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Research: Industrials
The H118 results and publication of the full interim report confirmed China Water Affairs Group’s (CWA) strong growth trajectory. In our view the outlook for the company remains positive. We have increased our EPS and DPS forecasts for CWA and raised our fair value from HK$6.7/share to HK$8.0/share.
Written by
China Water Affairs Group |
Strong growth trajectory continues |
Interim results |
Utilities |
24 January 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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The H118 results and publication of the full interim report confirmed China Water Affairs Group’s (CWA) strong growth trajectory. In our view the outlook for the company remains positive. We have increased our EPS and DPS forecasts for CWA and raised our fair value from HK$6.7/share to HK$8.0/share.
Year end |
Revenue (HK$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/17 |
5,708 |
1,963 |
55.4 |
20.0 |
13.9 |
2.6 |
03/18e |
7,069 |
2,279 |
64.9 |
19.6 |
11.9 |
2.5 |
03/19e |
8,075 |
2,641 |
72.1 |
21.7 |
10.7 |
2.8 |
03/20e |
9,219 |
3,041 |
83.0 |
25.0 |
9.3 |
3.2 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Continuing growth evident at the H118 results
Interim figures from CWA demonstrated a continuation of the strong growth trajectory that has been evident in recent years. Group revenue rose by 16.3% to HK$3,514m, while operating profits (excluding FV movements in derivatives and investment properties) rose by 40.7% to HK$1,344m. EPS (basic) increased by 22.9% to HK28.43 cents. Driving overall growth was the rise (+10.4%) in revenue and segmental profits (+22.8%) at the key water supply and construction business (c 94% of group revenues). The water business continues to benefit from the widespread adoption of the public-private partnership (PPP) model and the integration of urban and rural water systems. A turnaround in the performance of the associate business and tight control of costs, which fell by 6.2% to HK$287m despite the top line growth, also helped boost profitability.
Outlook remains positive
We expect the outlook to remain positive for CWA and the business to continue to grow. We believe this growth will be generated by both the geographical expansion of the business within China, facilitated by the factors cited above, as well as growth from the existing operations, underpinned by increases in tariffs and consumption. CWA plans, in part, to fund this expansion by recycling capital from the disposal of non-core businesses. Surplus capital generated by disposals could also be used to boost dividend payments, although we do not include this in our forecasts.
Valuation: Upside remains for investors
Following the publication of the interim report we have adjusted our earnings forecasts for FY18 and beyond (FY18e EPS +8% to HK$0.649). Given CWA’s announcement of its intention to pay not less than 30% of basic EPS as a DPS, we have also raised our DPS forecasts (FY18e DPS + 64% to HK$0.196). We have revisited our valuation, which increases from HK$6.71/share to HK$8.0/share. At our revised value of HK$8.0/share, CWA would trade on a P/E multiple of 12.3x and an EV/EBITDA multiple of c 7.8x. We believe such multiples are sustainable for a company that we expect to grow EPS by c 14% CAGR in 2017-20e.
