Strong performance delivers growth

China Water Affairs Group 13 December 2018 Update
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China Water Affairs Group

Strong performance delivers growth

H1 results

Utilities

13 December 2018

Price

HK$8.59

Market cap

HK$13,821m

Net debt (HK$m) at 30 September 2018

8,299

Shares in issue

1,608.9m

Free float

48.4%

Code

855

Primary exchange

HK

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

11.7

(5.6)

19.8

Rel (local)

9.3

(5.0)

31.7

52-week high/low

HK$10.5

HK$6.7

Business description

China Water Affairs is a pioneer in the privatisation of water supply assets in China. The company seeks to create growth via volume/price increases and acquisitions. It is a constituent of the FTSE Environmental Opportunities Asia Pacific Index.

Next events

FY19 results

June 2019

Analyst

Graeme Moyse

+44 (0)20 3077 5700

China Water Affairs Group is a research client of Edison Investment Research Limited

Interim results confirmed that China Water Affairs Group (CWA) continues to grow rapidly. We remain optimistic about CWA’s capacity to extend this growth trajectory and see the 50% increase in the interim dividend payment as evidence of management’s confidence in the outlook. In our view, the rating of the shares does not reflect the growth prospects.

Year end

Revenue (HK$m)

PBT*
(HK$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/17

5,708

1,963

55.4

20.0

15.5

2.3

03/18

7,580

2,462

71.8

23.0

12.0

2.7

03/19e

8,593

2,873

83.2

30.0

10.3

3.5

03/20e

10,002

3,415

98.4

35.0

8.7

4.1

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

H119 growth broadly in line with FY19 estimates

CWA achieved growth in revenue, net profit to shareholders, EPS and DPS (versus H118) of 17.9%, 20.3%, 14.9% and 50% respectively. The outcome compared to our previously published FY19 projections for year-on-year growth of 18% in revenue, 15.5% in net profits 13% in EPS and 13% in DPS. The core business of water supply and environmental protection, saw revenue increase by 21.5% and operating profits by 19.3% The core business now accounts for 96.6% of group revenues and 98.7% of profits, up 3% and 2% respectively. Increases in water volume sold, tariff hikes, new connections and contribution from new projects all contributed to increased profits. The environmental business in particular, which CWA has earmarked for a separate listing, achieved rapid growth in revenues and operating profits (+81.0% versus Edison FY19e +21%) and contributed 18.9% of group profits. Net debt of HK$8,299m is expected to decline in H2, with FY19 disposals of at least HK$780m of non-core assets and the receipt of HK$423.8m from strategic investors in the environmental business.

Outlook of continuing growth; forecasts revised

We have made some adjustments to our FY19 estimates and we now forecast revenue of HK$8,593m (HK$8,935m) and EPS of HK$0.832 (HK$0.815). We have also increased our DPS forecast to HK$0.30 (HK$0.262) following the large interim increase. We believe the macro operating environment remains favourable for CWA given the government’s desire to see investment in infrastructure, a recognition of the need for tariffs to reflect market-based pricing and CWA’s ability to increase capacity via project expansion and M&A. We see the announced 50% increase in the H1 DPS as an indication of management’s confidence in the future.

Valuation: Growth provides valuation upside

Applying blended peer group market multiples to our revised forecasts for CWA indicates a valuation of HK$10.5/share, while the application of the peer group P/E multiple produces a valuation of HK$11.7/share. In our view, the rating does not appear to reflect CWA’s continuing growth prospects, and the PEG ratio for CWA, at 0.7x, stands at a discount to a peer group average multiple of 1.1x.

Exhibit 1: Financial summary

HK$m

2017

2018

2019e

2020e

2021e

31-March

HKFRS

HKFRS

HKFRS

HKFRS

HKFRS

PROFIT & LOSS

Water supply revenue

4,874

6,204

6,726

8,042

9,112

Sewage treatment

531

814

1627

1709

1794

Other segments

303

562

239

251

264

Revenue total

 

 

5,708

7,580

8,593

10,002

11,170

EBITDA

 

 

2,646

3,097

3,644

4,246

4,836

Operating Profit

 

 

2,271

2,691

3,149

3,687

4,204

Amortization

315

334

390

429

472

Depreciation

60

71

105

130

160

Net Interest expense

(251)

