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Water: the Pressure Is Rising 23 November 2009 Global Equity Research Investment Strategy (Strategy) Water: The pressure is rising Credit Suisse THEME Research Institute Figure 1: Private sector investment in emerging markets in water, telcos, energy and transport (US$bn) Thought leadership from 80 Credit Suisse Research 70 and the world’s 60 foremost experts 50 40 US$bn 30 Product Co-ordinators Mary Curtis 20 44 20 7883 8885 Water [email protected] 10 Richard Kersley 0 44 20 7888 0313 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 [email protected] Water Telcos Energy Transport Research Analysts Michael Bleakley Source: World Bank PPI data, Credit Suisse research 44 20 7888 0336 [email protected] ■ The cliché of ‘blue gold’ is becoming ever more relevant: Since we first Robert Chantry wrote in 2007 of an unsustainable picture of excess water demand and 44 20 7888 0285 [email protected] depleted supply, the problem has become no less worrying. We estimate that by 2020, 37% of the global population (or 2.8 billion people) will face Patrick Jobin 212 325 0843 absolute water stress. At the same time, water-related investment in the [email protected] emerging world seems to be a low relative priority, judging by Figure 1 Adnan Kucukalic above. 612 8205 4427 ■ [email protected] Upward pricing pressure: In an economic model of excess demand, prices should rise to encourage supply or moderate demand. To a degree, this is Andrew M. Kuske 416 352 4561 happening. However, in some emerging countries where the problem is [email protected] most severe, the ‘politics of water’ is a major obstacle. Hamzah Mazari, CA ■ Whether financed through higher prices or not, we believe investment 212 538 7983 [email protected] will rise. Strong growth in spending in Australia and China should continue, Amish Shah, CFA with investment in MENA, the Mediterranean, Russia, the US and India also 9122 6777 3743 picking up, although in the case of the latter two, perhaps not enough. [email protected] ■ We examine companies under four simple headings: (1) activities and Elisenne Verdoja CFA 44 207 888 5302 technologies that increase supply; (2) the building of the necessary water [email protected] infrastructure; (3) processes that help reduce demand; and (4) water management. Names we highlight include Ashland, Energy Recovery, Flowserve, Hyflux, Alesco, IVRCL, Donaldson and United Utilities. Alternatively, the Credit Suisse Water Index built in conjunction with Credit Suisse HOLT® (Bloomberg: CSWTR) provides a portfolio approach to investing in the theme. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 23 November 2009 Analyst contact list Global Head of Research India Stefano Natella +1 212 325 4217 [email protected] Amish Shah +9122 6777 3743 [email protected] Nilesh Jasani +91 22 6777 3720 [email protected] Product Co-ordinators Govindarajan Chellappa +9122 6777 3715 [email protected] Mary Curtis +44 207 883 8885 [email protected] Anubhav Aggarwal +9122 6777 3808 [email protected] Richard Kersley +44 207 888 0313 [email protected] Arya Sen +91 22 6777 3807 [email protected] Strategy Japan Andrew Garthwaite +44 207 883 6477 [email protected] Emiko Shinohara +81 3 4550 9865 [email protected] Luca Paolini +44 207 883 6480 [email protected] Nick Robinson +81 3 4550 9968 [email protected] Marina Pronina +44 207 883 6476 [email protected] Masami Sawato +813 4550 9729 [email protected] Sebastian Raedler +44 207 888 7554 [email protected] Masashi Itaya +813 4550 7366 [email protected] Mark Richards +44 207 883 6484 [email protected] Shinji Kuroda +81 3 4550 9994 [email protected] Alex Redman +44 207 888 6896 [email protected] Other Asia Australia Catherine Lim +852 2101 6323 [email protected] Adnan Kucukalic +61 2 8205 4427 [email protected] Cusson Leung +852 2101 6621 [email protected] Damien Boey +61 2 8205 4615 [email protected] Danny Goh +603 2723 2083 [email protected] Chris Counihan +612 8205 4012 [email protected] Edwin Chen +852 2101 6550 [email protected] Larry Gandler +613 9280 1855 [email protected] Edwin Pang +852 2101 6406 [email protected] Paul Graham +61 28205 4538 [email protected] Haider Ali +65 6212 3064 [email protected] Michael Slifirski +613 9280 1845 [email protected] Henry Kwon +822 3707 3732 [email protected] Darren Vincent +612 8205 4054 [email protected] Thaniya Kevalee +662 614 6219 [email protected] Neil Watson +612 8205 4783 [email protected] Tingmin Tan +603 2723 2080 [email protected] Victoria Li +8621 3856 0326 [email protected] Europe Elisenne Verdoja +44 207 888 5302 [email protected] Latin America Rob Chantry +44 20 7888 0285 [email protected] Vanessa Quiroga +52 55 52 83 8939 [email protected] Mark Freshney +44 20 7888 0887 [email protected] Vinicius Canheu +55 11 3841 6310 [email protected] Michael Bleakley +44 20 7888 0336 [email protected] Charlie Mills +44 20 7888 0325 [email protected] North America Alex Molloy +44 20 7888 0848 [email protected] Andrew Kuske +1 416 352 4561 [email protected] Andre Kukhnin +44 20 7888 0350 [email protected] Carlos Laboy +1 212 538 4337 [email protected] Laia Izquierdo +44 20 7883 2153 [email protected] Gary Balter +1 212 538 4228 [email protected] Rhian Tucker +44 20 7888 0300 [email protected] Hamzah Mazari +1 212 538 7983 [email protected] Simon Smith +44 20 7883 6893 [email protected] Jamie Cook +1 212 538 6098 [email protected] Stuart Joyner +44 20 7888 0868 [email protected] John McNulty +1 212 325 4385 [email protected] Thomas Kalbermatten +41 44 333 0548 [email protected] Ur-cheng Leong +44 20 7883 4919 [email protected] Previous Credit Suisse New Perspectives reports: Water, 7 June 2007 – Garthwaite, Curtis, Kersley, Balter, et al. Higher Agricultural Prices: Opportunities and Risks, 6 November 2007 – Garthwaite, Curtis, Moskow, Mills, et al. Embracing China’s consumption boom, 3 March 2008 – Chan, Tao, Xiao Jia Zhi. Africa – The Commodity Warrant, 14 April, 2008 – Kersley, Curtis, Gray, Flannery, et al. Obesity and Investment Implications, 26 June 2008 – Arnold, Rochon, et al. Intangible Infrastructure: Building on the Foundations, 8 December 2008 – Kersley, Rochon, Curtis, et al. Agriculture: A structural story, 10 June 2009 – Kersley, Garthwaite, Kjellberg, Mills, Curtis, et al. Water: The pressure is rising 2 23 November 2009 Table of contents Analyst contact list 2 Executive summary 4 Stock picks 7 (I) The status quo is unsustainable 8 (II) Water prices: beating inflation 15 (III) Trends in investment 18 (IV) Increasing water supply 26 (V) Water infrastructure and water transfers 39 (VI) Reducing water demand 47 (VII) Water provision: A French case study 54 (VIII) Listed water managers 59 Appendix 1: Credit Suisse indices (Powered by HOLT) 63 Appendix 2: Lessons from the beverage sector 64 Appendix 3: The universe of water-related stocks 68 Water: The pressure is rising 3 23 November 2009 Executive summary Introduction Growing imbalances in global water supply and demand are well documented. We looked Sharp falls in ground water at the problem in some detail in our report Water, dated 7 June 2007. Since then, relatively illustrate the unsustainable little has changed in terms of the scale of the overall problem and the susceptibility of nature of water consumption certain geographic regions. Sharp falls in groundwater levels (in India, Australia, China and parts of the US, in particular) and natural reservoirs (for example, the Aral Sea) illustrate the unsustainable nature of water consumption patterns. The bottom line is that demand is outstripping supply. We estimate that by 2020, based on UN population projections (and assuming current levels of supply prevail), that 37% of the global population (or 2.8 billion people) will face absolute water stress (a UN definition where supply is less than 1,700 cubic metres per annum per capita). Problems get worse if IPCC forecasts on climate change are correct. This would have a Supply-side pressures are significant negative impact on water supply. For example, in its 2007 report the IPCC building on the back of controversially reiterated the forecast from the WWF that the Himalayan glaciers could climate change have all but disappeared by 2035. Roughly 1.3 billion people live along the drainage basins of the seven major rivers fed by the Himalayan glaciers. During the dry season the glaciers are the main source of river flow (70% in the case of the Ganga).
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