Can water be a good business?

As any good capitalist knows, free market forces fix all problems. OK, maybe not, but in the case of water, whose importance as a natural resource is difficult to overstate, many people (myself included) believe that systematic underpricing (i.e., free or almost free) results in wasteful use. The immediate image that jumps to mind is showering for 15 minutes instead of 5, but agriculture accounts ~70% of human water demand and is the main culprit for water mining.

A water price reflecting the negative externalities of water overexploitation would in theory help avert a tragedy of the commons. Unfortunately, water resources are deeply politicized almost anywhere in the world, and while some places (like Texas and Australia) are seeing attempts to acquire private water rights, such rights are fraught with uncertainty:

"The idea that water can be sold for private gain is still considered unconscionable by many," says James M. Olson, one of America's preeminent attorneys specializing in water- and land-use law.

So, if it's difficult to apply market forces to the resource itself, can we at least get some private sector technological innovation in the house? Investors were excited about the recent IPO of Duoyuan Global Water (WSJ, sub. required):

In 4 p.m. composite trading, Duoyuan soared 37%, or $5.87, to $21.87. It sold about 5.5 million American depositary receipts at $16, above the expected price range of $13 to $15

Based in Beijing, Duoyuan makes equipment used to purify water and treat wastewater in China. It plans to use proceeds to improve its manufacturing facilities and production lines, build new ones and construct a research-and-development laboratory. Proceeds also may be used for acquisitions and general corporate purposes.

Duoyuan's revenue and earnings have been increasing at a fast clip, with its first-quarter profit nearly doubling to $4.2 million.

The water-treatment industry is competitive in China; Duoyuan's rivals include Chinese and international firms, including subsidiaries of Dow Chemical Co. and General Electric Co.

What remains to be seen, of course, is how these businesses perform in the long run. According to Google Finance, Duoyuan is currently trading at ~34x earnings. So as a colleague of mine remarked, if the company can double profits every quarter, maybe the math works out, but unless some pretty heroic assumptions pan out, Duoyuan's IPO will only go to show that "(China + Environment + Growth) x Excess liquidity > common sense."