Well positioned in a growing market

China Water Affairs Group Limited 8 August 2018 Outlook
Download PDF

China Water Affairs Group

Well positioned in a growing market

Annual update

Utilities

 

8 August 2018

Price

HK$9.50

Market cap

HK$15,285m

.

Net debt (HK$m) at 31 March 2018

7,801

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

5.0

23.4

119.4

Rel (local)

5.2

31.0

115.1

52-week high/low

HK$10.5

HK$4.3

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 event

H119 results

November 2018

Analyst

Graeme Moyse

+44 (0)20 3077 5700

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

China Water Affairs Group (CWA) is well positioned to take advantage of the favourable trends that we expect in the Chinese water and sewage market. CWA’s portfolio of water assets, experienced team, stable financial position and impressive track record should enable the company to continue to grow returns for shareholders.

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

17.1

2.1

03/18

7,580

2,462

71.8

23.0

13.2

2.4

03/19e

8,935

2,829

81.5

26.2

11.7

2.8

03/20e

10,481

3,384

97.5

29.4

9.7

3.1

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

Impressive track record

CWA’s recent FY18 results extended the company’s impressive track record. In the period 2013–18, CWA achieved CAGR in EPS of 29.6% and DPS of 35.7%. In the same period, the revenues and segmental profits of the key water business (more than 85% of group profits) grew at a CAGR of 31.5% and 33.3%, respectively. The operating margin for the core water business has remained in the range of c 36–42% since 2011, and in 2018 was 38%. Over a longer 10-year period, CWA has posted CAGR of 32.8% in revenues and 39.8% in operating profits. Despite the strong growth, CWA has preserved its financial strength with total liabilities/total assets at c 61% in 2018 (2013–18 range: 55–65%).

Favourable market; strong position

We believe CWA is capable of achieving further growth in the forecast period. Politics and regulation require further improvements to the Chinese water and sewage infrastructure and, as the recent opinion on changes to the price change mechanism (No. 943) issued by the National Development and Reform Commission (NDRC) acknowledges, tariffs should be reflective of costs and not force operators to supply the domestic water market at a loss. However, even at current tariff levels, CWA has turned previously lossmaking state-owned enterprises into profit through efficiency improvements. Profitability will be further enhanced once tariff rises are implemented. With a government committed to involving private capital in system improvements, CWA, with its track record of success, experienced management team, sound financial footing and diversified portfolio of water assets, is well placed to take advantage of the expected transformation.

Valuation: Upside potential despite recent strength

Following the recent NDRC announcement, we have revised our forecasts (FY19e EPS HK$0.815 vs HK$0.762 previously), taking a more optimistic view on the scope for tariff increases and we also revise our minority interest charge. Blended peer group multiples indicate a valuation for CWA of c HK$10.7/share. Applying only peer group P/E multiples, CWA’s valuation would rise to HK$11.7/share (FY19) and HK$12.4/share (FY20). The two-year PEG ratio is c 0.9x (at HK$11/share).

Investment summary
Company description: Active in water asset privatisation

CWA is a one-stop water services solutions provider with operations encompassing the supply of raw and tap water, sewage treatment, network construction and maintenance and water resource management. Founded in 2003 and based in Beijing, CWA supplies water to over 58 cities in the People’s Republic of China (PRC) (under the transfer–own–operate model) and runs sewage treatment projects (under 25-year franchise agreements – build, operate, transfer (BOT)) spread across a number of provinces and regions. CWA also operates a number of other smaller businesses, including property development. The property business develops and sells land banks accumulated during the past 15 years. Proceeds are used for the development of the core water business. CWA seeks to grow its business both organically, via expansion of the network and tariff increases, and through the acquisition (privatisation) of existing assets.

Valuation: Rating offers further upside

Blended peer group multiples indicate a valuation for CWA of c HK$10.7/share. Applying only peer group P/E multiples (FY1 14.4x and FY2 12.7x) CWA’s valuation would rise to HK$11.7/share and HK$12.4/share, respectively. The two-year PEG ratios of 0.8x (at HK$10/share) and 0.9x (at HK$11/share) also appear undemanding for a company with CWA’s growth record. Our DCF valuation of HK$13.4 share is sensitive to assumptions on discount rates (we use 8%), terminal growth rates (we use 2%) and long-term EBIT growth rates (we assume 14% pa beyond 2021). Reducing our assumption for EBIT growth from 14% to 12% lowers the DCF valuation to HK$12.2/share (using discount rates of 8% and a terminal growth rate of 2%).

Financials: Growth trajectory to continue

Revenue growth – we forecast revenue growth of 18% in FY19 and 17% in FY20 (vs CAGR 2013–18 of 27.5%). The water supply business remains the key contributor, accounting for c 85% of revenue in both years.

Margins – we forecast operating margins for FY19 and FY20 of c 35% (FY18 35.5%).

EPS and DPS – growth in revenue and stable operating margins lead us to forecast EPS of HK$0.815 for 2019 and HK$0.975 in 2020, based on our assumption of a minority interest of 35% (previously 39%). We assume a pay-out ratio (based on basic EPS) of 32% in FY19 and 30% in FY20 (32.5% in FY18). Our assumptions produce a DPS forecast of HK$0.262 (2019) and HK$0.294 (2020).

