Last close As at 05/08/2026
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Market capitalisation
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Research: Industrials
China Water Affairs (CWA) continues to offer the prospect of attractive growth in EPS despite the fall in environmental protection construction revenue. The requirement for expenditure on the water sector in China remains intact and the current rating of the shares appears undemanding.
Written by
China Water Affairs Group |
Valuation ignoring growth potential |
H120 results |
Utilities |
3 December 2019 |
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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China Water Affairs (CWA) continues to offer the prospect of attractive growth in EPS despite the fall in environmental protection construction revenue. The requirement for expenditure on the water sector in China remains intact and the current rating of the shares appears undemanding.
Year end |
Revenue (HK$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/18 |
7,580 |
2,462 |
71.8 |
23.0 |
8.1 |
4.0 |
03/19 |
8,302 |
2,772 |
85.1 |
28.0 |
6.8 |
4.8 |
03/20e |
8,757 |
3,169 |
98.2 |
33.0 |
5.9 |
5.7 |
03/21e |
9,894 |
3,402 |
105.6 |
38.0 |
5.5 |
6.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
H120 EPS shows continued growth
In H120, CWA’s key financial benchmarks showed continued growth versus H119, with revenue +5.1% (Edison FY20e: +16.9%), EPS +36.6% (FY20e: +14.3%) and DPS +16.7% (FY20e: +17.9%). The dominant (80%+ of revenues) water supply business performed strongly, (+13.4% in H1 versus Edison FY20e +13.3%) despite negative currency movements, helped by volume growth (c.10%) and tariff hikes (4.8%). The overall shortfall in the H1 revenue growth rate versus our FY20e resulted, in large part, from a marked reduction in the revenue contribution from the environmental protection renovation and construction services (-46.3%), leading to an overall decline in the environmental segment revenue of 29.2% (Edison FY20e +35%). Operating margins remained constant at c 37%, and despite the lower than expected revenues, EPS of HK54.8c (+36.6%) significantly exceeded our forecasts, boosted by a stronger than anticipated associate line (+859% versus Edison FY20e of +161%, benefiting from a fair value adjustment to the recently acquired holding in Kangda International (KIE)), lower minority interests and a lower tax charge (22.7% versus Edison FY20e 28%). The DPS was increased by 16.7%, to HK14c (Edison FY20e +17.9%).
Long-term investment opportunity remains intact
We have revised our forecasts to reflect a more cautious view on environmental protection construction revenues (FY20 and beyond) but an enhanced contribution from associates (FY20e), lower minority payments and a lower tax rate. Our revised EPS forecast for FY20e of HK98.2c represents an increase of c 1% versus our previous estimate (FY21e -6.2%). Despite a general slowdown in Chinese fixed asset investment there is a requirement for further significant investment in the water sector and the government continues to appear favourably disposed to private investment in the sector.
Valuation: Undemanding rating
At current levels, CWA is trading on a FY20e P/E ratio of 5.9x (compared to an average of 15.0x for a group of selected Hong Kong- and China-listed peers) and a two-year PEG ratio of 0.6x (peers at c 2.0x). At a P/E of 10x, which is still below the peer group average, CWA would trade at HK$9.8 (a PEG ratio of c 1.0x).
Exhibit 1: Financial summary
HK$m |
2017 |
2018 |
2019 |
2020e |
2021e |
||
Year end 31 March |
HKFRS |
HKFRS |
HKFRS |
HKFRS |
HKFRS |
||
PROFIT & LOSS |
|||||||
Water supply revenue |
4,874 |
6,204 |
6,376 |
7,268 |
8,330 |
||
Environmental Protection |
