Water, water (projects) everywhere
It would seem these days that not a week passes by without news of major staff layoffs around the world, especially among global financial institutions and US companies. But for Singapore-listed water company, Hyflux, the opposite tack is true.
 In fact, as Sam Ong, group deputy CEO and CFO reveals in an interview with SIAS at Hyflux's headquarters in Kallang Bahru, the group will be hiring at an average of at least one new staff a day – both at technical and senior management levels – in the coming 12 months to cope with potential new projects as well as its record orderbooks to date of S$1.5 billion. Orders that will keep the company busy over the next two to three years.
Hyflux currently has a headcount of 1,500, which is about a third more than what it had on its payrolls a year ago, and of which 900 are located in China. Besides Singapore, which has 600 employees, the company also has staff in Malaysia, India, Dubai, Algeria and the Netherlands.
As indicative of its position in the technology space, about seven out of 10 of its staff are engineers and technicians. Also on its payrolls are about 20 PhDs employed in the area of research and development (R&D) such as membrane technology in which Hyflux is one of the world's – if not the global leader in this niche segment of the water treatment and recycling market.
The membrane-based reverse osmosis technology is currently used in two-thirds of total worldwide capacity, as it's more energy-efficient, cost-effective and more environmental-friendly (lower CO2 emissions) compared to a thermal distillation plant.
Competing toe-to-toe against the likes of more established players such as Veolia, Suez, Siemens and GE Water in various water projects around the globe, the group has recently often come up trumps especially in the bids for water desalination projects.
According to water industry newsletter, Global Water Intelligence, Hyflux is a company on the "brink of big time success" after winning the global open competitive bid for the Magtaa desalination plant in Algeria, which is the world's largest ultra-filtration (UHF) and reverse osmosis desalination plant.
Notes Mr Ong, "If you strip the water divisions from the likes of Veolia and Suez, they are not much bigger in size. GE may be big but GE Water is only about two to two-and-a-half-times bigger than Hyflux. We believe that Hyflux holds a very valuable portfolio in desalination plants, one that matches the global players at this point in time."
Besides the Magtaa plant in Algeria, Hyflux is on record as the designer and builder of the biggest seawater desalination in Asia in Tianjin, China as well as its home turf in Singapore at Tuas. It is also behind the processing technology and maintenance behind most of the NEWwater plants in Singapore. Together with the desalination unit, these existing plants account for about a third of the water supply in the Republic when fully utilised at designed capacities.
Hyflux has under its belt a track record of designing and commissioning some 44 water treatment plants in China, which accounted for 61% of the group's turnover of $198 million for the first half of 2008 (compared to $63 million for 1H 2007, or an increase of 215%; net profit vs 1H 2007 was up 326% from $7 million to $28 million).
Striving to outperform
Quite an astonishing feat for this multiple-award winning company on both the business and technology fronts considering that it was founded less than two decades ago in 1989 as a supplier of industrial water treatment equipment with a staff strength of only three, including its founder and current group CEO, president and managing director Olivia Lum.
 From such humble beginnings, it has gone on to become the first pure water play listed on the Singapore Exchange (SGX) in January 2001 with a market capitalisation of $50 million on its debut.
One of Hyflux's competitive edge which has seen its orderbooks going from strength to strength in terms of value and quality, stems from its emphasis on R&D, which the company spends some S$10 to S$15 million annually.
Says Mr Ong, "You may not see the results right away but they have been a mainstay for Hyflux for the past 20 years. The focus on R&D has brought about quality in our earnings growth and sustainability through higher levels of technological know-how, key competencies and competitive efficiency in our bids for new projects. We have more ways to win being a technology-driven company.
"We are not a contractor that happens to be building a waste water treatment plant, but rather a company that possesses proprietary technology – including patents in both products and processes – that rivals some of the best in the world."
The group has since grown about 35 times with annual topline and bottomline growth averaging more than 30%, and has since spun off Hyflux Water Trust (HWT) on the SGX in December 2007.
Hyflux, which holds a 31.5% stake in HWT pocketed some $23 million in divestment gains from the sale of 13 of its plants to the trust. Over the long term, it will also derive trust management as well as operational fees from the divested plants, but not income from water tariffs.