Sensitivities: Acquisitions, politics and regulation

Acquisition – given the acquisitive strategy of the business there is a risk that CWA overpays for an asset, although the scale of this risk is diminished by project diversification.

Political – the Chinese government has been supportive of the policy of privatisation of water assets, which has allowed CWA to grow. A reversal of this policy, although unlikely in our view, could significantly reduce CWA’s growth prospects.

Local government – CWA operates its projects jointly with local governments, which retain the right to terminate concessions. A breakdown of relations with the local government could pose a threat to a specific project.

Regulation – CWA is allowed to earn returns of between 8% and 12%. Reductions in the allowed return, although unlikely in our view, could reduce the profitability.

Company description: A utility offering rapid growth

CWA offers pure equity exposure to the Chinese water market and operates water supply assets across 58 Tier 3 and Tier 4 Chinese cities. The business expansion has delivered strong returns for shareholders, with CAGR in the DPS of 35.7% and 29.6% for EPS in the period 2013–18.

Chinese water market remains focus

CWA is focused on the Chinese water supply market, with a supply capacity of 8.49m m3/day currently. In FY18, c. 0.7m m3/day of additional capacity was added by acquisitions and organic expansion. The water business accounted for 87% of group operating profits in 2018. CWA entered the sewage treatment sector in 2012 and this business has also grown rapidly in recent years and contributed c 10% of operating profits in 2018. Of the other businesses, property development is the most notable, generating c 3% of operating profits in 2018.

Exhibit 1: Percentage of operating profit by division

Exhibit 2: CWA – composition of revenues and operating profits 2018 together with operating margin

Source: China Water Affairs, Edison Investment Research

Source: China Water Affairs, Edison Investment Research

Exhibit 1: Percentage of operating profit by division

Source: China Water Affairs, Edison Investment Research

Exhibit 2: CWA – composition of revenues and operating profits 2018 together with operating margin

Source: China Water Affairs, Edison Investment Research

Strategic growth in the Chinese water and sewage market

CWA‘s strategy is to continue to grow in its core Chinese market. Growth is targeted from expanding existing operations, through additional capex and improving profitability via tariff increases. CWA also seeks to acquire water networks (often loss-making) from local governments and as a result of operational improvements and tariff negotiations to improve profitability. Management targets earnings accretion from the acquisitions on a two- to three-year time frame.

Experienced team has delivered growth

The executive chairman, Mr Duan Chuan Liang, founded the predecessor company to CWA, Silver Dragon Group, in the 1990s. Prior to that, Mr Duan worked for the Ministry of Water Resources in the PRC for over 10 years. As a result of the implementation of its focused strategy, CWA has been able to achieve rapid growth for shareholders, with a CAGR in the period 2013–2018 of 26.1% for operating profits and 29.6% for EPS. The DPS has also been increased significantly (CWA’s policy is to pay at least 30% of basic EPS in DPS), achieving a CAGR of 35.7% in the period 2013–18.

 

Market opportunity facilitates growth

The Chinese government has implemented significant changes to the Chinese water system in order to address the problems of scarce water resources, poor water quality and financially hard-pressed local governments. Water transfer projects and environmental legislation have begun to address some of the issues, but it is, in particular, the privatisation of water assets, encouraged by the central government, that provides a significant market opportunity for CWA.

Chinese water resources and quality

Figures from the World Bank indicate that, in absolute terms, Chinese water resources, at 594.2bn m3 rank as the fifth most plentiful in the world, after Brazil, the Russian Federation, Canada and Indonesia. On a per-capita basis, the analysis appears less favourable, with China at approximately one-third of the global average, but nevertheless not out of line with some other major industrial economies. The headline figures do not, however, reveal the geographic disparity in terms of water resources between regions and the highly polluted nature of much of the water. According to the United Nations Food and Agriculture Organisation, some areas in the north of the country, such as the Huai and Hai-Luan river basins, possess resources of less than 500m3/year per inhabitant (below the level defined as ‘water scarce’ by the UN) versus c 25,000m3/year per inhabitant in the relatively sparsely populated south-west of the country. A total of 11 provinces in China fall below the 1,000m3 per capita level, defined by the World Bank as the ‘water poverty’ mark. Eight provinces are defined as suffering from ‘extreme scarcity’ with annual water resources below 500m3 per capita. According to CWA, over 400 out of 660 cities suffer from water shortages. With population and economic growth, and in the absence of intervention, the situation would worsen.

The quality of water has also been a major concern. According to the UN, FAO ‘Water Report 37 2012’, 80% of the 50,000km of major rivers in China are so polluted that they can no longer support fish. In addition, around urban areas 90% of rivers are said to be seriously polluted, especially in the industrial north of the country. According to the National Development and Reform Commission (NDRC), in 2015 over 30% of China’s seven major river systems fell below the expected standard (below grade III).

