Core Viewpoint - Feihe has issued a profit warning for 1H25, expecting a revenue decline of 7.9-9.9% and a net profit drop of 36-47%, primarily due to inventory adjustments and impairment losses on bulk powder [1] Group 1: Revenue and Profit Forecast - Feihe anticipates 1H25 revenue between 9.1-9.3 billion RMB, with a net profit of 1-1.2 billion RMB, which is below market expectations [1] - The company has initiated an inventory reduction strategy, aiming to lower channel inventory to below 0.5X, impacting sales performance in May and June [1] - The introduction of a 1.2 billion RMB fertility subsidy in the form of free formula milk has negatively affected revenue in the first half but is expected to benefit customer acquisition and future revenue growth [1] Group 2: Future Outlook - For the full year, the company guides for low single-digit revenue growth, with expectations of double-digit growth in the second half due to recovery post-inventory adjustments and an increase in newborn population [2] - The company plans to initiate a share buyback of no less than 1 billion RMB and maintain a dividend payout of at least 2 billion RMB, reflecting a commitment to enhancing shareholder returns [2] - Profit forecasts for 25/26 have been revised down by 26%/16% to 2.87 billion/3.66 billion RMB, with a target price adjustment of 27% to 6 HKD, indicating a potential upside of 31% [2]

Investment Rating - The investment rating for China Water Affairs (00855.HK) is "Buy" (maintained) [1] Core Views - The report highlights that the core operational profit is steadily growing, with a cash flow turning point already evident. The decline in FY2025 performance is primarily due to one-time impairment impacts, while the core operational business remains robust [1][7] Financial Performance Summary - For FY2025, the total revenue is projected at HKD 12,200 million, a decrease of 5.12% year-on-year. The net profit attributable to shareholders is expected to be HKD 1,075 million, down 29.92% year-on-year [1][7] - The main business revenue is HKD 11,656 million, reflecting a 9.4% decline year-on-year, mainly due to reduced income from water supply and direct drinking water installation, maintenance, and construction services [1][7] - The report details segment performance: - Urban water supply revenue is HKD 7,498 million, down 9.4% year-on-year, with segment profit slightly up by 0.1% [1] - Direct drinking water revenue is HKD 657 million, down 61.9%, with segment profit down 58.9% [1] - Environmental segment revenue is HKD 1,523 million, up 42.2%, with segment profit increasing by 56.9% [1] - Total construction revenue is HKD 664 million, down 19.7%, with segment profit down 9.3% [1] - Property revenue is HKD 361 million, with segment profit up 16.5% [1] Future Projections - The report forecasts a net profit of HKD 1,372 million for FY2026, HKD 1,387 million for FY2027, and HKD 1,415 million for FY2028, with corresponding P/E ratios of 7.2, 7.1, and 6.9 times [1][7] - Capital expenditures are expected to decrease from HKD 53.3 billion in FY2024 to HKD 34 billion in FY2025, with a target of under HKD 20 billion for FY2026 [1][7] - The dividend per share for FY2025 is projected to remain stable at HKD 0.28, with a payout ratio of 42.5% and a dividend yield of 4.65% [1][7]