As banks in China begin to lend again, we believe the water sector would soon be splashing with new order announcements after a prolonged nine-month drought. And this does not take into account China’s stimulus efforts, the full impact of which we believe could still be a quarter or two away. We remain Positive on the long term sector outlook - given firm environmental directives globally - and see easing credit in China as the key catalyst propelling sentiment and pushing water stocks higher in the near term. Focus on companies with good track record and well positioned to benefit from the impending order deluge. Our top buys remain Hyflux and Epure.

Easing credit in China provides the much-needed financial resources for companies to go after new contracts and start BOT projects, which were threatened by credit crunch at one point in time. Companies under our coverage have secured RMB707m of new loans year to date and there are as much as RMB1.6b more of BOT backlog to be financed in FY09.

Stimulus effects & tariffs hikes are longer-term positives. Water treatment industry is a key beneficiary of China's RMB 4tr stimulus plan. But, it will be two more quarter before the RMB350b of investments forenvironmental protection works its way into the sector. Meanwhile, Chinese officials are always reviewing tariff hikes to address growing water shortage in the country. China’s water tariffs rose by an average of 3.4% in 2008 compared to 6.7% rise globally, implying ample room for tariff hikes. Moreover, official surveys have indicated that average water expenditure as a percentage of household income in Beijing is about 2%, much lower than the 5% guideline set by the World Bank.

Singapore water stocks still cheapest in the region. On the average, SGX listed water companies are trading at 7x FY09 PER compared to 13.5x for HK/China and 12x globally. We like Epure (TP: S$0.32) and Hyflux (TP: S$1.96) for their clearer earnings visibility, relatively better credit access and strategic positioning to benefit from China’s focused investment in environmental protection.