In a previous post, I alluded to the unusually large number of...

In a previous post, I alluded to the unusually large number of Google searches for the term 'Phoslock' that seem to have originated in New Zealand over recent months.

Possibly, this might have something to do with the water reforms recently proposed by the new government of New Zealand. These reforms, called the Action plan for healthy waterways have been described as the most far reaching water reforms ever proposed in that country.

This description of the reforms is taken from the official New Zealand government website:

...The Government is taking action to stop the degradation of our waterways and clean up our rivers and lakes within a generation.

“Our rivers, lakes and wetlands are under serious threat after years of neglect. We can’t continue to go on like we are. If we don’t fix things now they only get worse and will be more expensive to fix,” Environment Minister David Parker said.

“Our Action Plan for Healthy Waterways aims is stop the degradation of our rivers and lakes, achieve a noticeable improvement in five years and restore our waterways within a generation.

“Many of the places we swam as kids are not safe to swim anymore. That’s not good enough. Our plan will stop things getting worse and start to reverse the damage.

“We were elected on the promise of cleaning up our waterways and this action plan sets us on that path. Cleaning up polluted waterways is a long-term challenge that will take a generation to fix, but the steps in this plan will make a real difference and get things heading in the right direction.”

The reforms are aimed at reducing the amount of pollution, including nitrogen, phosphorus, sediment and E. coli, entering local waterways from cities and farms. Within five years, the New Zealand Government is expecting environmental reporting to show evidence of improvements in water quality.

The New Zealand government is currently reviewing feedback on the proposal from citizens of that country, with submissions closing on the 17th.

Perhaps the numerous Kiwis who have been searching for Phoslock on Google lately are assuming that this company will be either be a direct or indirect beneficiary of this water reform plan.

It is interesting that the share price seems to have anchored around the $1.25 mark recently, with the share price quickly getting knocked back down every time it climbs above this mark. It would appear that this is about the price at which the Directors recently disposed of their shares for, as per the 'PET Directors satisfy significant institutional demand' announcement of 02/09/19.

Presumably, the logic of the market here is that shares in this company are worth no more than what the unnamed Investment Management Group who bought the shares were willing to pay for them when these Directors sold.

There seems to be some myopia here, especially when you bear in mind that the Directors disposed shares equivalent to 5% of the total number of shares outstanding, which represents a huge position.

If a major holder in a listed company wants to dispose a stake in a company anywhere near this size, it is almost inevitable that they will have to accept a price at the low end of the trading range, and I really doubt that the circa $1.25 price tag that the Directors sold for would really represent 'fair value', although all things considered I guess it isn't surprising that prospective buyers have become fixated by this number.

But more importantly, it seems to me that significance of the two recent announcements, namely the 'China' announcement of the 1/10/19 and the 'Florida' announcement of 9/10/19 has been largely overlooked, perhaps because in these two announcements there was either no clear dollar value attached (as in the case of the China announcement) or a relatively modest figure (in the case of the Florida announcement).

As a number of posters here have previously noted, there is reason to believe that there is more to these announcements than meets the eye, and I particularly think this is true for the announcement relating to the new large project in China that was released on the first day of October.

There may be a clue in the name of the city mentioned in the announcement: 'New Large Project in Wuhan, China'.

There was an piece about Wuhan City at the start of the year from the Guardian, titled 'Inside China's leading 'sponge city': Wuhan's war with water', and this article possibly offers some insight into the broader significance of the Wuhan City project.

As noted in the article, in 2015 Wuhan was designated as one of China's first of sixteen 'sponge cities', which the article goes on to describe as-

...areas piloting ecologically friendly alternatives to traditional flood defences and drainage systems. The pace of that project has been accelerated, with a total of 228 projects in the two pilot districts of Qingshan and Sixin to retrofit public spaces, schools and residential areas with sponge features. More than 38.5 sq km of the city has been retrofitted so far, at a cost of 11bn yuan.

The article then describes developments in Wuhan in more detail:

Nanganqu Park, which lies in the east near a large iron and steel company, was a dirty drainage ditch in the 1980s. It became a park in the 1990s and was last year transformed into a “sponge site”, with permeable pavements, rain gardens, grass swales, artificial ponds and wetlands.

The idea is that these features absorb excessive rainfall through soil infiltration and retain it in underground tunnels and storage tanks, only discharging it into the river once water levels there are low enough.

