China Water Affairs Group Limited — FY18 exceeds forecasts

China Water Affairs Group (HK: 855)

Last close As at 24/05/2024

6.11

0.00 (0.00%)

Market capitalisation

9,684m

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Research: Industrials

China Water Affairs Group Limited — FY18 exceeds forecasts

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.

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Industrials

China Water Affairs Group

FY18 exceeds forecasts

Company update

Utilities

4 July 2018

Price

HK$8.92

Market cap

HK$14,352m

Net debt (HK$m) at 31 March 2018

7,801

Shares in issue

1,609m

Free float

48.4%

Code

855

Primary exchange

HK

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

13.4

10.2

94.7

Rel (local)

21.2

16.5

75.9

52-week high/low

HK$8.9

HK$4.2

Business description

China Water Affairs (CWA) is a pioneer in the privatisation of water supply assets in China. The company seeks to create growth via volume/price increases

Next events

AGM

7 September 2018

Interim results

December 2018

Analyst

Graeme Moyse

+44 (0)20 3077 5700

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

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*
(HK$m)

EPS*
(c)

DPS
(c)

P/E
(x)

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.

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 12, 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 12, 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 12, 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 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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