Edison visited three water sites belonging to China Water Affairs Group (CWA) in the heavily industrialised Guangdong province in mainland China. The sites encompassed a raw water/reservoir facility, an industrial waste water treatment plant and a water supply business. A three-hour drive from Hong Kong, the sites visited depend heavily on the Huizhou Industrial Zone, which has been developed by the Chinese government and various private companies since its inception in the early 1990s. The visit assured us of the robust, high-quality nature of CWA’s assets and underscored how fundamental raw water provision and waste water treatment are to the Chinese industrial strategy. Ultimately, this gives us enhanced confidence in our high, long-term growth forecasts for CWA.
While the assets we visited in Huizhou were exposed to industrial water supply and treatment – the vast majority of CWA’s activities are in urban water supply – we were reassured to see how integral water management is to state-directed Chinese industrial expansion and to see for ourselves how much room for growth there is for private Chinese water companies. We also appreciated meeting and conversing with local management teams at each asset and gained a sense of how professionally each of the businesses is run. For investors accustomed to water utilities listed in the US and Europe, the notion of a water utility returning doubledigit profit growth can be hard to fathom. Our visit to Huizhou gave us several examples of the planned capacity increases necessary to facilitate such a high level of industrial expansion (in the case of Huizhou, oil refining and ethylene capacity were forecast to double between 2014 and 2016). It is common for CWA’s subsidiaries in Huizhou to have to provide year-on-year volume increases for customers well into double-digit percentages across its raw water, waste water treatment and tap water supply businesses.
We have left our earnings forecasts and valuation unchanged as we view FY17 results, expected in June, as a more appropriate time to revisit numbers. It is noteworthy that we are on average 14.4% ahead of Bloomberg consensus EBITDA estimates (2017 to 2019) and 3.8% ahead of Bloomberg EPS consensus (also 2017-2019). Our five-year reported EBITDA CAGR is 20.5% and our fair value per share of HK$7.12 offers equity holders 37.5% upside to the share price of HK$5.18 at the time of publication.