China Water Affairs Group Limited — Update 10 November 2016

China Water Affairs Group (HK: 855)

Last close As at 22/05/2024

6.11

0.00 (0.00%)

Market capitalisation

9,684m

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Research: Industrials

China Water Affairs Group Limited — Update 10 November 2016

China Water Affairs Group Limited

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Written by

Industrials

China Water Affairs Group

Tapping higher growth

Company update

Utilities

10 November 2016

Price

HK$5.44

Market cap

HK$8,268m

HK$7.75/US$

Net debt (HK$m) at 31 March 2016

4,680

Shares in issue

1,519.9m

Free float

46.8%

Code

855

Primary exchange

HK

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.0

8.8

31.1

Rel (local)

10.7

9.0

32.9

52-week high/low

HK$6.0

HK$3.2

Business description

China Water Affairs Group owns and operates regulated water supply assets across 40 cities in mainland China, serving eight million customers in the residential, commercial and industrial sectors.

Next events

H117 interim results

25 November 2016

Analysts

Jamie Aitkenhead

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

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

We increase our valuation for China Water Affairs (CWA) to HK$6.5 per share after upgrading our earnings forecasts. We believe CWA, as the only listed equity play on Chinese tap water supply, offers investors exposure to a unique and attractive set of industry fundamentals. Strong shareholder returns driven by high-teens earnings growth are likely to continue as CWA grows capacity. Capital expenditure requirements will remain elevated as capacity growth continues. However, given CWA’s strong balance sheet and high operating cash returns, we believe it will be able to execute its growth plan without weakening its balance sheet.

Year
end

Revenue (HK$m)

PBT*
(HK$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/15

2,859

886

16.6

7.00

32.8

1.3

03/16

4,033

1,337

38.5

8.00

14.1

1.5

03/17e

5,000

1,686

45.8

10.00

11.9

1.8

03/18e

6,232

2,065

56.1

12.50

9.7

2.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Tap water offers superior fundamentals

Due to a combination of low private sector penetration, higher earnings quality, full asset ownership and a lower risk profile, the tap water sector provides investors with a premium offering in comparison to the wastewater sector. CWA is the only means of gaining equity exposure to this subsector in China which, we forecast, will drive its revenues by a CAGR of 21.5% in the next five years.

Numbers upgraded: Delivering growth

For FY16, CWA reported consensus-beating underlying top-line growth of 20% with City Water Supply the main driver. We now update our forecasts to reflect this as well as discussions with management. Our forecast of a 19.8% EBITDA CAGR (previously 19.2%) for FY17-21 is mainly driven by capacity, volume and tariff growth in the City Water Supply (CWS) business (81% of FY16 EBIT).

Balance sheet: No growing pains

With a net debt to EBITDA of 2.6x at end March 2016, and also taking into account the HK$9.3bn in net operating cash flow we forecast CWA will generate over the next five years, the company is in a strong position to meet its growth capex requirements. Based on our capacity growth assumptions, we estimate CWA will invest HK$10.6bn between FY17 and FY21, which will be met predominantly by internal cash flows and by increasing debt levels moderately. Net debt (Edison definition) to EBITDA will peak at 2.6x in FY17e.

Valuation: Upside despite stellar performance

Since our initiation in April, CWA’s share price has risen by 46%. We have updated our numbers and roll forward our sum-of-the-parts valuation. We increase our fair value (FV) to HK$6.5 per share from HK$4.56.

