CHINA WATER-中国水务：FY25中期业绩胜预期，运营收入加快增长

Investment Rating - The report maintains a "Buy" rating for China Water Affairs (855 HK) with a target price of HK $6.23, implying a 43.6% upside potential from the current price of HK$ 4.34 [10][12][26] Core Views - FY25 interim results exceeded expectations, with operating revenue growth accelerating and a smaller-than-expected decline in shareholder net profit [9] - Water supply tariff adjustments have passed hearings in several regions, with over 20 cities initiating tariff adjustment procedures [9] - Direct drinking water and wastewater treatment operations showed strong growth, offsetting declines in construction revenue [9][10] - Capital expenditure is expected to decrease significantly from FY24 to FY26, supporting higher dividend payout ratios [10] Financial Performance Summary - FY25 interim revenue reached HK $5,953 million, with operating revenue up 16.6% YoY to HK$ 2,240 million [9] - Gross margin improved by 1.5 percentage points to 38.4% in 1H FY25 [9] - Shareholder net profit declined 8.5% YoY to HK $756 million in 1H FY25, better than expected [9] - Dividend payout ratio increased to 28.1%, with interim dividend maintained at HK$ 0.13 per share [9] Segment Performance Water Supply - Water supply volume increased 6.5% YoY to 720 million tons in 1H FY25 [9] - Water supply operating revenue grew 6.8% YoY to HK $1,724 million [9] - Tariff adjustments expected to drive 6.4%, 7.3%, and 2.5% YoY growth in water supply operating revenue for FY25-27 respectively [9] Direct Drinking Water - Direct drinking water operating revenue surged 57.1% YoY to HK$ 196 million in 1H FY25 [10] - Service population coverage expanded 42.5% YoY to 11.4 million people [10] - Projected YoY growth of 31.2%, 8.0%, and 5.0% in direct drinking water operating revenue for FY25-27 [10] Wastewater Treatment - Wastewater treatment operating revenue jumped 76.8% YoY to HK $315 million in 1H FY25 [10] - Growth driven by the operation of Huizhou ExxonMobil petrochemical wastewater treatment project [10] - Expected YoY growth of 64.8%, 7.3%, and 2.5% in wastewater treatment operating revenue for FY25-27 [10] Financial Forecasts - FY25-27 shareholder net profit forecasts revised upward by 11.9%, 2.1%, and 5.2% respectively [10] - EPS forecasts for FY25-27 adjusted to HK$ 0.90, HK $0.83, and HK$ 0.84 [10] - Dividend per share forecasts for FY25-27 increased to HK $0.27, HK$ 0.25, and HK $0.25 [10] - Capital expenditure expected to decrease from HK$ 5,330 million in FY24 to approximately HK $3,600 million in FY25 and HK$ 2,000 million in FY26 [10] Valuation Metrics - Current P/E ratios: 3.8x (FY24), 4.6x (FY25), 4.8x (FY26) [8] - Current P/B ratio: 0.55x [8] - Dividend yield: 7.8% (FY24), 6.5% (FY25), 6.2% (FY26) [8] - Target P/E multiple: 7.5x FY25 earnings [10]