Government policy to address deficiencies

The Chinese government has taken a number of initiatives to address issues of water scarcity and pollution.

The South-to-North Water Diversion Project involves drawing water from southern rivers and supplying it to the north and thereby reducing water abstraction in the relatively dry Northern provinces. The project will link China’s four main rivers and will involve the construction of three diversion routes, across the eastern, central and western parts of China. Planned for completion in 2050, it is estimated the project will cost $62bn and, when complete, will facilitate the diversion of 44.8bn cubic metres of water annually.

As we have already noted, a significant proportion of China’s water resources are polluted. To tackle the problems of pollution the authorities have devised a regime of increased supervision and punishment. The revised Water Pollution Prevention and Control Law came into effect on 1 January 2018 with increasing government responsibility and supervision. Over 900,000 river chiefs have been appointed, who will in turn have their performance assessed by public bodies based on the quality of rivers and lakes in their jurisdiction. The river chief system is designed to improve the co-ordination of trans-jurisdictional matters. Stronger enforcement also forms a key part of the law and fines can reach as much as RMB1m with the potential for criminal punishment for significant violations. The Ministry of Ecological Environment, in its recently published 2017 ‘State of Ecology & Environment Review’, revealed that RMB11.6bn of violation fines were levied in 2017. While the changes have begun to bear fruit in terms of river quality (in 2017, rivers meeting grades I–III rose to 71.8% (from 71.2% in 2016) versus the target of 70%), the picture remains mixed, with groundwater and lakes and reservoirs showing a deterioration.

The 13th Five Year Plan for the Construction of Urban Wastewater Treatment and Recycling Facilities (issued 2017) has set out a number of objectives for increasing the rate of urban sewage treatment, sludge treatment and expansion of the sewage pipe network. In total, investment is expected to reach RMB560bn, c 31% higher than the expenditure envisaged in the 12th Five Year Plan.

The rapid rate of urbanisation in China and the weak financial state of the local governments’ balance sheets have also led to the Chinese authorities to encourage the participation of private capital in the provision of water services and this has created a significant business opportunity for CWA and allowed it to grow its business strongly in recent years. In addition, the recent economic policy document (943 – June 2017) from the NDRC called for, among other issues, more stringent discharge standards for sewage, competitive bidding for sewage treatment contracts and the introduction of a pricing mechanism for sewage treatment and sludge. Most importantly for CWA, in our view, NDRC 943 advocates the establishment of a price-adjustment mechanism that fully reflects the costs of the water supplied, so that the residential water price is no longer below cost level and prices in the non-residential section of the market allow for a reasonable profit level to be earned.

Market size figures for water treatment and sewage

The underlying Chinese water market has been growing modestly over the longer term, at a rate of c 1%, although domestic usage has been growing more rapidly, at almost 3%, over the same period. However, the percentage of the market that has been privatised remains small (c 15% of the water market is currently in private hands), allowing significant scope for expansion.

Exhibit 3: China – growth in water usage by sector 1980–2013

Sector

1980 (in 100m3)

2013 (in 100m3)

Average growth rate 1980–2013 (% pa)

Agricultural

370

392

0.175

Industrial

46

141

3.337

Domestic

28

75

2.941

Total

444

618

0.997

Source: Ministry of Environment Protection of PRC (2013)

Despite recent rises, water tariffs in China remain low. A comparison of international water tariffs shows clearly that China remains well below international averages for industrialised nations. Tariffs correspond to c 1% of average disposable income compared to a world average of c 3–5%, providing potential for upward revision over time.

Exhibit 4: International comparison of water tariffs for customers using 6m3/month and 15m3/month

Source: IBNet Tariffs DB

Competitive position

As a pioneer of the public–private partnership in the water supply business in China and integrated across the entire water supply value chain (using the TOO model), CWA has been able to expand more rapidly than some of its competitors and has established an extensive network of contacts with local governments. The network, covering 58 cities (operated using 30–50-year contracts) allows CWA to ensure that it is not overly exposed to adverse regulatory/political outcomes in any one specific area. The direct collection of tariffs from the end user also provides for a stable income and cash flow. Although international water companies have made some inroads into the Chinese market, recent history (since the financial crash) would suggest that they have pulled back from the market. We believe that CWA’s local knowledge, Chinese credentials, experienced management team and proven track record have made it a trusted partner of local governments and place it in a strong position to grow the business.

CWA business model

CWA’s strategy is to exploit the growth opportunity in the Chinese water market. As we have already seen, the water business remains the core component of profitability and has grown rapidly in recent years, with the principal profit drivers being price increases and volume growth (organic and acquisitive). In the case of acquisitions, CWA will buy water assets (often loss-making) from local authorities, and improve and expand the system while applying for tariff increases. The regulation allows for an 8–12% (post-tax) return on equity.

