Investment Rating - The report initiates coverage on China Water Affairs Group with an "Overweight" rating [2][31] Core Views - China Water Affairs is a leading integrated water operator in China, with a dual-drive business model of "water supply + direct drinking water" [2][8] - The company's direct drinking water business is expected to achieve above-expectation growth, driven by advanced water purification technology, rich customer resources, and strong brand and service capabilities [2] - The water supply business is stable, with clear trends of increasing volume and price [2][24] - The company has strong cash flow and stable dividend payouts, with a dividend payout ratio maintained at 29-30% over the past three years [2][29] Business Overview Water Supply Business - China Water Affairs is one of the top 10 urban water supply operators in China, with a total designed water supply capacity of 1,410 million tons per day and a water supply pipeline network of approximately 148,000 kilometers, covering a population of over 30 million [8] - The company focuses on rapidly growing third- and fourth-tier cities, implementing integrated urban-rural water supply and drainage systems and actively developing direct drinking water supply services [8] - The water supply business is expected to benefit from China's new cycle of water price increases, with a clear trend of increasing volume and price [24][27] Direct Drinking Water Business - The company began expanding its direct drinking water business in 2015 and currently operates over 3,600 direct drinking water projects nationwide, serving approximately 4.5 million people [13] - In 2022, the company ranked first in China in terms of direct drinking water sales revenue, with a market share of 7.3% [13] - The direct drinking water business revenue grew by 89% year-on-year in FY2023, reaching HKD 1.31 billion, with a gross margin of 44.1% [13] - The direct drinking water market in China is expected to grow rapidly, with the market size projected to reach RMB 14.6 billion by 2027 [20][21] Financial Performance - The company's revenue and net profit have shown steady growth, with a compound annual growth rate (CAGR) of 20% and 26%, respectively, from FY2014 to FY2023 [9] - The company's operating cash flow in FY2023 was HKD 4.851 billion, with a CAGR of 19% from FY2014 to FY2023 [29] - The dividend payout ratio has been maintained at 29-30% over the past three years, indicating stable dividend payments [29] Shareholder Structure - The top three shareholders are ORIX Corporation (17.84%), Duan Chuanliang (15.50%), and Asset Full Resources Limited (13.36%), with Duan Chuanliang being the actual controller of the company, holding 28.86% of the shares [11][12] Market Outlook - The direct drinking water market in China is still in its early stages, with significant growth potential driven by rising living standards, policy support, and consumer preference for convenient and environmentally friendly drinking water solutions [17][21] - The water supply business is expected to benefit from China's new cycle of water price increases, with a clear trend of increasing volume and price [24][27] Valuation and Forecast - The report forecasts the company's net profit for FY2024-2026 to be HKD 1.881 billion, HKD 1.973 billion, and HKD 2.062 billion, respectively, with corresponding EPS of HKD 1.15, HKD 1.21, and HKD 1.26 [2][31]
直饮水带动公司发展进入新阶段