Company Update

For the six months ended 30 June 2019, the company's revenue was HKD 12.829 billion (corresponding period in 2018: HKD 10.009 billion), representing an increase of 28.18%. Revenue from Sewage and reclaimed water treatment services was HKD 2.513 billion (corresponding period in 2018: HKD 2.064 billion), representing an increase of 21.79%. Revenue from Water distribution services was HKD 1.173 billion (corresponding period in 2018: HKD 1.015 billion), representing an increase of 15.62%. Revenue from Construction services was HKD 7.94 billion (corresponding period in 2018: HKD 5.752 billion), representing an increase of 38.04%. Revenue from Construction services for comprehensive renovation projects was HKD 3.221 billion (corresponding period in 2018: HKD 2.463 billion), representing an increase of 30.77%. Revenue from Construction of BOT water projects for comprehensive renovation projects was HKD 4.719 billion (corresponding period in 2018: HKD 3.298 billion), representing an increase of 43.48%. Revenue from Technical services and sale of machineries for the water environmental renovation for comprehensive renovation projects was HKD 1.203 billion (corresponding period in 2018: HKD 1.179 billion), representing an increase of 2.07%. The gross profit was HKD 4.771 billion (corresponding period in 2018: HKD 3.834 billion), representing an increase of 24.49%. The GP margin was 37.10%, decreasing by 1.1 ppt compared with 1H2018, which is mainly due to the change of revenue portfolios. Profit attributable to equity holders of the company was HKD 2.77 billion (corresponding period in 2018: HKD 2.366 billion), representing an increase of 17.06%. Basic and diluted earnings per share were HK28.68 cents and 28.25 cents respectively. The interim dividend of HK10.7 cents per ordinary share for the six months ended 30 June 2019 (six months ended 30 June 2018: HK9.5 cents per ordinary share), showing an increase of 12.63%, the payout ratio is 37%, same as 1H2018.

The company's performance of core business is basically consistent with our forecast, related performance increase in total revenue was mainly contributed from the increase of water treatment services and construction services for the water environmental renovation. Total daily design capacity for new projects secured for the period was 1,355,925 ton, the net increase in total daily design capacity of the period was 936,925 tons, less than the company's guidance of 4 million tons additional for the full 2019. But the company maintain the above new capacity target, believing there will be more opportunities of M&A in 2H2019.

Stable growth in production capacity, waiting for high quality M&A opportunities

As at 30 June 2019, the company entered into service concession arrangements and entrustment agreements for a total of 1,047 water plants including 875 sewage treatment plants, 140 water distribution plants, 30 reclaimed water treatment plants and 2 seawater desalination plants. Total daily design capacity for new projects secured for the period was 1,355,925 tons including BOT projects of 130,000 tons, PPP projects of 882,925 tons, entrustment operation projects of 263,000 tons, and 80,000 tons through mergers and acquisitions. Due to different reasons such as expiration of projects, the company exited projects with aggregate daily design capacity of 419,000 tons during the period. As such, the net increase in daily design capacity of the period was 936,925 tons. As at 30 June 2019, total daily design capacity was 37,761,558 tons. The company's production capacity has maintained a compound annual growth of 35.96% since 2008. Although the progress of new projects in 1H2019 has slowed down, we are still optimistic about the company's capacity growth in 2H2019. We expect that the company will achieve the goal of adding 4 million tons of new capacity in 2019 through more M&A projects.

Continue asset-light transformation, closely cooperate with the Three Gorges Group

On January 18, 2019, the company entered into a subscription agreement with China Yangtze Power International, which has conditionally agreed to subscribe for 470,649,436 new ordinary shares. This means that the company will further deepen its partnership with China Three Gorges Corporation, to develop water environmental protection business in the Yangtze River area. In addition, the company also adheres to the “dual-platform strategy” and asset-light business model. It is expected that there will be a new signed RMB 20 billion water environment renovation projects and a capital expenditure of HKD 12 billion for the whole year. The interest expense for 1H2019 has also increased 42.73% to HKD 1.193 billion, the gearing ratio dropped from 114% to 110%. However, we expect that as the company's asset-light model continues to promote, the future capital expenditure will gradually decline, and the financial situation will further improve.

Financial Forecast and Valuation

We adjust the company's revenue in FY19/FY20/FY21 to be HKD 28.0/31.5/35.6 billion, representing increases of 13.96%/12.32%/12.95% YoY; net profit attributable to shareholders will be HKD 5.6/6.3/7.2 billion, representing increases of 25.05%/12.04%/14.57% YoY; corresponding EPSs are HKD 0.58/0.63/0.71. We adjust the TP of HKD 5.83, corresponding to FY19/FY20/FY21 10.06x/9.19x/8.21x PE with a +36.76% potential upside compared with CP of HKD 4.26 as of September 6, 2019, we maintain “BUY” investment rating.

Risk

1. Project progress fail expectations; 2. Industry policy; 3. Interest rate; 4. M&A fails expectations.

Financials

Click Here for PDF format...