“The air is always fresh here,” says retired electrical engineer Liao Baozheng as he walks in the park.

“In Wuhan’s scorching summer, it’s cooler here as the lush vegetation brings down the temperature by two or three degrees.”

Under the sponge city scheme, Wuhan and the other participating areas must ensure that 20% of their urban land includes sponge features by 2020, with a target of being able to retain 70% of storm water. For Wuhan that equates to just over 170 sq km of a total urban area of 860 sq km, and last year the sponge projects were rolled out to a further nine districts.

Note that mention of Nanganqu Park, at the start of the above extract, which is said to be located near a large iron and steel company. I had a look for this on the internet, and although I couldn't track down the exact location of the park, there is a 'Nangnaqu street' not far to the north of the East Lake/Donghu (the Wuhan lake that is named in the announcement of the 1st), and the facilities of an iron and steel company, the Wuhan Iron and Steel Group, are only a few kilometres north east of the same lake.

These Wuhan Iron and Steel facilities are also located in the Qinhshan district, which was mentioned in the Guardian extract pasted above as being one of the pilot districts in the Wuhan 'Sponge City' initiative.

What I am getting at here is that it seems that Phoslock (the company and the product) seem to be playing a role in China's 'Sponge City' initiative. Perhaps the East Lake/Donghu project is the next stage in the public/private partnership, involving the city government and Wuhan Iron and Steel, that was behind the Nannaqu Park redevelopment.

This is significant for, three reasons:

1. For a start, the Wuhan authorities are investing a vast amount of money into the 'Sponge City' project. Take the aforementioned 'Nanganqu Park' project that the article mentions was transformed into a 'sponge site' last year. The Guardian article goes on to note the cost of the Nanganqu project:

...Such projects can be eye-wateringly expensive. Transforming the 3.8 sq km Nanganqu site involved a total investment of 1.26bn yuan, through a public-private partnership where 20% of the funds came from city government and the rest from the private sector – in this case the iron and steel company that built the affected residential areas for workers in the 1970s and 80s.

The 1.26 billion yuan converts to roughly $260 million AUD at the current exchange rate. As was noted by Chand in a previous post on this thread, even this figure is dwarfed by the hundreds of billions that the Chinese government are throwing at the broader Yangtze River Economic Belt.

So even if it turns out that Phoslock has been allocated just a small slice of this, it is quite a sizeable figure nonetheless.

2. The second point is that Wuhan City, as was noted in the Guardian article quoted above, is just one of sixteen 'Sponge Cities' in China, and all of these cities are expected to have commenced their redevelopments by the end of next year. If Phoslock has a role in the Wuhan City rebuild, one of the first of the 'Sponge Cities', I would assume that it is probably going to have a role in all such designated cities.

One particular development to keep an eye on is Suzhou Creek. According to a report from Shine yesterday, the Shanghai government has invested over 25 billion yuan (US$3.6 billion) in the fourth stage of the rehabilitation project for the creek, aimed at improving water quality and preventing floods.

The report notes that according to the development plan, continuous riverside zones will be created along the Huangpu River and Suzhou Creek by 2020, boasting more greenery, preserved historical buildings, bridges, and “sponge city” technology.

This is of particular interest, given that Suzhou Creek is down the road from the Changxing Phoslock factory.

3. Finally, although China is a pioneer in the development of sponge cities, other countries, including the United States, have started to investigate the concept of sponge cities in flood prone areas, as noted in this article on the subject. Thus, Phoslock's apparent involvement in China's sponge city initiative will serve the company well when they are looking to secure roles in future sponge city developments outside of China.

At the time of writing, the PET share price is sitting well below the $1.25 mark at which the management recently sold off their shares, which by necessity was probably below fair value for the stock. But if you read between the lines, the Wuhan City project announcement is probably more significant than is being appreciated by current market actors, as it seems to imply that Phoslock has a role to play in China's 'sponge city' developments.

One point to keep in mind about Phoslock is that the company has been listed for a very long time, over fifteen years, so most veteran Fund Managers and other stock market professionals would have come across the stock at some stage.

Given that this stock has lately been subjected to a publicity blitz from mainstream finance sites such as Livewire and the Financial Review, I suspect that a number of such professionals are currently running the ruler over the company, and my guess is that it is only a matter of time before they cotton on to the significance of the recent announcements, particularly that announcement relating to Wuhan City earlier this month.

As such, I would find it surprising if the share price was caught below that $1.25 barrier for too much longer.