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Veolia and China
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Veolia Environnement (VE) is a global leader in the provision of water infrastructure. It is a massive company, with revenues in 2007 of $32.6 billion euros (about $48 billion) and an after-tax profit of 927.9 million ($1.37 billion). It achieved good growth in its June 2008 half-year results, and expects its profits to grow for the full year.
However, the shares have been dismal performers this year, with the company's business hit especially hard by currency movements and the higher oil price. Could one incentive for them be the company's involvement in China? This short article is an attempt to discern - from the meager amount of information that Veolia will release - just what impact its Chinese operations are having on the company's overall business.
It is no secret that China is struggling to modernize its backward water supply systems, and is spending heavily on new infrastructure. In a previous report I detailed some of Veolia's Chinese operations.
Since 1997 – when Veolia signed a contract with Tianjin Municipal Government to renovate and operate a drinking water plant - it has been building a major presence in China.
It achieved particular success in 2002 and 2003 when it signed a 50-year full-service water contract for Shanghai’s Pudong business district and a 50-year municipal out-sourcing contract for water and wastewater in Shenzhen.
Since then, other successes include:
Altogether, Veolia is working on 25 projects for municipal and industrial partners in 19 cities covering drinking water production and distribution, customer services as well as consumer and industrial wastewater treatment. You can obtain some more detail at the Veolia Water China website.
But what sort of impact is all this having on the company's bottom line? Unfortunately, Veolia will only provide hints.
In its 2007 annual report it noted that it achieved 34.8 per cent revenue growth in Asia-Pacific that year, compared to 22.6 per cent in Europe and 7.6 per cent in North America. However, Asia Pacific contributed just 7 per cent of total revenues, compared to 44 per cent for France and 36 per cent for the remainder of Europe.
In the June 2008 half-year press release we learn that, in the Water division, "in Asia-Pacific, robust growth of 36 per cent at constant consolidation scope and exchange rates, was mainly driven by the start-up of new industrial and municipal contracts in China (Lanzhou, Haikou, etc.), by the increase in volumes and the expansion of the Shenzhen concession as well as significant volume of engineering works in Australia (the Gold Coast contract and the desalination contract in Sydney)."
However, the company also noted that the division's operating margin fell, due to a big increase in lower-margin work in the Middle East, Asia and Australia.
Good growth, but declining margins and only a modest part of total turnover. It is not the best recipe for stock price appreciation. Veolia is wonderfully placed to reap rewards from an eventual big surge in Chinese water spending. But for the time being its China exposure looks unlikely to provide much of a boost to the shares.
Disclosure: No positions
September 24th, 2008
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