Exhibit 5: Organic growth of CWA’s water supply business in 2018

Region

Company

Capacity (m3/day)

Huizhou, Guangdong

Daya Bay

130,000

Huaihua, Hunan

Yuanchen

40,000

Jingzhou, Hubei

Jianglin Silver Dragon

30,000

Shangrao, Jiangxi

Wannian Silver Dragon

25,000

Changsha, Hunan

Changsha (China Water)

10,000

Yungcheng, Shanxi

Pinglu

10,000

Pingxiang, Jianxi

Luxi

5,000

Total

250,000

Source: China Water Affairs

Exhibits 5 and 6 show that in 2018 acquired projects accounted for c 64% of the total increase in capacity, with organic growth accounting for the other 36%. In total, the capacity additions of 702,000 m3/day represent an increase of c 9% in capacity. Customer numbers increased from 2.9m at year-end FY17 to 3.3m at FY18 (+c 14%). In FY18, CWA was also successful in negotiating tariff increases in 16 cities (versus seven in each of the previous two years). Since the year-end, a further eight cities have agreed tariff increases. We believe the scale of the tariff increases varies significantly, from as little as 2% in some cases, up to a maximum of 20%.

Exhibit 6: Acquired water supply projects in 2018

Region

Company

Capacity (m3/day)

Shishou, Hubei

Urban and Rural Water Supply Integration

220,000

Ji'an, Jiangxi

Ji'an Silver Dragon

80,000

Shangqiu, Henan

Xiayi Water Supply

50,000

Heyuan, Guangdong

Heping Water Supply

50,000

Jiaozuo, Henan

Wuzhi Minsheng Water Supply

30,000

Xingtai, Hebei

Xinhe Silver Dragon

22,000

Total

452,000

Source: China Water Affairs

CWA entered the sewage market in 2012 and this business has grown quickly too (2013–18 CAGR in operating profit: 66.5%) to a point where it contributes c 10% of operating profits. An additional 205,00m3/day of sewage treatment capacity was added as a result of organic growth in 2018 and four cities agreed tariff increases (one each in the previous two years).

Increasingly, CWA will also seek to explore the provision of value-added water services and the development of a direct drinking water business (not regulated and not subject to return caps). Growth is targeted by both organic and acquisitive routes with the continuing disposal of non-core assets used, in part, to fund the expansion.

CWA scope of operations

CWA now serves 58 cities in the east and north of China, spread over 13 provinces and three independent municipalities. Most of the cities served are small to medium-sized (Tier III or IV). The distribution network is over 135,000km in length. In total, CWA serves 3.3m people and its assets have a total designed capacity of 13.91m m3/day. The current capacity of 8.49m m3/day will be supplemented by 1.85m m3/day of assets currently under construction and 3.57m m3/day of plans for future expansion (Exhibit 7).

Exhibit 7: CWA capacity as at 31 May 2018

(million m3/day)

Capacity (current)

Construction

Planned

Tap

5.776

1.764

3.350

Sewage

0.825

0.088

0.215

Raw

1.890

0.000

0.000

Total

8.491

1.852

3.565

Source: China Water Affairs

Exhibit 8: CWA geographical coverage 31May 2018

Source: China Water Affairs

Disposals finance growth

The growth is, in part, funded by the disposal of non-core assets and this forms a key part of CWA’s strategy. In 2018, CWA disposed of assets worth HK$833m and plans to increase the rate of disposals to over HK$1,000m in 2019. A significant proportion of the disposal proceeds are generated by the profits on property development and investment. Unwanted water assets (eg water treatment plants) are either developed by CWA’s own property development business or sold on to other developers for cash.

Exhibit 9: CWA non-core asset disposals 2018

Typethe profits

Amount (HK$m)

Comment

Property Development and Investment

446

Sold property projects in Jingzhou, Hubei and Zhoukou and Henan.

2349.HK Shares and Assets Disposal

180

Recouped cash of around HK$180m

Land Asset Disposal

107

Sold two pieces of land in Ningxiang and Hunan

Tourism Asset Disposal

100

Reduced CWA's share in Fairy Lake (JV with local government), Xinyu, Jiangxi to 10% (from 65%)

Total

833

Source: China Water Affairs

CWA’s long-term growth record

Exhibit 10: CWA capacity growth 2003-18

Source: China Water Affairs

The increased capacity (illustrated graphically but unfortunately not quantified by CWA) has been accompanied by rising revenues and profitability as shown in Exhibit 11. Over the period since 2008, CWA has achieved CAGR of 32.8% in revenues and 39.8% in operating profits. The operating margin for the core water business has remained in the range of 36–41% since 2011, and in 2018 was 38%, marking an improvement over the 37% margin recorded in 2017. Over the past five years, revenues and segmental profits in the key water business have grown at a CAGR of 31.5% and 33.3%, respectively.

Exhibit 11: CWA core water business revenue and profit growth, 2005–2018 (HK$m)

Source: China Water Affairs

FY18 results exceed expectations

CWA posted continuing year-on-year growth in group revenue (HK$7,580m, +32.8%), recurring operating profit (HK$2,718m, +37.5%) and EPS (71.8c, +29.6%). The growth reported exceeded our expectations for both revenue (HK$7,069m) and EPS (64.9c). The performance was aided by property profits, tariff hikes, acquisitions and an improvement in the cost-to-income ratio. It is worth noting that, excluding fair value gains on investment properties and a change in the fair value of derivative financial assets, CWA’s growth in operating profit was 37.5%. The DPS was increased to 23.0c (Edison FY18e: 19.6c) and represented c 32% of basic EPS, in line with CWA’s policy of paying at least 30% of basic EPS as a DPS. The headline numbers can be seen in Exhibit 12.