Exhibit 1: Financial summary
HK$m |
2017 |
2018e |
2019e |
2020e |
||
31 March |
HKFRS |
HKFRS |
HKFRS |
HKFRS |
||
PROFIT & LOSS |
||||||
Water supply revenue |
4,874 |
6,033 |
6,987 |
8,077 |
||
Sewage treatment |
531 |
719 |
755 |
793 |
||
Other segments |
303 |
317 |
333 |
349 |
||
Revenue TOTAL |
|
|
5,708 |
7,069 |
8,075 |
9,219 |
EBITDA |
|
|
2,647 |
2,968 |
3,404 |
3,884 |
Operating Profit |
|
|
2,271 |
2,548 |
2,909 |
3,325 |
Amortization |
316 |
350 |
390 |
429 |
||
Depreciation |
60 |
70 |
105 |
130 |
||
Net Interest expense |
(251) |
(324) |
(333) |
(359) |
||
Profit Before Tax |
|
|
1,963 |
2,279 |
2,641 |
3,041 |
Tax |
(583) |
(638) |
(739) |
(851) |
||
Profit After Tax |
1,379 |
1,641 |
1,901 |
2,190 |
||
Net profits contributable to shareholders |
853 |
1,017 |
1,160 |
1,336 |
||
Average Number of Shares Outstanding (m) |
1,505 |
1,559 |
1,601 |
1,601 |
||
EPS - fully diluted (HK c) |
|
|
55.4 |
64.9 |
72.1 |
83.0 |
Dividend per share (c) |
20.0 |
19.6 |
21.7 |
25.0 |
||
EBITDA Margin (%) |
46.4 |
42.0 |
42.2 |
42.1 |
||
Operating Margin (%) |
39.8 |
36.0 |
36.0 |
36.1 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
15,689 |
17,797 |
19,649 |
21,457 |
Intangible Assets |
10,316 |
12,266 |
13,976 |
15,647 |
||
Plant, property and equipment |
1,127 |
1,157 |
1,152 |
1,122 |
||
Investment properties |
1,173 |
1,321 |
1,488 |
1,675 |
||
Investment in associates |
635 |
560 |
475 |
380 |
||
Other |
2,438 |
2,493 |
2,558 |
2,633 |
||
Current Assets |
|
|
9,942 |
8,445 |
8,791 |
9,429 |
Properties Under Development |
|
|
690 |
550 |
550 |
550 |
Properties Held for Sale |
|
|
289 |
500 |
550 |
550 |
Inventory |
|
|
285 |
355 |
405 |
463 |
Trade and Bills Receivables |
|
|
872 |
1,945 |
1,240 |
1,415 |
Due from Non-controlling Equity Holders of Subsidiaries |
252 |
298 |
355 |
408 |
||
Due from Associates |
|
|
408 |
408 |
408 |
408 |
Prepayments, Deposits and Other Receivables |
1,743 |
1,309 |
2,478 |
2,829 |
||
Pledged Deposits |
|
|
783 |
783 |
783 |
783 |
Deposits and cash |
4,314 |
1,991 |
1,717 |
1,717 |
||
Other |
307 |
306 |
306 |
306 |
||
Current Liabilities |
|
|
7,393 |
7,470 |
7,158 |
6,873 |
Trade and Bills Payables |
|
|
1,097 |
1,483 |
1,300 |
1,400 |
Accrued Liabilities, Deposits and Other Payables |
2,102 |
2,809 |
3,199 |
3,654 |
||
Short-term Borrowings |
3,206 |
2,073 |
1,374 |
345 |
||
Other |
988 |
1,104 |
1,285 |
1,474 |
||
Long Term Liabilities |
|
|
9,275 |
8,350 |
9,484 |
10,631 |
Long-term Borrowings |
8,123 |
7,123 |
8,123 |
9,123 |
||
Other long term liabilities |
1,152 |
1,227 |
1,361 |
1,508 |
||
Shareholders' Equity |
|
|
8,963 |
10,422 |
11,798 |
13,381 |
- |
- |
- |
- |
|||
CASH FLOW |
||||||
Net Cash Flows from Operating Activities |
1,453 |
2,217 |
2,014 |
2,735 |
||
Purchase of property, plant and equipment |
(92) |
(100) |
(100) |
(100) |
||
Increase in concession rights for water supply and sewage processing |
(1,808) |
(2,300) |
(2,100) |
(2,100) |
||
Acquisitions/disposals |
(283) |
0 |
0 |
0 |
||
Increase in pre-payments and other receivables |
(1,226) |
0 |
0 |
0 |
||
Others |
(134) |
173 |
138 |
99 |
||
Net Cash Flows from Investing Activities |
(3,543) |
(2,227) |
(2,062) |
(2,101) |
||
Dividends |
(135) |
(305) |
(348) |
(401) |
||
Shares issue and/or options exercised |
(38) |
274 |
0 |
0 |
||
Other |
245 |
(150) |
(178) |
(205) |
||
Net Cash Flow |
(2,019) |
(191) |
(574) |
29 |
||
Opening net debt (CWA definition) |
|
4,213 |
6,232 |
6,423 |
6,997 |
|
Closing net debt/(cash) |
|
|
6,232 |
6,423 |
6,997 |
6,968 |
Net debt to equity ratio (CWA definition) |
|
70% |
62% |
59% |
52% |
|
Source: China Water Affairs Group, Edison Investment Research
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