A.O. Smith buys interest in Chinese firm

Sep 18, 2009 (Milwaukee Journal Sentinel - McClatchy-Tribune Information Services via COMTEX) -- AOS | Quote | Chart | News | PowerRating -- With a $77 million acquisition in China, A.O. Smith Corp. Thursday said it is plunging into the fast-growing global market for water purification and expanding beyond its signature water-heater business.

The Milwaukee-based company acquired a controlling 80% stake in Tianlong Holding Co. Ltd., which it calls "the leading residential and commercial water purification company" in the world's most populous nation.

Tianlong's headquarters is in Hong Kong, but its manufacturing base and major market are in China. Tianlong produces a broad line of water technologies for industrial users, including filter systems, water softeners and most critically an increasingly common form of filtration called reverse osmosis that is used in stripping impurities for everything from ocean-water desalination to bottled water.

While Tianlong's biggest market is in China, it exports to more than 30 nations, giving A.O. Smith a new global platform in the $425 billion-a-year market for water technology, analysts said. Within three years, the company predicts that its new China venture will generate more than $100 million in sales with double-digit operating profit.

"One of the biggest issues facing much of the world is securing clean drinking water and Tianlong has experienced significant growth over the last several years meeting this demand," said Paul W. Jones, chairman and chief executive officer of A.O. Smith.

Milwaukee business leaders applauded the strategy as a major boost to the region's efforts to redefine its international image as a hub of water research and technology. Jones is the co-chairman of the Milwaukee Water Council, a year-old trade group that supports regional water industries. But until the announcement, A.O. Smith's water heaters fit awkwardly into the region's aspirations to invest in technologies that conserve, recycle, clean and pump water.

"A.O. Smith's move further demonstrates and reinforces the Milwaukee region's worldwide reach and leadership in water technology," said Rich Meeusen, chairman and CEO of Badger Meter Inc. and co-chair of the Water Council.

A.O. Smith, which posted $2.3 billion in 2008 sales, has reinvented itself several times in its century-old history.

It started out making baby buggies and bicycles and grew into a major manufacturer of the undercarriages of passenger cars. It left the automotive business over a decade ago but kept the water-heater division that had earlier made beer kegs and brewing vats.

After an earlier expansion in China, the company ranks as China's second-biggest maker of water heaters, which provides it with a well-known brand and distribution channels on the mainland.

Analysts said the Tianlong acquisition has the potential to take A.O. Smith in a new strategic direction. "They definitely have a huge market opportunity over there," said Ned Borland, an industry analyst in Chicago at Next Generation Equity Research.

There's little doubt that water technology is poised for growth in China and Asia. Nine of China's 10 largest cities have unfit drinking water, according to a Goldman Sachs investment report. Half of China's rivers and lakes and 35% of its aquifers are classified as polluted, Goldman reports. Also, China has 7% of the world's renewable water supply but 21% of its population.

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