Aqua Resources Fund Limited, the Authorised Closed-ended investment scheme managed by FourWinds Capital Management and established to invest in global water opportunities, has reported a “precipitous decline” in the share price of China Hydroelectric Corporation, one of Aqua's investments, with the publication of its unaudited interim results for the six month period ending 30 June 2011.

The Group appears to have undergone a turbulent six months, with difficulties currently continuing.

At the Annual General Meeting on 2 June 2011, resolutions to receive the Report and Accounts of the Company, to re-appoint Ernst & Young LLP as the Company’s auditors and, to re-elect Kimberly Tara, who represents the Manager, FourWinds Capital Management, to the Board were all defeated, on a low voting turn out.

PricewaterhouseCoopers LLP were subsequently appointed as the Company’s new auditors on 25 June 2011. 

Kimberly Tara, Chief Executive Officer of FourWinds Capital Management, commented on the results:

"Aqua has an excellent well-balanced portfolio across the global water sector. The portfolio companies continue to show strong growth in pipeline and excellent success rates in winning bids.  The key drivers behind water industry growth remain strong, with global demand for water expected to outstrip supply by 40% by 2030.

Ms. Tara said the company remained confident that Aqua was well placed to capture the sector’s long term investment opportunities. Kimberly Tara is a shareholder of Fourwinds and was a Director of the Company up to 2 June 2011. As at 30 June 2011, Kimberly Tara had an interest in 3,685,000 Ordinary Shares in Aqua, which are owned by Fourwinds.  

Challenging six months and possible merger with other funds 

According to the company statement Aqua Resources Fund Limited has had a challenging six months, primarily due to a combination of the volatility in the markets, a lack of liquidity in its shares, a loss of appetite for private equity investments and a retreat from credit assets more generally. The company’s share price has suffered significantly “rather more than other broadly comparable companies.” The Chairman said the Board was “acutely aware” of the need to consider steps which might redress the situation. The Board is not proposing a dividend for the Period.

The Board said it recognised that the current discount in the share price to the Net Asset Value and poor liquidity was a source of continuing concern to shareholders and that it needed to consider alternatives.These could include some form of corporate action such as a possible merger or consolidation with other assets or similar funds and/or an examination of the merits of the Company maintaining its public listing.

The statement said that an assessment of the alternatives available to the Company and their feasibility would take time and further announcements would be made “as soon as practicable.”

Collapse in share price of China Hydroelectric Corporation

The company said there had been a “precipitous decline” of 43.8% in the share price of China Hydroelectric Corporation - Aqua’s original investment was for US$20,000,000 or 26.71% of the total assets of the Company.

The decline in CHC’s share price was attributed to a the following combination of factors:

• poor sentiment towards small-cap Chinese stocks
• a relatively below average set of results for the first half of 2011
• and a further skewing of results by an above average corresponding period in 2010 where unusually favourable weather was experienced at all project locations.

According to Aqua, Chinese companies listed on the stock exchanges in the United States are going through a period of re-assessment and questions have been raised by international investors about the integrity of some of the valuations. As far as the Board can tell, however, such issues have not been raised about China Hydroelectric Corporation.

CHC is an owner, consolidator, developer and operator of small hydroelectric power projects in China. Led by an international management team, CHC’s primary business is to identify and evaluate acquisition and development opportunities and acquire and in some case construct, hydroelectric power projects in China.

CHC currently owns twenty-four operating hydroelectric power projects in China (consisting of twenty nine operating stations) in China with a total installed capacity at 30 June 2011 of 563.8 Megawatt (“MW”). The projects are located in four provinces: Zhejiang, Fujian, Yunnan and Sichuan.

However, in comparison to the difficulties at CHC, other Aqua investments appear to be holding up well. In June 2011, Bluewater Bio International executed a US$20 million contract with the Ministry of Works in the Kingdom of Bahrain to upgrade and expand the Tubli wastewater treatment plant, and completed the installation of its Hybrid Bacillus Activated Sludge known as HYBACS process at the Botleng wastewater treatment plant in South Africa.

In April 2011, In-Pipe Technology Company Inc. was awarded new contracts totalling US$1.75 million for green sewer collection system treatment in its core North American market.

In January 2011, the Company announced that its wholly owned subsidiary, Aqua Resources Asia Holdings Limited had agreed to invest a further US$2,325,000 via a subscription for new shares to be issued by RWT, the international joint venture established in March 2009 between the Company and the Ranhill Group to invest in water and wastewater operations in the People's Republic of China and Thailand.

The proceeds will be used by RWT to undertake investments in two large wastewater treatment operations in mainland China, in regions which experience severe shortages of fresh water supplies, impacting potential economic growth and making this a critical project to government and commerce.

The Company also committed to invest a further US$2,250,000 in RWT, subject to the Ranhill Group subscribing alongside it to maintain its current shareholding ratio at 52.1%. The Company’s commitment is valid until 16 February 2012. The purpose of the additional commitment is to finance the next stage of RWT’s growth and to fund specific projects in the pipeline which are targeted for calendar years 2011 and 2012.

Key drivers behind water industry growth remain strong

Despite the difficulties, Aqua said the key drivers behind water industry growth remain strong with global demand for water is expected to outstrip supply by 40% by 2030 Governments and companies across almost every sector from pharmaceuticals to mining are continuing to focus on efficiency, water re-use and sustainability. The continuing low carbon agenda is also driving growth in parts of the sector, such as the hydroelectric market as well as helping to give additional fuel to the drivers behind water efficiency, resource recovery and sludge management.

In Europe, stringent regulation and the accession of new countries to the EU continue to drive investment in infrastructure upgrades and an increased focus on technology to improve efficiency and reduce wastage.

Aqua said that activity in the water utility-led part of the European water market would be driven by privatisations as debt-ridden countries attempt to raise funds through asset sales.

In Portugal and Greece analysis is already under way into the privatisation of their water utilities and whilst Italy has rejected privatisation, question marks remain over where the debt ridden government will find the €64 billion needed to upgrade its water system to European standards without recourse to private finance.

A condition of the €85 billion IMF / EU bailout for Ireland was the introduction of  water charges for domestic customers. Discussions are currently underway to divert over €500 million of government cash that was expected to be spent on water meters into upgrading Ireland’s water network to increase its efficiency and reduce losses.