Solid 1HFY22 results

■ China Water Affairs (CWA) reported solid 1HFY22 results, stronger than we expected.
■ Its water supply-related business reported resilient yoy revenue growth, and its waste water treatment business also reported good yoy growth in 1HFY22.
■ CWA management discussed the potential for its pipeline direct drinking water operations, which in our view, will be one of the growth drivers.
■ The less positive point about the Company’s 1HFY22 results was a yoy increase in its total gearing ratio.
■ Despite its share price outperformance, CWA is trading at 6.7x FY22F P/E and 5.9x FY23F P/E, and with a yield of 4.2%, CWA’s valuation still looks attractive. We maintain our ADD rating, with a new target price of HK$11.12 (up from HK$8.29), based on 9x FY22F P/E, which is in line with its historical average.

1HFY22 results higher than we expected

CWA reported revenue of HK$6,472.8m, up 26.1% yoy in 1HFY22. It reported a net profit of HK$1,019.7m in 1HFY22, up 23.4% yoy from HK$826.5m in 1HFY21. The Company’s results were better than we expected. CWA declared an interim dividend of HK$0.16/share for 1HFY22, up from HK$0.15/share in 1HFY21. Revenue from city water supply operations and the construction segment amounted to HK$5,144.7m in 1HFY22, up 21.4% yoy, from HK$4,240.2m in 1HFY21. Segment results of its city water supply operations and construction were up 18.5% yoy, from HK$1,626.4m in 1HFY21 to HK$1,927.4m in
1HFY22. The environmental protection segment reported revenue of HK$596.1m in 1HFY22, up 19.2% yoy from HK$500.2m in 1HFY21. In this segment, revenue from sewage treatment and water environmental renovation construction services increased 28.0% yoy, from HK$291.9m in 1HFY20 to HK$373.5m in 1HFY21. Segment results of the environmental protection division were up 42.0% yoy, from HK$132.8m in 1HFY21 to HK$188.6m in 1HFY22. During the results conference call, CWA management discussed the potential for its pipeline direct drinking water operations. As at 30 Sep 21, CWA had developed over 1,200 direct drinking water projects, serving 1.5m people. CWA achieved revenue of HK$240m from its direct drinking water business in 1HFY22, up 362.1% yoy.

Growth outlook

CWA management highlighted that the direct drinking water industry had enormous room for growth and promising market prospects. The development of the pipeline direct drinking water business and the enhancement of service quality will become CWA’s key development strategies in the next five years. CWA will intensify and develop the business expansion model of cooperation with local governments. It will also establish new business and profit growth points, and improve and optimize its business deployment and industry value chain to enhance synergies, to enable it to create higher returns for shareholders and contribute to national economic development and improvement of people’s livelihood.

Forecast and TP adjustment

We raised our revenue forecasts for FY22F, FY23F and FY24F by 10.0%, 13.6% and 16.0%, respectively, partly due to factoring in revenue contribution from its direct drinking water operations. We raised our net profit forecasts for FY22F, FY23F and FY24 by 6.8%, 8.2% and 9.1%, respectively, because of higher revenue forecasts. CWA is trading at 6.7x FY22F P/E and 5.9x FY23F P/E, and with a yield of 4.2%, its valuation still looks attractive. We maintain our ADD rating, with a new target price of HK$11.12 (up from HK$8.29), based on 9x FY22F P/E, which is in line with its historical average.