Desalination: China's Next Growth Industry?

China is working to meet the country's growing demand for fresh water by building and improving desalination plants. In doing so the nation is on a path to growing the next big industry, and attracting plenty of attention from international producers who are prepared to team up.

The New York Times reports a $4 billion plant recently erected in the outskirts of Tianjin, China is funded by the Chinese government, which is a good thing considering desalted water costs twice as much to produce as it sells for.

Economically, the project makes no sense, but the government is claiming it is acting on social responsibility to provide fresh water to its expanding population.

But there are other less humanitarian reasons China is throwing its money into desalination plants: China has once again identified a way to be on the cutting edge of what promises to be a hugely profitable industry.

Today, one billion people lack access to clean drinking water, and that number is continuing to grow to include a wealthier, perhaps more game-changing population.

Kapitall recently reported on the water-shortage crisis that is building across the globe. While issues of clean water access and drought largely plague underdeveloped and developing regions, it is increasingly impacting developed regions that include large parts of Europe, the United States, and Australia. Notably, these regions include a wealthier population that has greater incentive to put money in clean water investments.

China's water demand is expected to grow 63% by 2030. At present, the majority of water desalination technology and equipment, roughly 60%, comes from Israel, but China plans to work toward a goal of 90% in-country production.

Not content to stand on the sidelines, "the list of foreign companies that have plunged into China's desalination industry is long: Hyflux of Singapore, Toray of Japan, Befesa of Spain, Brack of Israel and ERI of the United States, among others," reports the New York Times. For many of these companies the plan to shift factories and headquarters to China is under consideration.

In the words of ERI's chief executive officer Thomas S. Rooney Jr., "You can either fight them or join them, and our philosophy is that China likely is going to be the next big desalination market ... "I would rather develop technology for China in China and take a more open approach than play the secrets game."

Interested in following the trend? We list here the companies involved in desalination trading on the U.S. stock exchange. Do you think these names have something to gain from China's determination (and funds) to grow the desalination industry? (Click here to access free, interactive tools to analyze these ideas.)

1. Consolidated Water (NAS: CWCO) : Water Utilities Industry. Market cap of $135.41M. Develops and operates seawater desalination plants and water distribution systems. Share price as of 10/26 at $9.44. The stock has had a good month, gaining 15.53%.

2. Energy Recovery (NAS: ERII) : Pollution & Treatment Controls Industry. Market cap of $158.45M. Engages in the development, manufacture, and sale of energy recovery devices and pumps primarily for use in seawater and brackish water desalination worldwide. Share price as of 10/26 at $3.08. The stock is a short squeeze candidate, with a short float at 15.27% (equivalent to 19.88 days of average volume). The stock has lost 21.82% over the last year.

3. Exterran Holdings (NYS: EXH) : Oil & Gas Equipment & Services Industry. Market cap of $580.58M. Provides operations, maintenance, service, and equipment for oil and natural gas industry. Share price as of 10/26 at $8.96. The stock has lost 64.24% over the last year.

4. Graham (NYS: GHM) : Metal Fabrication Industry. Market cap of $175.73M. Engages in the design, manufacture, and sale of vacuum and heat transfer equipment worldwide. Share price as of 10/26 at $18.65. It's been a rough couple of days for the stock, losing 5.94% over the last week.

5. Hercules Technology Growth Capital (NAS: HTGC) : Diversified Investments Industry. Market cap of $409.21M. Hercules Technology Growth Capital, is a private equity, venture capital, and venture debt firm specializing in providing debt and equity to privately held venture capital and private equity backed companies and select publicly traded companies. Share price as of 10/26 at $9.43. The stock is a short squeeze candidate, with a short float at 5.64% (equivalent to 8.34 days of average volume). The stock has lost 2% over the last year.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Data sourced from Finviz.

At the time thisarticle was published Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.