Interim results confirmed that China Water Affairs Group (CWA) continues to grow rapidly. We remain optimistic about CWA’s capacity to extend this growth trajectory and see the 50% increase in the interim dividend payment as evidence of management’s confidence in the outlook. In our view, the rating of the shares does not reflect the growth prospects.
CWA achieved growth in revenue, net profit to shareholders, EPS and DPS (versus H118) of 17.9%, 20.3%, 14.9% and 50% respectively. The outcome compared to our previously published FY19 projections for year-on-year growth of 18% in revenue, 15.5% in net profits 13% in EPS and 13% in DPS. The core business of water supply and environmental protection, saw revenue increase by 21.5% and operating profits by 19.3% The core business now accounts for 96.6% of group revenues and 98.7% of profits, up 3% and 2% respectively. Increases in water volume sold, tariff hikes, new connections and contribution from new projects all contributed to increased profits. The environmental business in particular, which CWA has earmarked for a separate listing, achieved rapid growth in revenues and operating profits (+81.0% versus Edison FY19e +21%) and contributed 18.9% of group profits. Net debt of HK$8,299m is expected to decline in H2, with FY19 disposals of at least HK$780m of non-core assets and the receipt of HK$423.8m from strategic investors in the environmental business.
We have made some adjustments to our FY19 estimates and we now forecast revenue of HK$8,593m (HK$8,935m) and EPS of HK$0.832 (HK$0.815). We have also increased our DPS forecast to HK$0.30 (HK$0.262) following the large interim increase. We believe the macro operating environment remains favourable for CWA given the government’s desire to see investment in infrastructure, a recognition of the need for tariffs to reflect market-based pricing and CWA’s ability to increase capacity via project expansion and M&A. We see the announced 50% increase in the H1 DPS as an indication of management’s confidence in the future.
Applying blended peer group market multiples to our revised forecasts for CWA indicates a valuation of HK$10.5/share, while the application of the peer group P/E multiple produces a valuation of HK$11.7/share. In our view, the rating does not appear to reflect CWA’s continuing growth prospects, and the PEG ratio for CWA, at 0.7x, stands at a discount to a peer group average multiple of 1.1x.