Exhibit 12: CWA FY18 versus FY17 – key figures

2017

2018

% change

Revenue

HK$000

5,707,895

7,580,176

32.8%

Gross profit

HK$000

2,484,905

3,270,636

31.6%

Operating profit

HK$000

2,271,093

2,691,382

18.5%

PBT

HK$000

1,962,625

2,462,111

25.4%

Profit for the year

HK$000

1,379,346

1,761,524

27.7%

Attributable to owners

HK$000

853,634

1,140,518

33.6%

EPS – basic

HK$ cents

56.720

72.6200

28.0%

EPS – diluted

HK$ cents

55.3900

71.8200

29.7%

Short-term borrowings

HK$000

3,205,875

3,450,300

7.6%

Long-term borrowings

HK$000

8,123,092

7,431,752

-8.5%

Total borrowings

HK$000

11,328,967

10,882,052

-3.9%

Total liabilities

HK$000

16,668,776

17,434,878

4.6%

Total assets

HK$000

25,631,709

28,589,287

11.5%

Liabilities/assets

%

65.0%

61.0%

Equity

HK$000

8,962,933

11,154,409

24.5%

Source: China Water Affairs

The core water business (c 82% of group revenues) saw revenues and operating profits increase by 25.1% (to HK$6,204m) and 30.1% (to HK$2,401.9m), respectively. The profit growth resulted from tariff increases, capacity expansion (acquisitive and organic) and a strong performance from construction and connection. The sewage business saw year-on-year growth in revenues of 47.1% and 30.4% in profits. Once again, tariff hikes and capacity expansion fuelled growth along with construction and connection work. The relative contributions of each of CWA’s divisions can be seen in Exhibit 13.

Exhibit 13: CWA segmental revenues and profits, FY18 versus FY17

2017 Revenue

2017 Profit

2018 Revenue

2018 Profit

% change revenue

% change profit

City water supply

4,960,825

1,846,595

6,204,059

2,401,861

25.1%

30.1%

Sewage treatment

552,940

207,760

813,636

270,955

47.1%

30.4%

Property development

22,033

315,991

478,659

88,859

2072.5%

(71.9%)

Other

172,097

(27,076)

83,822

(7,780)

(51.3%)

(71.3%)

Total

5,707,895

2,343,270

7,580,176

2,753,895

32.8%

17.5%

Source: China Water Affairs – NB Total segmental profits do not correspond to operating profits as they do not include unallocated corporate income and expenses, options expenses, gains on disposals and fair value gains taken through the P&L.

As CWA continues to expand the scope of its operations, net debt rose to HK$7,801m, but the balance sheet remains healthy and the ratio of total liabilities to total assets reduced from 65% to 61%, helped by the recovery of HK$833m from the sale of non-core assets. The returns on capital employed, according to our calculations, were 10.3%

Outlook remains favourable

The 13th Five Year Plan and the recent opinion issued by the NDRC (934) show that the government remains committed to an improvement in environmental standards and accepts the idea that improved standards will require tariffs to be placed on an economic footing. This political direction of travel is clearly a positive for CWA. The reform of the water supply market in China is at an early stage and the implementation of the public–private partnership model is expected to accelerate. CWA’s competitive position is strong and its financial position remains sound, with cash inflow and disposal proceeds underpinning growth. CWA is a stable (cash flow is relatively immune from economic fluctuations) but growing utility business with the opportunity to offer additional services, such as the provision of hazardous waste services and direct drinking water (unregulated with the potential for significantly higher margins). We believe the outlook for CWA remains favourable.

Management

Executive chairman Mr Duan Chuan Liang: Mr Duan worked in the Ministry of Water Resources of the PRC for more than 10 years, before founding the Silver Dragon Group in the 1990s. Mr Duan has over 30 years’ experience of the water industry and he has a bachelor’s degree in water conservation and hydro power from North China College of Water Conservation and Hydro Power. Mr Duan is also is the chairman and non-executive director of China City Infrastructure Group.

Executive director Ms Ding Bin: Ms Ding Bin graduated from Zhengzhou University of Technology in finance and computer management and has over 10 years of experience in financial management and tax planning. She is also a certified public accountant in the PRC.

Executive director Ms Liu Yu Jie: Ms Liu Yu Jie has been working in Hong Kong, Singapore and the PRC for over 20 years in total. She graduated from the University of International Business and Economics in Beijing and is also the executive director of New Universe Environmental Group.

Executive director Mr Li Zhong: graduating from St Mary’s University of Canada with a master’s degree in business administration, Mr Li Zhong is a member of the Standing Committee of the Shenzhen Municipal Committee of the Chinese People’s Political Consultative Conference, as well as being the director of Shenzhen Bus Group and the honorary chairman of the Hong Kong Volunteers Association. He has served in large state-owned enterprises and US-based corporations for over 20 years.

