern province of Johor, which has seen more than $30 billion in investment since 2006 and has increased its demand for fresh water.

What was Old Waste is now NEWater

The numerous desalination and recycling plants across the country produce ~40% of the total 456 million gallons of water consumed daily by 5.2 million people. PUB itself produces the cost-effective NEWater, which is reclaimed municipal wastewater, in four plants currently and this technology is something it is keen to export. This water has so far passed more than 65,000 tests and is healthier than the WHO's minimum standards of clean drinking water. PUB sells it locally. The success of NEWater is what makes it so confident of hitting long-term objectives. Currently 30% of the total water demand is supplied by NEWater. PUB plans to take this further and meet half of Singapore's total demand by 2060.

Necessity being the mother of invention, the nation has become a regional leader in water R&D, with 25 research centers established in both the public and private sectors, in part due to $376 million in government funding.

Singapore has become the global hub for water R&D and is attracting firms from all around the world. Japan's Toshiba has a water research center in the country, its first outside of Japan, as it aims to become a dominant player in industrial wastewater treatment worldwide. German based Mann+Hummel as well as PWN Technologies (PWNT) from Holland are also eying Singapore to develop regional offices and design centers for the Asia-Pacific region.

A Week without Water?

In the first week of July, Singapore hosted the International Water Week conference that ended with $10.8 billion in investments and projects being awarded and announced. The participating and supporting organizations included Mitsubishi (NYSE:MTU), GE, France's Veolias well as Singapore's own Keppel Corp and Hyflux. Keppel Corp is the 3rd-largest holding in the iShares MSCI Singapore Index ETF (WS) at 6.85% of AUM.

During the event, Xylem Inc. (NYSE:XYL), announced that it is collaborating with Singapore's Visenti Pte LTD to work on optimizing water distribution networks by using the latest water sensing and monitoring technology. Xylem also announced in late August the results of a full-scale test on a municipal treatment facility in Sweden, wherein it demonstrated a 65% reduction in energy usage through efficient aeration techniques. This is a significant breakthrough for an industry having to use energy-intensive reverse-osmosis systems. Anything that can significantly lower the cost of wastewater reclamation will have huge implications in the world's future economy.

In competing with industry leaders like GE and DowChemical (NYSE:DOW) in producing RO membranes Hyflux has landed a number of high-profile contracts for major desalinization facilities. Its most recent earning showcased a 66% increase in semi-annual revenue atS$264.4 million and a 15% increase in profits to S$20 million. 94% of its revenue come from Asia. It is expanding into the Middle East and North Africa. Hyflux recently signed an agreement with Hitachifor a $337 million project in Gujarat, India, which, when completed, will be the continent's biggest desalination plant.

Hyflux's largest exposure internationally is in the Powershares Palisades Global Water Fund (NASDAQ:PIO). Veolias is a major component of the fund. Year to date, the fund is up 8.3%. EWS, on the other hand, is up 21.2% year to date and pays a handsome 3.6% dividend while giving investor's broad exposure to the production of the world's richest per capita population. Singapore is setting its economy up to be both the Zurich of the Asian banking world as well as being a leader in essential technology for the 21st century. Investors would be remiss in not having some exposure to both this increasingly important country and its prized industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.