Tap water drives strong earnings and cash flow

Since our April initiation, CWA has published results (in June) well ahead of our own and consensus expectations. We take this opportunity to reassess our forecasts and valuation; we are lifting the latter by around 43% from HK$4.56 per share to HK$6.5 per share. We have updated our forecasts to reflect CWA’s outperformance in FY16 and continue to expect growth for both revenues (21.5% five-year CAGR) and EBITDA (19.8% five-year CAGR) at similar levels to our previous forecasts. Our forecasts are underpinned by strong fundamentals in the tap water industry in China together with CWA’s track record in generating high cash returns. The revenue growth in our Water Supply business forecasts in the coming years is driven by c 20% capacity growth, 5% tariff growth and 5% volume growth, while we expect the other CWS subdivision Water Supply Related Connections, to grow at 25%. This translates into a five-year revenue CAGR of 24.2% in CWS, the largest single unit at CWA. The result is a 19.5% increase in FY17e group EBITDA and a 20.5% increase in FY18e. Mechanically, this increases our fair value as our valuation is driven by an EBITDA multiple sum-of-the-arts methodology.

Exhibit 1: City Water Supply (CWS) revenue split

Source: China Water Affairs, Edison Investment Research

Tap water: Low private penetration, high cash flow potential

Around 80% of CWA’s operating profit come from its Clean Water Supply operations and Construction business. In contrast to the wastewater segment, tap water in China exhibits a low level of private market penetration, thus offering high levels of potential growth and market share expansion for market participants. CWA fully owns its assets, providing potential further embedded value in land and property assets. Growth is underpinned by high levels of urbanisation, water connection increases and Chinese GDP growth as the tap water segment is a natural monopoly whereas wastewater is not.

Of the several listed Chinese water utilities, CWA is the only one with a predominantly tap water-based business model. The rest are principally concerned with wastewater treatment. For the reasons we outline below, we believe tap water is a more attractive subsector for investors.

Full asset ownership means greater cash revenue

A key contrast between CWA’s tap water business and the wastewater sector is that private tap water operators take on full perpetual ownership of the assets. CWA’s ‘transfer own operate’ (TOO) model is shorthand for full privatisation. In contrast, wastewater operators typically operate on a concession basis, which means they return the asset to the state after a set period.

We believe asset ownership is the preferable model as it provides asset-backed, long-term cash flows, a regional monopoly status and offers investors further potential cash windfalls in the form of land sales. A further value support for CWA lies in the application of IFRIC 12 (the accounting standard concerned with concession accounting). This forces concession operators to recognise near-term revenues associated with the concession contract well before the cash from these activities arrives. Exhibit 2 shows that only 14% of CWA’s revenues relate to IFRIC 12. Consequently, CWA has far higher cash revenue ratio than its closest listed peers, which average 58% of non-cash revenues associated with this accounting standard.

Exhibit 2: CWA – highest ‘cash flow’ revenues in the sector

Source: China Water Affairs, Edison Investment Research, Bloomberg

Low private penetration means high continuing growth

CWA estimates that private sector penetration in wastewater is 90% in tier 1 cities and 80% in tier 2 cities in China. In contrast, private sector penetration in tap water as a whole is more like 15%. There is therefore a significantly higher potential of market share growth for CWA to capture, while wastewater has virtually reached its maximum level of penetration. CWA has well-established relationships with regional authorities in China. Its status as a trusted partner extends to its function as a tariff collector for other utility services on behalf of local government agencies. CWA’s relationships, reputation and existing scale ensure it is a frontrunner for new private water supply opportunities as they arise in China. Of the listed water supply companies in China, CWA has the second highest installed water supply capacity and comfortably the highest revenues from this activity.

