Water firms that operate in Asia are on the shopping list of UK-based Wessex Asset Management because it believes growing wealth and strong industrial growth have boosted demand.
Throw urbanization into the pot and you have the classic ingredients for water companies with knowledge and experience to make money and create shareholder value, the hedge-fund firm’s chief executive Tim Weir told Reuters.
To benefit from higher demand for water and related companies, Wessex launched the Global Water Fund in January. The fund has about $25 million (Rs108 crore) under management.
“The idea behind the fund is that you are going to get superior growth from this sector because the price of water is going up everywhere,” Weir said this week. “Hundreds of billions are going to have to be spent on infrastructure.”
The most obvious need at the moment is in China and India, two of the world’s fastest growing economies.
“Demand exceeds supply. Demand is coming from affluence, from urbanization, from industrial growth,” Weir said, adding that China has only one-quarter of fresh water resources per head of population compared to the global average.
“Over 85% of China’s 1.2 billion people lack access to clean tap water... There are relatively affluent suburbs of New Delhi, which have running water for only half an hour a day.”
Fresh water in Asia is no longer just a health issue, it has become a constraint on economic growth, Weir said. Two-thirds of China’s larger cities suffer from water shortages and underinvestment in related infrastructure.
“There are parts of China where you can’t build electronics factories because there isn’t enough fresh water,” Weir said. “People will pay to have fresh water delivered and it isn’t just that they need it, they can also afford to pay for it.”
The fund’s biggest holding is Hong Kong-listed China Water Affairs Group Ltd, a utility which is aiming to triple its supply capacity in three years.
“China water affairs is successful at winning new contracts and running them profitably. It has the right connections and technical and financial expertise,” Weir said.
China Water controls 11 urban water supply projects, from central Henan to southern Guangdong, with a total daily capacity of 1.6 million tonnes (mt).
The company has signed agreements to buy another four companies, which could eventually bring its total capacity to more than 2.55 mt.
China Water’s strategy of chasing deals in secondary cities means it avoids head-on competition with government-backed water suppliers such as Beijing Capital and Shanghai Industrial Holdings Ltd’s General Water of China.
The key risk for the fund’s portfolio is overall equity market direction, which is being hedged with short positions on stock market indices in Singapore and Hong Kong.
These short positions will make money if the indices fall and offset any losses on individual equity positions.