The Straits Times / The Business Times News on Hyflux

Hyflux stocks rise on news of WB funding

But investors should be selective of Chinese water plays: analysts

SHARES of water specialist Hyflux rose yesterday on news that it has received World Bank (WB) funding for its China projects, but analysts say investors should be highly selective of stocks with China water exposure.

The International Finance Corp (IFC), the commercial lending arm of the World Bank, said on Monday that Sinospring Utility, a company 50 per cent-owned by Hyflux, is receiving US$45 million of financing from IFC. Hyflux had earlier this year announced the completion of the subscription and loan agreements with IFC.

The IFC will make a US$20 million investment in SinoSpring, in the form of a preferred convertible bond issue. SinoSpring is Hyflux's vehicle for China-based water treatment projects and is currently executing eight contracts. IFC will also make a US$25 million loan to Tianjin Dagang NewSpring Co, a wholly owned subsidiary of SinoSpring that is currently building what will be China's largest desalination plant when completed.

Hyflux shares rose another 2.5 per cent to $2.43 yesterday, after gaining 3 per cent on Monday.

Analysts, however, are mostly cautious on Hyflux. A Bloomberg poll found only two bullish recommendations out of seven. According to Global Water Intelligence, China will spend 200 billion yuan (S$40 billion) on water supply and another 200 billion yuan on sewage disposal projects from 2006 to 2010.

'The market potential is huge and there is no lack of opportunities here,' said UOB-Kay Hian in a report on the water sector. 'But it is getting competitive as more players enter the market, and it is necessary to look at each company on a case by case basis.'

UOB, which has a 'sell' on Hyflux, said it prefers to stay away from water players that lean towards large build-operate-transfer (BOT) and transfer-operate-transfer (TOT) projects. 'While BOT/TOT projects provide more long-term recurring income, such projects require huge capital outlay and the payback period is long,' it said. 'Furthermore, as recurring income becomes an increasing contributor to the companies' earnings, their earning profiles are becoming like that of the utilities companies.'

UOB said its preferred China water plays are companies with strong downstream integration such as distribution, given its belief that water tariffs will increase as part of the Chinese government's efforts to manage scarce water resources, cut inefficiency and promote conservation. It also likes niche players which provide equipment or expertise, like Sinomem and Sino-Environment.