Exhibit 3: Water supply capacity vs peers

Exhibit 4: Water supply revenues vs peers

Source: China Water Affairs, Beijing Enterprises, Beijing Capital

China Water Affairs, Beijing Enterprises, Beijing Capital

Exhibit 3: Water supply capacity vs peers

Source: China Water Affairs, Beijing Enterprises, Beijing Capital

Exhibit 4: Water supply revenues vs peers

China Water Affairs, Beijing Enterprises, Beijing Capital

Financials

CWA published its FY16 full year results in June. Key items to note were a headline revenue increase of 41% (20% once the IFRIC 12 accounting adoption is stripped out). The 20% underlying increase in full year revenues was mainly driven by high growth in the CWS segment. Installation revenues grew by 46% showing the company is continuing to connect a significant number of customers, which will, in turn, drive future revenues. We update our forecasts to reflect the stellar FY16 numbers although our revised five-year EBITDA CAGR is now slightly below our previous growth estimates (+19.8% versus +19.2%) due to the higher starting point. As demonstrated in the FY16 results, CWS is the main engine of growth. It provided 81% of group EBIT in FY16, growing by 46.9% year-on-year. Our five-year revenue CAGR of 22.8% for CWS is split between capacity growth, volume growth and tariff increases.

Financials: Upgrades across the horizon

Our updated five-year forward 21.5% revenue CAGR drives a 19.8% EBITDA CAGR over the same period. Contributing 81% of FY16 EBIT and, according to our forecasts, growing at a top-line CAGR of 24.2% for FY17-21e, the City Water Supply (CWS) unit is the main driver of CWA’s exceptional revenue expansion. High growth in CWS is, in turn, being driven by capacity growth predominantly, with positive contributions from tariff and volume increases. Capacity increases achieved by privatising formerly state-owned water supply networks will require significant capital expenditure in the years ahead. However, CWA’s strong operating cash generation and conservative balance sheet mean the company has room to invest without stretching key credit metrics; we forecast net debt to EBITDA will peak at 2.6x in FY17e.

Exhibit 5: CWA forecast change table

EPS* (c)

PBT* (HK$m)

EBITDA (HK$m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

FY16a*

30.42

38.54

20.2

1,130.5

1,337.4

15.7

1,613.1

1,820.2

11.6

FY17e

36.10

45.77

26.8

1,407.0

1,686.2

19.8

1,907.7

2,279.8

19.5

FY18e

43.78

56.05

28.0

1,706.0

2,065.3

21.1

2,290.1

2,759.9

20.5

Source: Edison Investment Research, China Water Affairs accounts. Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. FY16 previous numbers were forecast versus actual.

Growth far from watered down

After a stellar FY16, CWA will seek to repeat extraordinary recent growth levels. The 41.1% revenue growth was mainly driven by a 46.9% increase in City Water Supply revenues to HK$3,296m and Sewage Treatment revenues doubled to HK$339m after a full year contribution from the Goldtrust acquisition. Within City Water Supply, Installation and Construction increased 45% year-on-year to HK$1,768m. CWA also recognised construction revenue as part of IFRIC 12 for the first time, which contributed HK$589m. Without this change in accounting policy, the year-on-year group underlying revenue increase was 20%, in line with both our previous forecasts and our growth estimates. We continue to base our earnings growth forecasts on underlying growth and do not adjust for further accounting changes in our estimates.

Unfortunately CWA does not communicate formal earnings guidance or targets. However, via a combination of speaking with management, looking at industry wide trends and taking into account its historical earnings trajectory, we forecast CWA will grow EBITDA at CAGR of 19.8% (previously 19.2%) over the next five years. The largest driver of this will come through expanding tap water supply capacity, which stood at 6.23m tonnes per day in FY16. In recent years capacity has grown by a CAGR of 9.5%, which we believe will be exceeded. Over the next five years, we forecast capacity will increase at a CAGR of 15.9%. In addition to this, tariff increases and volume increases help drive overall top-line growth in the City Water Supply business by a CAGR of 24.2% to FY21e. This converts to a group top-line CAGR 21.5% over the next five years.

Our EBITDA margin forecast over this period declines from 45.1% in FY16 to 42.5% in FY20 as a function of a smaller percentage of revenues coming from higher-margin ‘connection fees’ associated with meter installations for new tap water customers (see Exhibit 1 for an explicit CWS divisional revenue forecast split). CWA has two revenue components: ‘Water Supply’ and ‘Connection Fees’. Water Supply related installation reflects setting up new customers on its tap water supply network, including meter installation. CWA charges a one-off amount for this, which we estimate is highly profitable. Water Supply reflects revenue received from each customer for supplying tap water. We believe this to be at a lower operating margin than from its installation business. Installation fees are likely to be a diminishing percentage of overall revenues and so therefore we expect margins to decline over our forecast period.

