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SINGAPORE (Reuters) - Water companies in Singapore are attracting big-name investors as they profit from exporting their expertise to China, which plans to spend $850 billion over the next decade to improve its scarce and polluted water supplies.
Singapore is a hub for water technology because of its own concerns about water security. With few domestic freshwater resources of its own, the city-state has been trying to reduce its reliance on imports from neighboring Malaysia, where politicians have in the past threatened to turn off the taps.
Since 2006, the number of companies in Singapore's water sector has doubled to about 100 and S$470 million ($371.2 million) has been committed to fund water research, government data shows. Over the same period, Singapore-based water companies secured more than 100 international projects worth close to S$9 billion.
Singapore has been experimenting with reservoirs, recycled water known as NEWater, and desalination as it aims to become self-sufficient in water by 2061, when a water supply agreement with Malaysia expires.
"Singapore should be one of the world's dominant players in water. It should be the Silicon Valley of water," said Jim Rogers, who co-founded the Quantum Fund with George Soros and owns shares of Singapore's biggest listed water treatment company, Hyflux Ltd (HYFL.SI).
Hyflux, which has a market capitalization of S$1.2 billion, signed two agreements in April for projects in China. The company is known for its membrane technology used for ultrafiltration, a process to separate certain dirty or harmful particles in water.
Hyflux's chief executive, Olivia Lum, is the biggest shareholder with 32.4 percent as of March, while Matthews International Capital Management LLC and Mondrian Investment Partners Ltd have a combined 14.2 percent of deemed interest, according to its latest annual report.
U.S. private equity firm KKR & Co LP (KKR.N) invested $40 million in United Envirotech Ltd UNIT.SI earlier this year after subscribing to $113.8 million of its convertible bonds in 2011.
The company is listed and based in Singapore, but most of its operations are in China, where it derives more than 90 percent of its revenue. It designs and builds water treatment plants, on top of providing services to China's chemical, petrochemical and industrial park sectors, all of which are heavy water users.
United Envirotech, whose "membrane bioreactor technology" combines membrane separation with biological wastewater treatment, said on May 28 its net profit for the full year ended March 2013 had nearly tripled from a year earlier.
The company is in talks with some investors who have expressed interest in buying a stake, a spokeswoman said, adding that Singapore is attractive to the firm because of its status as a financial centre and its ongoing growth as a "global hydrohub".
"The root of the whole commitment to grow the water industry lies with the Singapore water story," said Goh Chee Kiong, executive director of cleantech at Singapore's Economic Development Board. "Singapore has been very vulnerable when it comes to water for many decades, therefore we view water as a strategic resource and asset."
With the world's population hovering at around 7 billion, investors are betting on soaring demand for clean water not just for people, but also to help fuel industries ranging from semiconductors and pharmaceuticals to petrochemicals and agriculture.
"Water treatment companies have not been on the radar for a while, but now investors are increasingly looking at companies that are undervalued or have yet to realize their potential," said Carey Wong, an analyst at OCBC Investment Research.
In the last 12 months, the Thomson Reuters Global Water and Other Utilities Index .TRXFLDGLPUWATR has jumped around 20 percent.
In Singapore, shares of United Envirotech have surged more than 170 percent over the same period, outperforming the 19 percent gain in the benchmark Straits Times Index .FTSTI. SIIC Environment Holdings Ltd (SIIC.SI), Memstar Technology Ltd (MEMS.SI) and HanKore Environment Tech Group Ltd HETG.SI have risen in the range of 33-67 percent.
However, Hyflux shares have underperformed the index in the past year. CIMB Research said in a report that the company's project win rate has to accelerate so its share price can pick up. Its valuation also appears "fairly priced" compared to its major Asian peers, CIMB said.
Moya Asia Ltd (MOYA.SI) and Sound Global Ltd SOGL.SI, both of which reported weak quarterly earnings recently, have lagged the index too.
Many companies have their sights set on China where, despite spending 700 billion yuan ($114 billion) on water infrastructure over the five years to 2010, much of the water remains undrinkable, a situation that has led to mounting discontent across the country.
China's environment ministry said 43 percent of the locations it was monitoring in 2011 contained water not fit even for human contact.
United Envirotech said stricter discharge limits imposed by the Chinese government and water shortages in various parts of the country are pushing up demand for water treatment services.
Chinese players like China Everbright International Ltd (0257.HK) and Beijing Enterprises Water Group Ltd (0371.HK) may put up a tough fight, especially for the lower-end water treatment projects, due to their ability to keep costs down and their local network, said DBS Vickers analyst Tan Ai Teng.
Scinor Water Ltd recently received financing from CLSA Capital Partners' Clean Resources Asia Growth Fund and venture capital firm Kleiner Perkins Caufield & Byers to expand the Chinese company's membrane manufacturing capacity and products.
"There are going to be huge fortunes made in China on water because China has a staggering water problem and they know it. They are spending a lot of money to solve it," said Rogers.
Editing by John O'Callaghan and Matt Driskill