531 |
814 |
1522 |
1065 |
1119 |
||
Other segments |
303 |
562 |
404 |
424 |
445 |
||
Revenue total |
|
|
5,708 |
7,580 |
8,302 |
8,757 |
9,894 |
EBITDA |
|
|
2,646 |
3,097 |
3,507 |
3,899 |
4,473 |
Operating Profit |
|
|
2,271 |
2,691 |
3,022 |
3,289 |
3,785 |
Amortization |
315 |
334 |
404 |
480 |
528 |
||
Depreciation |
60 |
71 |
81 |
130 |
160 |
||
Net Interest expense |
(251) |
(289) |
(319) |
(493) |
(570) |
||
Profit Before Tax |
|
|
1,963 |
2,462 |
2,772 |
3,169 |
3,402 |
Tax |
(583) |
(701) |
(642) |
(729) |
(783) |
||
Profit After Tax |
1,379 |
1,762 |
2,130 |
2,440 |
2,620 |
||
Net profits contributable to shareholders |
853 |
1,141 |
1,369 |
1,586 |
1,703 |
||
Average Number of Shares Outstanding (m) |
1,505 |
1,571 |
1,609 |
1,606 |
1,604 |
||
EPS - fully diluted (c) |
|
|
55.4 |
71.8 |
85.1 |
98.2 |
105.6 |
Dividend per share (c) |
20.0 |
23.0 |
28.0 |
33.0 |
38.0 |
||
EBITDA Margin (%) |
46.4 |
40.9 |
42.2 |
44.5 |
45.2 |
||
Operating Margin (%) |
39.8 |
35.5 |
36.4 |
37.6 |
38.3 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
15,689 |
19,581 |
24,493 |
28,666 |
31,561 |
Intangible Assets |
10,316 |
13,499 |
16,514 |
19,534 |
22,506 |
||
Plant, property and equipment |
1,127 |
1,695 |
2,020 |
1,990 |
1,930 |
||
Investment properties |
1,173 |
909 |
912 |
915 |
918 |
||
Investment in associates |
635 |
661 |
676 |
1,483 |
1,275 |
||
Other |
2,438 |
2,817 |
4,371 |
4,744 |
4,931 |
||
Current Assets |
|
|
9,942 |
9,008 |
11,332 |
11,911 |
9,910 |
Properties Under Development |
|
|
690 |
1,370 |
1,274 |
1,274 |
1,274 |
Properties Held for Sale |
|
|
289 |
597 |
816 |
816 |
816 |
Inventory |
|
|
285 |
348 |
531 |
560 |
633 |
Trade and Bills Receivables |
|
|
872 |
1,055 |
1,243 |
1,311 |
1,481 |
Due from Non-controlling Equity Holders of Subsidiaries |
251 |
260 |
288 |
323 |
347 |
||
Due from Associates |
|
|
409 |
563 |
227 |
227 |
227 |
Prepayments, Deposits and Other Receivables |
1,743 |
1,293 |
1,550 |
1,635 |
1,847 |
||
Pledged Deposits |
|
|
783 |
570 |
645 |
645 |
645 |
Deposits and cash |
4,314 |
2,511 |
3,973 |
4,335 |
1,855 |
||
Other |
307 |
440 |
785 |
784 |
784 |
||
Current Liabilities |
|
|
7,393 |
8,649 |
10,019 |
11,977 |
10,005 |
Trade and Bills Payables |
|
|
1,097 |
1,626 |
2,410 |
1,400 |
1,500 |
Accrued Liabilities, Deposits and Other Payables |
2,102 |
2,306 |
1,979 |
2,529 |
2,822 |
||
Short-term Borrowings |
3,206 |
3,450 |
3,437 |
5,656 |
3,165 |
||
Other |
988 |
1,267 |
2,192 |
2,392 |
2,517 |
||
Long Term Liabilities |
|
|
9,275 |
8,786 |
12,903 |
14,026 |
15,102 |
Long-term Borrowings |
8,123 |
7,432 |
11,494 |
12,494 |
13,494 |
||
Other long term liabilities |
1,152 |
1,354 |
1,409 |
1,532 |
1,608 |
||
Shareholders' Equity |
|
|
8,963 |
11,154 |
12,902 |
14,573 |
16,363 |
- |
- |
- |
- |
- |
|||
CASH FLOW |
|||||||
Net Cash Flows from Operating Activities |
1,452 |
1,632 |
1,429 |
2,554 |
3,276 |
||
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) |
(2,500) |
(3,500) |
(3,500) |
||
Acquisitions/disposals |
(283) |
0 |
0 |
(1,200) |
0 |
||
Increase in prepayments and other receivables |
(1,226) |
0 |
0 |
0 |
0 |
||
Others |
(134) |
(171) |
(708) |
159 |
164 |
||
Net Cash Flows from Investing Activities |
(3,543) |
(2,771) |
(3,308) |
(4,641) |
(3,436) |
||
Dividends |
(135) |
(369) |
(450) |
(530) |
(610) |
||
Shares issue and/or options exercised |
(38) |
301 |
0 |
(34) |
0 |
||
Other |
245 |
(362) |
(183) |
(205) |
(220) |
||
Net Cash Flow |
(2,020) |
(1,569) |
(2,513) |
(2,857) |
(989) |
||
Opening net debt (CWA definition) |
|
4,213 |
6,232 |
7,801 |
10,313 |
13,170 |
|
Closing net debt/(cash) |
|
|
6,232 |
7,801 |
10,313 |
13,170 |
14,160 |
Source: Company data, Edison Investment Research
|
|
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