Capex requirements met by operating cash with balance sheet capacity

The corollary of our forecast for rapid tap water capacity expansion is an upward-sloping capex trajectory. We forecast tap water supply capex will increase markedly to FY19 as the company aims to install significantly more capacity, and thereafter it will drop off. It is noteworthy that once capacity has been added, maintenance capex is very small (below HK$100m).

Exhibit 6: Tap water supply capex rising (Edison forecasts)

Source: China Water Affairs, Edison Investment Research

Net operating free cash flow will return HK$8.6bn over the next five years according to our forecasts, covering the majority of our forecast capital investment of HK$10.6bn in the same period. The fact that the balance sheet is conservatively geared for a regulated utility (FY16 2.6x net debt to EBITDA – Edison definition) means that there is more capacity to finance growth. We see net debt to EBITDA peaking at 2.6x in FY17e and net debt to equity peaking in FY19e at 74%.

Our balance sheet forecasts assume CWA continues to grow its dividend in line with growth in retained earnings. We expect CWA to more than double its dividend by FY21. FY16’s dividend was 8.0c/share, which we estimate will increase to 20.0c/share in FY21. Based on our five-year CAGR of 18.2% in net income, this dividend growth can be achieved without increasing the payout ratio above 25%. The FY16 report stated that CWA had repurchased a total of 16.32m shares for a total consideration of HK$63.7m. We await further news from management about the composition of shareholder returns, but we reiterate our view from previous publications that shareholder returns can be higher without weakening the balance sheet. The FY16 and FY17e yields of 1.5% and 1.8% are low in comparison to other regulated names.

High profitability and low leverage make enhanced returns more likely

In the context of regulated utilities, CWA is conservatively geared. At 2.6x FY16 net debt (Edison definition) to EBITDA and 61.7% FY16 net debt (Edison definition) to equity, the company has further room to expand its balance sheet. Edison’s definition of net debt is stricter than CWA’s as we do not include pledged deposits as a cash equivalent. We forecast CWA’s gearing will increase from 61.7% to 74.0% to FY19, and then decline as investment tails off. Despite this, (Edison) net debt to EBITDA peaks at only 2.6x in FY17e and interest is well covered (profit from operation/ finance costs) at around 10x across our forecast period.

Exhibit 7: CWA capex peak and associated EBITDA

Source: Edison Investment Research. Note: Capex at operating segment level does not include associates, acquisition of subsidiaries.

Valuation

The principal valuation methodology used in arriving at our updated FV of HK$6.5 per share is a segmental sum-of-the-parts (SOTP). Our FV increase from HK$4.56 reflects the ‘rolling forward’ of the SOTP to FY18e, as well as a c 20% increase in FY17e and FY18e EBITDA.

Exhibit 8: CWA sum-of-the-parts valuation

Current price (HK$)

5.44

 

 

 

Fair value per share (HK$)

6.5

 

Upside/(downside) to FV

16.3%

 

Dividend yield (FY16a)

2.3%

 

Total return

20.1%

 

Current number of shares (m)

1,520

 

Segment

Valuation method

HK$000s

Multiple

Total (HK$000s)

City Water Supply Operation and Construction

FY18e EBITDA multiple

2,447

6.5

15,905

Sewage Treatment Operation and Construction

FY18e EBITDA multiple

179

6.0

1,076

Property Development and Investment

FY16a Book Value Multiple

1,646

2.0

3,293

Concrete Related Products and Services

FY18e EBITDA multiple

68

5.0

338

All other segments

FY18e EBITDA multiple

31

5.0

155

Group enterprise value

 