(289)

(340)

(347)

(319)

Profit Before Tax

 

 

1,963

2,462

2,873

3,415

3,970

Tax

(583)

(701)

(805)

(956)

(1,112)

Profit After Tax

1,379

1,762

2,069

2,459

2,858

Net profits contributable to shareholders

853

1,141

1,339

1,591

1,849

Average Number of Shares Outstanding (m)

1,505

1,571

1,609

1,609

1,609

EPS - fully diluted (c)

 

 

55.4

71.8

83.2

98.4

114.4

Dividend per share (c)

20.0

23.0

30.0

35.0

40.0

EBITDA Margin (%)

46.4

40.9

42.4

42.5

43.3

Operating Margin (%)

39.8

35.5

36.6

36.9

37.6

BALANCE SHEET

Fixed Assets

 

 

15,689

19,581

21,061

22,524

23,849

Intangible Assets

10,316

13,499

15,209

16,880

18,408

Plant, property and equipment

1,127

1,695

1,690

1,660

1,600

Investment properties

1,173

909

705

546

424

Investment in associates

635

661

576

481

376

Other

2,438

2,817

2,882

2,957

3,042

Current Assets

 

 

9,942

9,008

9,355

9,344

11,520

Properties Under Development

 

 

690

1,370

1,370

1,370

1,370

Properties Held for Sale

 

 

289

597

550

550

550

Inventory

 

 

285

348

394

459

512

Trade and Bills Receivables

 

 

872

1,055

1,196

1,392

1,555

Due from Non-controlling Equity Holders of Subsidiaries

251

260

306

364

423

Due from Associates

 

 

409

563

563

563

563

Prepayments, Deposits and Other Receivables

1,743

1,293

1,466

1,706

1,906

Pledged Deposits

 

 

783

570

570

570

570

Deposits and cash

4,314

2,511

2,500

1,930

3,631

Other

307

440

440

440

440

Current Liabilities

 

 

7,393

8,649

7,922

6,480

6,798

Trade and Bills Payables

 

 

1,097

1,626

1,300

1,400

1,500

Accrued Liabilities, Deposits and Other Payables

2,102

2,306

2,549

2,996

3,297

Short-term Borrowings

3,206

3,450

2,617

359

-

Other

988

1,267

1,456

1,725

2,001

Long Term Liabilities

 

 

9,275

8,786

9,929

11,135

12,346

Long-term Borrowings

8,123

7,432

8,432

9,432

10,432

Other long term liabilities

1,152

1,354

1,497

1,703

1,914

Shareholders' Equity

 

 

8,963

11,154

12,566

14,253

16,226

-

-

-

-

-

CASH FLOW

Net Cash Flows from Operating Activities

1,452

1,632

2,568

3,547

3,943

Purchase of property, plant and equipment

(92)

(100)

(100)

(100)

(100)

Increase in concession rights for water supply and sewage processing

(1,808)

(2,500)

(2,100)

(2,100)

(2,000)

Acquisitions/disposals

(283)

0

0

0

0

Increase in prepayments and other receivables

(1,226)

0

0

0

0

Others

(134)

(171)

112

112

104

Net Cash Flows from Investing Activities

(3,543)

(2,771)

(2,088)

(2,088)

(1,996)

Dividends

(135)

(369)

(483)

(563)

(644)

Shares issue and/or options exercised

(38)

301

0

0

0

Other

245

(362)

(175)

(208)

(242)

Net Cash Flow

(2,020)

(1,569)

(178)

688

1,060

Opening net debt (CWA definition)

 

4,213

6,232

7,801

7,978

7,291

Closing net debt/(cash)

 

 

6,232

7,801

7,978

7,291

6,230

Net debt to equity ratio (CWA definition)

 

70%

70%

63%

51%

38%

Source: Company accounts, Edison Investment Research. Note: CWA’s interim results did not include the publication of a cash flow statement.

General disclaimer and copyright

This report has been commissioned by China Water Affairs Group and prepared and issued by Edison, in consideration of a fee payable by China Water Affairs Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by China Water Affairs Group and prepared and issued by Edison, in consideration of a fee payable by China Water Affairs Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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