Sensitivities/risks

Acquisition – given the acquisitive strategy of the business, there is a risk that CWA overpays for an asset, although the scale of this risk is diminished by CWA’s portfolio of assets.

Political – the Chinese government has been supportive of the policy of privatisation of water assets that has allowed CWA to grow. A reversal of this policy, although unlikely in our view, could significantly reduce CWA’s growth prospects. CWA is also beholden to the government for the various permits necessary to operate its business. Failure of the government to renew these permits would represent a significant negative outcome for CWA.

Local government – CWA operates its projects jointly with local government, which retains the right to terminate concessions. Local governments often offer support to CWA in the forms of grants subsidies and low interest rate loans. A breakdown of relations with the local government could pose a threat to a specific project.

Regulation – CWA is allowed to earn returns of between 8% and 12%. Adjustments to tariffs and returns could reduce the profitability of CWA’s water projects.

 

Valuation

We use peer valuation multiples cross-referenced to a DCF to arrive at a suggested valuation for CWA.

For the comparable valuation analysis, we have selected a range of mid-sized to large Chinese and international water companies and tabulated the P/E, EV/EBITDA, Yield and P/B multiples (for FY1 and FY2) to obtain sector averages. An average of peer group multiples indicate a valuation for CWA of c HK$10.7/share. Applying only peer group P/E multiples (FY1 14.4x and FY2 12.7x) CWA’s valuation would rise to HK$11.7/share and HK$12.4/share, respectively. The two-year PEG ratios of 0.8x (at HK$10/share) and 0.9 x (at HK$11/share) also appear undemanding for a company with CWA’s growth record (sector average of 1.2x).

Exhibit 14: Peer group comparable valuation multiples

 

Ticker

Market cap

Price

P/E (x)

EV/EBITDA (x)

Yield (%)

Price/Book (x)

PEG

(x)

(local)

Hist

FY1

FY2

FY1

FY2

FY1

FY2

FY1

FY2

2 yr

Guangdong Investment

270:HK

86,088

13.16

15.8

17.3

16.2

11.1

10.4

4.2

4.7

2.0

2.0

N/A

Beijing Entps. Water

371:HK

38,403

4.08

9.9

8.3

7.1

12.4

10.4

4.2

5.0

1.5

1.3

0.6

Ct Environmental Grp.

01363:HK

6,191

0.98

8.8

8.1

6.8

6.3

5.3

2.6

3.7

1.2

1.0

N/A

Tianjin Capital

1065:HK

11,763

3.28

N/A

7.7

7.3

9.5

9.0

2.5

2.8

0.7

0.7

N/A

Beijing Capital

600008 CH

19,186

3.98

32.4

25.3

22.1

15.1

13.4

2.3

2.4

1.6

1.5

1.7

Beijing Originwater Tech

300070 CH

39,854

12.65

16.3

12.5

9.1

10.3

7.6

0.9

1.1

1.9

1.6

0.6

Chongqing Water Grp.

601158 CH

25,872

5.39

14.0

15.6

15.0

N/A

N/A

5.0

5.0

N/A

N/A

N/A

Tus-Sound Enviro. Resources

000826 CH

21,816

15.25

15.5

13.0

10.3

12.2

9.7

1.7

2.3

1.4

1.3

0.6

Suez

SEV FP

7,565

12.17

16.9

19.7

17.4

7.6

7.4

5.3

5.4

1.2

1.2

N/A

Veolia

VIE FP

10,617

18.85

16.7

16.4

14.5

6.6

6.3

4.7

5.0

1.6

1.6

2.3

United Utilities

UU/LN

4,921

720.00

16.1

14.1

14.1

11.3

10.7

5.7

5.9

1.7

1.6

N/A

Average

 

 

 

 

14.4

12.7

10.2

9.0

3.6

3.9

1.5

1.4

1.2

Multiples Of CWA@

HKD/share

10.0

 

13.9

12.3

10.3

7.9

5.5

2.6

2.9

2.0

1.8

0.8

 

 

11.0

 

15.3

13.9

11.3

8.4

5.9

2.4

2.7

2.2

1.9

0.9

Source: Edison Investment Research, Bloomberg. Prices as at (6th August 2018).

We have also constructed a DCF, valuing cash flow to 2024 assuming capex of HK$2,200m pa and using as a base-case long-term EBIT growth of 14%, a discount rate of 8% and a terminal growth rate of 2%. The valuation is sensitive to assumptions on discount rates and long-term EBIT margins, but as can be seen from Exhibit 16, using our base case assumptions a valuation of HK$13.4/share is obtained. Reducing the long-term growth assumption for EBIT, from 14% to 12% or raising the discount rate to 9% would reduce the valuation to HK$12.2/share or HK$10.8/share respectively. Exhibit 15 shows the sensitivity of the DCF valuation to changes in discount rate and terminal growth assumptions, while Exhibit 16 shows the impact of variations to assumptions on long-term EBIT growth.