 

20,767

Less: FY18e net debt

 

 

6,970

Less: FY18e Pensions and other

 

 

0

Less: FY18e Minorities

 

 

3,895

SOTP valuation

 

 

 

9,902

Source: China Water Affairs, Edison Investment Research

Given the rapid growth we forecast, especially in the City Water Supply business (+26% year-on-year), our FV increases substantially. We have not altered our segment EBITDA multiples, which is conservative given the excellent growth being delivered by management and taking into account inflated multiples for regulated assets globally. However, as private sector involvement in tap water supply is at a nascent stage, we believe it is better to be prudent on EBITDA multiples at this stage.

Exhibit 9: Peer comparison

Company

Share price (local)

No of shares (m)

Market cap (local m)

Dividend
yield (%)

Current
P/E (x

Next P/E
(x)

Current EV/
EBITDA (x)

Next EV/ EBITDA
(x)

FCF yield
(%)

Next net debt*/ EBITDA (x)

China Water Affairs

5.53

1520

8,814

1.8

12.1

12.1

5.7

5.4

7.1

2.6

Guangdong Investment

12.02

6264.9

75,304

2.8

16.9

15.4

9.5

8.8

4.8

-1.1

Beijing Enterprises Water Group

5.98

8730.8

52,210

1.6

17.1

13.9

14.1

11.6

-12.2

4.5

Tianjin Capital Environmental Protection Group Co

4.45

340.0

1,513

1.6

15.1

14.4

2.9

2.8

23.2

1.3

Average Hong Kong Listed

 

2.0

16.4x

14.6

8.8

7.7

5.3

1.6

Beijing Originwater Technology Co

17.80

3123.4

55,597

0.2

26.6

16.9

20.3

13.9

-3.3

-1.7

Chongqing Water Group Co

7.85

4800.0

37,680

3.3

25.3

25.7

15.2

15.8

3.8

-1.1

Tus-Sound Environmental Resources Co

34.20

854.3

29,217

0.4

25.8

20.8

17.1

13.2

-3.9

2.4

Average Mainland China Listed

 

1.3

25.9

21.1

17.6

14.3

-1.1

-0.1

Veolia Environnement

17.52

563.4

9,867

4.2

17.5

14.5

5.7

5.4

5.7

2.5

Suez

13.49

564.4

7,611

4.8

17.7

15.3

5.9

5.6

4.4

3.0

Severn Trent

2,248.00

235.7

5,298

3.6

21.5

21.0

12.0

11.5

2.8

5.7

United Utilities Group

919.00

681.9

6,267

4.2

20.1

19.6

13.2

12.6

0.9

6.9

Average Europe

 

 

 

4.2

19.2

17.6

9.2

8.8

3.5

4.5

Average global

 

 

 

2.7

20.4

17.7

11.6

10.1

2.6

2.2

Source: China Water Affairs, Edison Investment Research, Bloomberg. Note: *Edison definition, which excludes pledged deposits. Prices as at 8 November 2016.

Exhibit 9 shows CWA trades at a discount to its closest peers listed in both Hong Kong and mainland China. It trades at a c 23% discount to prospective EV/EBITDA of Hong Kong-listed water utilities and over a 40% discount to the global average. This comes despite the extraordinarily high growth profile and earnings characteristics we described earlier in the note. On P/E too it trades at a discount to all other listed peers. Crucially, from a cash-generation perspective, CWA exceeds almost all of its closest listed peers. With an operating free cash flow per share of HK$0.99, equivalent to a 16.6% free cash flow yield, it returns more than six times as much cash profit as its closest peers.

Exhibit 10: Financial summary

HK$m

2014

2015

2016

2017e

2018e

31-March

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

2,747

2,859

4,033

5,000

6,232

Cost of Sales

(1,599)

(1,506)

(2,132)

(2,592)

(3,266)

Gross Profit

1,147

1,352

1,901

2,408

2,966

EBITDA

 

 

1,075.8

1,299.8

1,820.2

2,279.8

2,759.9

Operating Profit (before amort. and except.)

