Lower-than-expected FY22 results; operations remain resilient
? China Water Affairs (CWA) reported its FY22 results, which were lower than we
expected, given the lower-than-expected gross profit margin.
? Higher energy costs, a less favourable revenue mix, and spin-off-related expenses
were the reasons for the lower-than-expected profitability.
? CWA separately disclosed its pipeline direct drinking water operations, which reported
strong yoy growth in FY22. In our view, this will be one of its growth drivers.
? Despite its share price outperformance, CWA is trading at 5.9x FY23F P/E and 5.1x
FY24F P/E, and with a yield of 4.3%, CWA’s valuation still looks attractive. We reiterate
our ADD rating, with a new target price of HK$10.76 (down from HK$11.12), based on
8x FY23F P/E, which is in line with its historical average.
FY22 results lower than we expected
CWA reported revenue of HK$12,949.8m in FY22, up 25.2% yoy from HK$10,345.5m in
FY21. It reported a net profit of HK$1,893.6m, representing a steady increase of 11.9%
from HK$1,692.5m in FY21. The Company’s results were lower than we expected, given
the higher-than-expected expenses. CWA declared a final dividend of HK$0.18/share for
FY22, up from HK$0.16/share in FY21. The revenue contribution from water supply
operation services and water supply connection income amounted to HK$5,617.9m in
FY22, up 18.7% yoy from HK$4,733.5m in FY21. The revenue contribution from water
supply construction services amounted to HK$4,527.7m in FY22, up 22.8% yoy from
HK$3,685.8m in FY21. Revenue from city water supply operations and construction
services amounted to HK$10,347.1m in FY22, up 21.1% yoy from HK$8,544.0m in FY21,
representing approximately 79.9% of total revenue in FY22, down from 82.6% in FY21.
City water supply profit amounted to HK$3,710.2m, up 9.4% yoy from HK$3,392.2m in
FY21. The revenue contribution from sewage treatment and drainage operations services
amounted to HK$389.1m in FY22, up from 18.2% yoy from HK$329.1m in FY21. The
revenue contribution from sewage treatment and water environmental renovation
construction services amounted to HK$771.4m in FY22, up 3.3% yoy from HK$747.1m in
FY21. Revenue from the environmental protection segment amounted to HK$1,250.8m in
FY22, up slightly from HK$1,205.2m in FY21. The environmental protection segment profit
amounted to HK$411.0m, up 39.8% yoy from HK$294.0m in FY21. CWA separately
disclosed its pipeline direct drinking water operations, which reported a 379.4% yoy
increase in revenue in FY22. As at 31 Mar 22, CWA had developed over 2,000 direct
drinking water projects (up from 1,200 at end of 1HFY22), serving 3m people.
Growth outlook
The direct drinking water industry has 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
several years. CWA will continue to accelerate the development of its pipeline direct
drinking water business in various regions to improve its service quality and provide urban
and rural residents with better “last-meter” drinking water solutions. The Company will
strive to fulfill the general desire of the people to improve their quality of life and take the
lead to promote a healthy, low-carbon lifestyle. The General Office of the State Council
issued “Opinions on Promoting Urbanisation with Counties and Towns as Vital Drivers”,
which provides opportunities for the Group’s strategic implementation of urban-rural water
supply integration and supply-drainage integration.