Monday, June 30, 2008

An Investment Idea: YTL Corp -- Part II

I'm taking a closer look at YTL Corp when I saw them venturing into growing water industry in China.

From a big picture perspective, water infrastructure has been way under-invested since 1950.

I read in citing big water problem in China.

One official recently said China's problem is "more serious and urgent than [in] any other country in the world." China's rapid industrialization has outpaced its water infrastructure, which is on the verge of collapse. As Minister of Water Resources Wang Shucheng noted, "The price of China's economic boom is being paid in water." Two-thirds of China's 600 largest cities don't have enough water; half of these cities have polluted groundwater. Less than 15% of China's population has safe drinking water from tap. The recent spill in the Songhua River, widely covered in the media, only worsens the problem.

For further perspective, consider this: China has about as much water as Canada, but a population 40 times as large. On a per capita basis, China's water reserves are only about one-quarter of the global average. Worse, the distribution of people and water creates its own logistical obstacles. Nearly half of China's population resides in the northeastern provinces, where only 14% of the water resources are located.

These facts provide endless challenges for the Chinese. Water shortages are a serious threat to China's booming economy. It costs billions each year in lost output. Plus, water efficiency in China is way behind that of developed countries. As Dickerson says, for an equivalent amount of work, "China uses approximately 7-15 times more water than do developed countries, and with usable water supplies steadily diminishing, will not their competitive position also begin to erode?"

As a result of the urgency, China government allocated around RM 470 billion from 2006 - 2010 for water infrastructure projects.

Can YTL Corp translates this big picture into bottom line? If you asked me to define who is YTL Corp, it's a long term concessions and cement company though they put up impressive branding of Star Hill, Ritz Carton, software and etc.

Can recent tied up with AEH delivering meaningful earnings in short and medium term? Unlikely. Who is AEH? It has a revenue of RM 220 million(2006:130 million) in 2007, it's a relatively small company though has been growing very fast. Green field start up will take several years before it can contribute meaningfully.

Is there any other earning driver? Cement? They acquired Zhejiang Lin’an Jin Yuan Cement Co. Ltd. which is one of the top 5 in Hang Zhou. Again, my believe is if you cannot acquire no 1 or 2 market leader, it will take a long time to see results.

It will be a better idea to investigate the top leaders listed in Hong Kong Exchange to exploit the big picture of China. I'll revisit YTL Corp again if I can see new growth catalysts especially acquisitions. With that, I'm not going into valuation.

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