771

1,001

1,479

1,848

2,269

Intangible Amortisation

0

0

0

0

0

Exceptionals

58

136

(30)

0

0

Other

0

0

0

0

0

Operating Profit

829

1,137

1,449

1,848

2,269

Net Interest

(107)

(117)

(171)

(162)

(203)

Profit Before Tax (norm)

 

 

730

886

1,337.4

1,686.2

2,065.3

Profit Before Tax (FRS 3)

 

 

788

1,021

1,308

1,686

2,065

Tax

(230)

(317)

(305)

(422)

(516)

Profit After Tax (norm)

500

569

1,033

1,265

1,549

Profit After Tax (FRS 3)

558

704

1,003

1,265

1,549

Average Number of Shares Outstanding (m)

1,423.2

1,416.9

1,508.5

1,519.9

1,519.9

EPS - normalised (c)

 

 

15.7

16.6

38.5

45.8

56.1

EPS - normalised and fully diluted (c)

 

15.7

16.6

38.54

45.77

56.05

EPS - (IFRS) (c)

 

 

19.8

26.2

36.6

45.8

56.1

Dividend per share (c)

5.0

7.0

8.0

10.0

12.5

Gross Margin (%)

41.8

47.3

47.1

48.2

47.6

EBITDA Margin (%)

39.2

45.5

45.1

45.6

44.3

Operating Margin (before GW and except.) (%)

28.1

35.0

36.7

37.0

36.4

BALANCE SHEET

Fixed Assets

 

 

8,578

9,416

11,313

12,783

14,556

Intangible Assets

424

415

1,428

1,428

1,428

Tangible Assets

5,425

5,995

6,716

8,186

9,959

Investments

1,827

2,106

2,242

2,242

2,242

Other

902

901

928

928

928

Current Assets

 

 

4,929

5,686

7,507

8,079

8,894

Stocks

249

301

289

358

446

Debtors

578

656

1,084

1,343

1,674

Cash

1,590

1,501

2,552

2,563

2,662

Other

2,513

3,228

3,583

3,815

4,112

Current Liabilities

 

 

(3,972)

(5,214)

(5,557)

(5,430)

(5,632)

Creditors

(529)

(486)

(855)

(728)

(931)

Short term borrowings

(1,299)

(2,376)

(2,156)

(2,156)

(2,156)

Other

(2,143)

(2,352)

(2,546)

(2,546)

(2,546)

Long Term Liabilities

 

 

(3,839)

(3,452)

(5,715)

(6,915)

(8,115)

Long term borrowings

(3,524)

(3,024)

(5,076)

(6,276)

(7,476)

Other long term liabilities

(316)

(428)

(639)

(639)

(639)

Net Assets

 

 

5,696

6,436

7,548

8,517

9,703

CASH FLOW

Operating Cash Flow

 

 

554

566

1,494

1,591

2,246

Net Interest

(34)

(0)

(72)

(162)

(203)

Tax

(106)

(201)

(160)

(422)

(516)

Capex

(794)

(781)

(670)

(1,901)

(2,265)

Acquisitions/disposals

0

0

(972)

0

0

Financing

(343)

(134)

(82)

0

0

Dividends

(71)

(85)

(106)

(136)

(167)

Net Cash Flow

(792)

(635)

(569)

(1,030)

(906)

Opening net debt/(cash)

 

 

2,234

3,377

3,966

4,649

5,679

HP finance leases initiated

0

0

0

0

0

Other

(351)

46

(114)

0

0

Closing net debt/(cash)

 

 

3,377

3,966

4,649

5,679

6,584

Source: China Water Affairs accounts, Edison Investment Research

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Copyright 2016 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2016. “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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2016. “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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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