Although FY19 revenue was below expectations, it was offset by higher than expected margins in the water supply business and a lower tax charge, allowing EPS to beat our forecast. China Water Affairs Group’s (CWA’s) 2013–19 compound annual growth rate (CAGR) in EPS now stands at over 27% and the group remains positive about its prospects. The current rating is undemanding for a company with CWA’s growth prospects.
CWA’s FY19 revenue rose by 9.5%, to HK$8.3bn, but undershot our expectations (HK$8.7bn), the result of slower growth in the water supply business due to currency effects and a capex-related decline (-6.6%) in construction services. However, strong growth in water supply revenues (+12.6%, +16.7% before currency effects), connections service revenues (+9.7%, +13.7%) and an improvement in the margin, (from 37% to 41%), resulted in overall water supply profits increasing by 9.0%. The Environmental Protection business continues to grow strongly, posting an 87.1% rise in revenue and a 63.8% increase in segment profits, helped by facilities upgrades and construction work. EPS (basic) of 85.1c was up 17.2% versus 2018 and exceeded our forecast for FY19 of 83.2c, thanks to a lower than anticipated tax rate (23% versus our assumed 28%). Excluding currency fluctuations, y-o-y net profit growth was 25.4%. CWA has achieved a CAGR in EPS for the period 2013–19 of 27.4%. The DPS of 28c (+21.7% y-o-y), undershot our forecast of 30c (2013–19 CAGR of 33%). Net debt increased to HK$10.3bn with a total liabilities/total assets ratio of 64% (a five-year avg. of 61%)
CWA remains confident of its prospects and believes recent statements from the Chinese government are supportive of the role of private finance in public infrastructure. The April 2019 acquisition of a 29.5% stake in Kangda International Environmental Group (KIEG) for HK$1.2bn occurred after the year end. The shortterm financial impact of the acquisition (from FY20) is likely to be small but in the long term should help to strengthen CWA’s Environmental Protection business.
We have revised our forecasts and now expect EPS of 96.8c for FY20 (versus 101c previously). Our projections for the period 2019–22 assume a CAGR in EPS of c 16%. At a share price of HK$8, CWA is trading on an FY20e P/E of 8.3x, a P/B ratio of 1.4x and a PEG ratio of 0.6x compared to peer group averages of 15.6x, 1.6x, and 1.2x, respectively. A PEG ratio of 0.9x would produce an indicative share price of HK$11 for CWA.