Swiss' SAM keen on U.S., China-focused water firms

HONG KONG (Reuters) - Swiss asset manager SAM Sustainable fancies water firms with exposure to the United States and China as increased spending to address water scarcity in these large economies will boost industry expansion.

Zurich-headquartered SAM Sustainable Asset Management, manages assets worth 7 billion euros ($10 billion) in total and has $2.5 billion invested in water-related companies.

"Rapid expansion in China has put a heavy strain on its water resources and with the expected doubling of demand, the only solution is to become water efficient," said Dieter Kuffer, manager of SAM Sustainable Water Fund.

China needs $500 billion to build new water facilities and treatment plants over the next 10 yeas, while the U.S. will require double that to restore its aging infrastructure, Kuffer told Reuters in an interview on Friday.

On average, China lacks 40 billion cubic meters of water each year, according to state media reports. Outright shortages of water are exacerbated by climate change and water pollution.

With water unfit to drink in many less developed cities and provinces in China, the vast country with 1.3 billion population is a key growth market for U.S. firm Dionex, which runs systems to analyze water, and French utility giants Suez Environnement SA and Veolia Environnement.

SAM Sustainable Water fund owns stakes in these companies.

Since the fund's launch in 2001, a U.S. dollar version of the fund has gained 67 percent by the end of June, outperforming a 20 percent gain in the MSCI World Index.

Within the water sector, Kuffer said he likes water treatment companies and water utilities.

Last week, U.S. firm Waste Management Inc agreed to buy a 40 percent stake of Shanghai Environment Group, the city's largest environmental services provider owned by Shanghai Chengtou Holding Co Ltd, to help it grow business.

CHEAP WATER IN CHINA

China, which has among the lowest water tariff in the world at 20 to 50 cents a cubic meter, announced plans in July to raise water prices to encourage efficient use of the resource.

"From a valuation point, we are overweight utilities in the U.S. and Asia where price increases, for instance, in China is expected to be implemented," Kuffer said.

"Less than 1 percent of household income goes to pay for water, surely there's room for increase in the tariff," he said, adding he expects rates to double or triple over the next 10 to 20 years.

The fund's asset portfolio includes Guangdong Investments, American Water Works Co and U.S. firm Danaher Corp, which are among its top holdings as of end-June.

Kuffer is cautious on utility firms in the United Kingdom, given regulations limiting "allowable returns" for British water companies.

"We are also cautious about water industrial companies which supply technology equipment for industrial end-use," he said, adding "utilization rate in industrial production globally is low and companies may invest less in these technology."

"Margins for engineering firms are usually lowest two years after a recession due to a time lag in getting the orders and executing them" he said, highlighting margin pressure for water-related engineering firms including URS Corp and Arcadis.

(Editing by George Chen and Anshuman Daga)