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Research: Industrials
Better-than-expected growth in profitability in FY18, a higher than forecast DPS and a favourable market outlook are clearly positive for China Water Affairs (CWA). We forecast continuing growth over the next few years and have raised our valuation to HK$10 per share. At that price, CWA would trade on a forward-looking P/E multiple of 13.1x, a c 15% discount to our group of selected peers.
Written by
China Water Affairs Group |
FY18 exceeds forecasts |
Company update |
Utilities |
4 July 2018 |
Share price performance
Business description
Next events
Analyst
China Water Affairs Group is a research client of Edison Investment Research Limited |
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Better-than-expected growth in profitability in FY18, a higher than forecast DPS and a favourable market outlook are clearly positive for China Water Affairs (CWA). We forecast continuing growth over the next few years and have raised our valuation to HK$10 per share. At that price, CWA would trade on a forward-looking P/E multiple of 13.1x, a c 15% discount to our group of selected peers.
Year end |
Revenue (HK$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/17 |
5,708 |
1,963 |
55.4 |
20.0 |
16.1 |
2.2 |
03/18 |
7,580 |
2,462 |
71.8 |
23.0 |
12.4 |
2.6 |
03/19e |
8,803 |
2,804 |
76.2 |
24.5 |
11.7 |
2.7 |
03/20e |
10,021 |
3,246 |
88.2 |
26.6 |
10.1 |
3.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
FY18 extends growth trend
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 tariff hikes, acquisitions and an improvement in the cost to income ratio. 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 DPS was increased to 23.0c (Edison FY18e 19.6c) and represented c 32% of basic EPS. 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.
Favourable outlook for FY19 and beyond
CWA has achieved five-year CAGR of 33.3% in core water profits and the outlook continues to appear promising. CWA’s strong market position should allow it to take advantage of the incremental privatisation of the Chinese water system as China seeks to address regional water imbalances, integrate urban and rural water supply and improve water quality. Targeted acquisitions, funded by organic cash flow and an increased pace of non-core disposals, tariff increases, capacity expansions and the strategic co-operation agreement with Toray in the high-margin drinking water market should provide for growth at CWA.
Valuation: Increasing forecasts and valuation
We have revised our forecast and valuation on the back of the strong FY18 results. We now forecast EPS of 88.2c for 2020 (previously 83.0c) and expect a CAGR in EBIT of c 14% for the period 2018-21 (c 27% CAGR 2013-18). We have also reassessed our valuation, which increases from HK$8.0 per share to HK$10.0 per share. At that price, CWA trades on an FY19e P/E of 13.1x (a discount to a group of 10 Chinese and international peers at c 15.1x) and a PEG ratio of c 1.3x (c 1.4x for peer group).
Exhibit 1: Financial summary
HK$m |
2017 |
2018* |
2019e |
2020e |
2021e |
||
31-March |
HKFRS |
HKFRS |
HKFRS |
HKFRS |
HKFRS |
||
PROFIT & LOSS |
|||||||
Water supply revenue |
4,874 |
6,204 |
7,358 |
8,504 |
9,804 |
||
Sewage treatment |
531 |
814 |
854 |
897 |
942 |
||
Other segments |
303 |
562 |
591 |
620 |
651 |
||
Revenue TOTAL |
|
|
5,708 |
7,580 |
8,803 |
10,021 |
11,397 |
EBITDA |
|
|
2,646 |
3,097 |
3,574 |
4,075 |
4,636 |
Operating Profit |
|
|
2,271 |
2,691 |
3,079 |
3,516 |
4,004 |
Amortization |
315 |
334 |
390 |
429 |
472 |
||
Depreciation |
60 |
71 |
105 |
130 |
160 |
||
Net Interest expense |
(251) |
(289) |
(340) |
(346) |
(320) |
||
Profit Before Tax |
|
|
1,963 |
2,462 |
2,804 |
3,246 |
3,769 |
Tax |
(583) |
(701) |
(785) |
(909) |
(1,055) |
||
Profit After Tax |
1,379 |
1,762 |
2,019 |
2,337 |
2,714 |
||
Net profits contributable to shareholders |
853 |
1,141 |
1,231 |
1,426 |
1,655 |
||
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 |
76.2 |
88.2 |
102.4 |
Dividend per share (c) |
20.0 |
23.0 |
24.5 |
26.6 |
30.9 |
||
EBITDA Margin (%) |
46.4 |
40.9 |
40.6 |
40.7 |
40.7 |
||
Operating Margin (%) |
39.8 |
35.5 |
35.0 |
35.1 |
35.1 |
||
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 |
9,454 |
9,369 |
11,635 |
Properties Under Development |
|
|
690 |
1,370 |
1,370 |
1,370 |
1,370 |
Properties Held for Sale |
|
|
289 |
597 |
550 |
550 |
550 |
Inventory |
|
|
285 |
348 |
404 |
460 |
523 |
Trade and Bills Receivables |
|
|
872 |
1,055 |
1,225 |
1,395 |
1,586 |
Due from Non-controlling Equity Holders of Subsidiaries |
251 |
260 |
330 |
382 |
444 |
||
Due from Associates |
|
|
409 |
563 |
563 |
563 |
563 |
Prepayments, Deposits and Other Receivables |
1,743 |
1,293 |
1,502 |
1,710 |
1,944 |
||
Pledged Deposits |
|
|
783 |
570 |
570 |
570 |
570 |
Deposits and cash |
4,314 |
2,511 |
2,500 |
1,930 |
3,645 |
||
Other |
307 |
440 |
440 |
440 |
440 |
||
Current Liabilities |
|
|
7,393 |
8,649 |
8,014 |
6,531 |
6,958 |
Trade and Bills Payables |
|
|
1,097 |
1,626 |
1,300 |
1,400 |
1,500 |
Accrued Liabilities, Deposits and Other Payables |
2,102 |
2,306 |
2,694 |
3,095 |
3,520 |
||
Short-term Borrowings |
3,206 |
3,450 |
2,571 |
363 |
- |
||
Other |
988 |
1,267 |
1,449 |
1,673 |
1,938 |
||
Long Term Liabilities |
|
|
9,275 |
8,786 |
9,911 |
11,081 |
12,282 |
Long-term Borrowings |
8,123 |
7,432 |
8,432 |
9,432 |
10,432 |
||
Other long term liabilities |
1,152 |
1,354 |
1,480 |
1,649 |
1,850 |
||
Shareholders' Equity |
|
|
8,963 |
11,154 |
12,590 |
14,281 |
16,244 |
- |
- |
- |
- |
517 |
|||
CASH FLOW |
|||||||
Net Cash Flows from Operating Activities |
1,452 |
1,632 |
2,539 |
3,372 |
3,824 |
||
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) |
(394) |
(428) |
(497) |
||
Shares issue and/or options exercised |
(38) |
301 |
0 |
0 |
0 |
||
Other |
245 |
(362) |
(189) |
(219) |
(254) |
||
Net Cash Flow |
(2,020) |
(1,569) |
(132) |
638 |
1,077 |
||
Opening net debt (CWA definition) |
|
4,213 |
6,232 |
7,801 |
7,932 |
7,294 |
|
Closing net debt/(cash) |
|
|
6,232 |
7,801 |
7,932 |
7,294 |
6,217 |
Source: Company data, Edison Investment Research. Note: *While the FY18 P&L and balance sheet have been reported, the cash flow has not and remain Edison estimates.
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