Exhibit 15: CWA DCF valuation sensitivity to discount rates and terminal growth rates

Exhibit 16: CWA DCF valuation sensitivity to changes in long-term margin assumptions

0%

1%

2%

7.00%

12.2

14.2

17.1

8.00%

10.0

11.5

13.4

9.00%

8.3

9.4

10.8

10.00%

7.0

7.8

8.8

11.00%

5.9

6.5

7.3

12.00%

5.0

5.5

6.1

13.00%

4.3

4.7

5.2

Margin

EBIT Growth

Valuation

Scenario

21-24e (%)

HK$/share

1

10%

11.0

2

12%

12.2

3

14%

13.4

4

16%

14.7

5

18%

16.1

6

20%

17.5

Source: Edison Investment Research

Source: Edison Investment Research

Exhibit 15: CWA DCF valuation sensitivity to discount rates and terminal growth rates

0%

1%

2%

7.00%

12.2

14.2

17.1

8.00%

10.0

11.5

13.4

9.00%

8.3

9.4

10.8

10.00%

7.0

7.8

8.8

11.00%

5.9

6.5

7.3

12.00%

5.0

5.5

6.1

13.00%

4.3

4.7

5.2

Source: Edison Investment Research

Exhibit 16: CWA DCF valuation sensitivity to changes in long-term margin assumptions

Margin

EBIT Growth

Valuation

Scenario

21-24e (%)

HK$/share

1

10%

11.0

2

12%

12.2

3

14%

13.4

4

16%

14.7

5

18%

16.1

6

20%

17.5

Source: Edison Investment Research

Financials

We have revised our estimates to reflect more optimistic assumptions on the scope for tariff increases, following the publication of NDRC 943. We have also taken the opportunity to refine our assessment of the likely level of minority interest.

Revenue growth – we forecast revenue growth of 18% in FY19 and FY20 (vs CAGR 2013–18 of 27.5%). The water supply business remains the key contributor, accounting for c 85% of revenue in both years. We assume growth in connection income (+18%), construction services (+20%) and (+21%) in water supply operations in FY19 and FY20.

Operating margins – we forecast stable operating margins for FY19 and FY20 of c 35% (FY18: 35.5%). The margin for the key water business remains just under 36% for both FY19 and FY20.

Capex – our forecasts are based on annual capex of HK$2,200m for FY19 and FY20.

Tax rate – we assume a tax rate of 28% for FY19 and FY20 (FY18: 28%).

Equity issue/repurchase – we do not include equity issues or share buyback in our forecasts.

Leverage – based on our forecasts, total liabilities/total assets decline from 61% in FY18, to 59% in FY19 and 55% in 2020. Net debt/equity declines from 109% in FY18, to 81% in 2020.

Minorities and EPS – we now forecast minority interests equivalent to c 35% of net income in both FY19 and FY20 (FY18 35% – three-year average 39%) producing basic EPS for FY19 of HK$0.815 and HK$0.975 for FY20.

DPS – we assume a payout ratio (based on basic EPS) of 32% in FY19 and 30% in FY20 (32.5% in FY18). Our assumptions produce a DPS forecast of HK$0.262 (2019) and HK$0.294 (2020).

Exhibit 17: 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

7,490

8,964

10,207

Sewage treatment

531

814

854

897

942

Other segments

303

562

591

620

651

Revenue TOTAL

 

 

5,708

7,580

8,935

10,481

11,800

EBITDA

 

 

2,646

3,097

3,599

4,212

4,871

Operating Profit

 

 

2,271

2,691

3,104

3,653

4,239

Amortization

315

334

390

429

472

Depreciation

60

71

105

130

160

Net Interest expense

(251)

(289)

(340)

(344)

(312)

Profit Before Tax

 

 

1,963

2,462

2,829

3,384

4,011

Tax

(583)

(701)

(792)

(948)

(1,123)

Profit After Tax

1,379

1,762

2,037

2,437

2,888

Net profits contributable to shareholders

853

1,141

1,318

1,576

1,869

Average Number of Shares Outstanding (m)

1,505

1,571

1,609

1,609

1,609

EPS - fully diluted (HK c)

 

 

55.4

71.8

81.5

97.5

115.6

Dividend per share (c)

20.0

23.0

26.2

29.4

34.8

EBITDA Margin (%)

46.4

40.9

40.3

40.2

41.3

Operating Margin (%)

39.8

35.5

34.7

34.9

35.9

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

9,472

9,511

12,078

Properties Under Development

 

 

690

1,370

1,370

1,370

1,370

Properties Held for Sale

 

 

289

597

550

550

550

Inventory

 

 

285

348

410

481

541

Trade and Bills Receivables

 

 

872

1,055

1,244

1,459

1,642

Due from Non-controlling Equity Holders of Subsidiaries

251

260

302

361

428

Due from Associates

 

 

409

563

563

563

563

Prepayments, Deposits and Other Receivables

1,743

1,293

1,524

1,788

2,013

Pledged Deposits

 

 

783

570

570

570

570

Deposits and cash

4,314

2,511

2,500

1,930

3,961

Other

307

440

440

440

440

Current Liabilities

 

