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.