Commenting on the move, Mr Ong says, "Hyflux does not fit the profile of a utility owner relying on stable income from the sales of water, which is the profile of the trust. As a technology-driven company, Hyflux is in the position to recycle the capital in order to reinvest in higher growth areas by delivering our technology to not another five, but 500 new plants in the years to come."
He adds that both listed vehicles – Hyflux and HWT – complement each other in that they offer different investment profiles for investors with different risk appetites. HWT would appeal to institutional investors such as pension funds who prefer stable income and high dividend yields while the Hyflux stock to those looking for capital appreciation and total returns from the angle of water technologies.
Mr Ong is confident that Hyflux will continue to create shareholder value for its investors with a sustained bottomline growth of at least 30% in the coming years, based on the simple fact that the industry itself is expected to grow at an annual pace of 20% to 30% in the coming decade.
"At Hyflux, we do not stand still but constantly strives to exceed market performance. Furthermore, we are not just participating in a high-growth sector, but also the fastest growing segment within the water sector, which is that of membrane-based desalination."
Mr Ong points out for example that Hyflux's current contract value for desalination plants alone in China of about $500 million represents only the tip of the iceberg, or about 1% of the potential size of the water market in China.
In Algeria, which is expected to double its desalination capacity over the next five years with an additional 45 new plants, Hyflux has already wrested a 30% market share in Algeria. Both China and Algeria are expected to be two of the biggest markets for desalination plants in the world.
The same trend to beef up the water sector is also expected in other countries in the Middle East such as Oman, Dubai, Bahrain, Abu Dhabi and Saudi Arabia where Hyflux has also set up a foothold in these markets.
Abu Dhabi, for instance has plans to emulate Algeria in the doubling of its desalination capacity while Saudi Arabia is looking at privatising its US$50 billion water sector with a view to incorporate new membrane-based technologies in its national upgrading programme of plants in the desert kingdom.
Despite the challenging global credit conditions, Mr Ong notes that "in no way is the water market saturated." He adds, "The water desalination and infrastructure projects in water utilities are not slowing down. In fact, they are a priority with governments who are looking at fiscal policies to stimulate domestic economic growth and provide jobs. In Singapore, it's projects like the MRT. In China, it's water. For the Middle East, there is also the drive to convert their wealth from petrodollars into new infrastructure projects such as water."
Meanwhile in India where Hyflux has a rep office in Chennai (formerly Madras) and has smaller water and industrial projects with local partners like Tata, the momentum in the water sector is likely to come from private sector port operators and petrochemical companies in new special economic zones, says Mr Ong who adds, "There's currently one sizable desalination plant in India, so we are still not too late at all in entering the Indian market."
In other words, there would be plenty of prospective jobs in the global pipeline for all water sector and utilities players, putting Hyflux in a sweet spot for a share of the global pie.
"Being in the top three in each water segment is enough, there's a lot of plants out there to be designed, built and operated," says Mr Ong who also stresses that Hyflux's focus will be on execution of its projects and will be selective in its choice of financial backers and equity partners in order to capture the vast opportunities and reap better returns on investment for its shareholders.
"However, we are not project-hungry. We do not need more projects but rather more profitable projects by looking at the risk rewards and quality of cashflow they can bring to the group's bottom line," says Mr Ong.
Meanwhile, it should be noted that Hyflux is not just about water and desalination plants.
Its membrane technology can also be used for industrial applications such as oil recycling, recovery and separation of impurities for the petrochemical, textile, biotech, pharmaceutical, electronics and food industries. The industrial segment accounted for $43 million or 20% of the group's revenues in the first half of 2008 and includes oil-recycling plants in Singapore, Vietnam, China, India and Saudi Arabia.
It has also tied up with US-based Marmon Water since January 2007 to develop new products to provide clean, filtered and softened water for homes in North America, Europe and Asia. The joint venture with Marmon will also enable the group to tap the non-Asian market for sales of its filtration and membrane products including its ceramic membranes which is developed by Hyflux's subsidiary in the Netherlands.
Or as Mr Ong remarks, "You can say that at the back of our mind, we like to see ourselves as a fully integrated water company providing water treatment and recycling not just for industrial applications but also for homes; as well as other relevant areas including those used for crisis relief as was in the case with Myanmar (after Typhoon Nargas) and the Sichuan earthquake."
By A J Leow
Also click below for:
• Water Sector analyst report by DBS Vickers (27 Aug 2008)
• Hyflux Water Trust report by DBS Vickers (3 July 2008)
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