 

7,393

8,649

8,025

6,558

7,129

Trade and Bills Payables

 

 

1,097

1,626

1,300

1,400

1,500

Accrued Liabilities, Deposits and Other Payables

2,102

2,306

2,748

3,263

3,607

Short-term Borrowings

3,206

3,450

2,542

185

-

Other

988

1,267

1,434

1,710

2,021

Long Term Liabilities

 

 

9,275

8,786

9,912

11,123

12,361

Long-term Borrowings

8,123

7,432

8,432

9,432

10,432

Other long term liabilities

1,152

1,354

1,480

1,691

1,930

Shareholders' Equity

 

 

8,963

11,154

12,597

14,354

16,437

-

-

-

-

517

CASH FLOW

Net Cash Flows from Operating Activities

1,452

1,632

2,579

3,555

4,018

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 prepayements 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)

(422)

(473)

(561)

Shares issue and/or options exercised

(38)

301

0

0

0

Other

245

(362)

(173)

(206)

(245)

Net Cash Flow

(2,020)

(1,569)

(103)

787

1,216

Opening net debt (CWA definition)

 

4,213

6,232

7,801

7,904

7,116

Closing net debt/(cash)

 

 

6,232

7,801

7,904

7,116

5,901

Net debt to equity ratio (CWA definition)

 

70%

70%

63%

50%

36%

Source: China Water Affairs, Edison Investment Research

Contact details

Revenue by geography

China Water Affairs Group

Suite 6408. 64/F, Central Plaza 18 Harbour Road,

Wanchai

Hong Kong +852 3968 6666 www.chinawatergroup.com

Contact details

China Water Affairs Group

Suite 6408. 64/F, Central Plaza 18 Harbour Road,

Wanchai

Hong Kong +852 3968 6666 www.chinawatergroup.com

Revenue by geography

Management team

Executive chairman: Mr Duan Chuan Liang

Executive director: Ms Ding Bin

Mr Duan Chuan Laing worked for the Ministry of Water Resources in China for over 10 years. He serves as a director of numerous other enterprises in the PRC. He graduated from the North China College of Water Conservancy and Hydro Power with a bachelor’s degree specialising in irrigation and water conservancy works.

Ms Ding Bin joined the group in 2007. She has over 10 years of experience in financial management and tax planning. She graduated from Zhengzhou University of Technology in finance and computing management. Ms Ding is a certified public accountant in the PRC and a member of the Chinese Institute of Certified Public Accountants. Ms Ding was the general manager’s assistant and general manager of the finance department prior to her appointment as executive director.

Executive Director: Ms Liu Yu Jie

Executive Director: Mr Liu Zhong

Ms Liu Yu Jie joined the group in 2014. She graduated from the University of International Business and Economics in Beijing and obtained an MBA. She has worked in Hong Kong, Singapore and the PRC.

Mr Li Zhong joined the group in 2015. He graduated from the Beijing University of Chemical Technology and from Saint Mary’s University in Canada with an MBA in 1997. He holds registered engineer certifications from both mainland China and Canada, and has served in large state-owned enterprises, US-based corporations and global enterprises in mainland China and Hong Kong for over 20 years.

Management team

Executive chairman: Mr Duan Chuan Liang

Mr Duan Chuan Laing worked for the Ministry of Water Resources in China for over 10 years. He serves as a director of numerous other enterprises in the PRC. He graduated from the North China College of Water Conservancy and Hydro Power with a bachelor’s degree specialising in irrigation and water conservancy works.

Executive director: Ms Ding Bin

Ms Ding Bin joined the group in 2007. She has over 10 years of experience in financial management and tax planning. She graduated from Zhengzhou University of Technology in finance and computing management. Ms Ding is a certified public accountant in the PRC and a member of the Chinese Institute of Certified Public Accountants. Ms Ding was the general manager’s assistant and general manager of the finance department prior to her appointment as executive director.

Executive Director: Ms Liu Yu Jie

Ms Liu Yu Jie joined the group in 2014. She graduated from the University of International Business and Economics in Beijing and obtained an MBA. She has worked in Hong Kong, Singapore and the PRC.

Executive Director: Mr Liu Zhong

Mr Li Zhong joined the group in 2015. He graduated from the Beijing University of Chemical Technology and from Saint Mary’s University in Canada with an MBA in 1997. He holds registered engineer certifications from both mainland China and Canada, and has served in large state-owned enterprises, US-based corporations and global enterprises in mainland China and Hong Kong for over 20 years.

Principal shareholders (Taken from Bloomberg 5 July 2018)

(%)

Mr Duan Chuan Liang

29.16

Orix Corporation

18.10

Li Zhong

2.33

Vanguard Group

1.80

Blackrock

1.07

Companies named in this report

Guandong Investment, Beijing Enterprises Water, Tianjin Capital, Beijing Capital Beijing Originwater tEch, Chongqing Water Group, Tus-Sound Enviro Resources, Suez, Veolia, United Utilities

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by China Water Affairs Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. 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.

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

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by China Water Affairs Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. 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.

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

Share this with friends and colleagues