China Water Affairs Group — Strong growth trajectory continues

China Water Affairs Group (HK: 855)

Last close As at 12/07/2024

6.11

0.00 (0.00%)

Market capitalisation

9,684m

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Research: Industrials

China Water Affairs Group — Strong growth trajectory continues

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.

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Industrials

China Water Affairs Group

Strong growth trajectory continues

Interim results

Utilities

24 January 2018

Price

HK$7.70

Market cap

HK$12,327m

Net debt (HK$m) at 30 September 2017

7,740

Shares in issue

1,600.9m

Free float

48.7%

Code

855

Primary exchange

HK

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.5

29.2

41.8

Rel (local)

(0.8)

11.1

(1.4)

52-week high/low

HK$7.7

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 and acquisitions. It is a constituent of the FTSE Environmental Opportunities Asia Pacific Index.

Next events

FY18 results

June 2018

Analyst  

Graeme Moyse

+44 (0)20 3077 5700

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

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*
(HK$m)

EPS*
(c)

DPS
(c)

P/E
(x)

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

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.

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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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