Core Viewpoint - After four months of consolidation, China Water (00855) is expected to enter a new market phase due to strong market conditions and its own operational improvements [1][2]. Market Conditions - The Hong Kong stock market has shown strong performance since April, with the Hang Seng Index rising over 33% in less than five months, reaching a peak of 25,918 points on August 25, the highest in nearly four years [1]. - The market's strength is attributed to three main drivers: valuation recovery, policy benefits, and significant inflows of southbound capital, which have exceeded HKD 970 billion this year, surpassing the total for 2024 [1]. - Southbound capital has shown a preference for high-dividend assets, particularly in sectors like banking, energy, and utilities, which positions China Water favorably for accelerated investment [1]. Company Developments - Recent news indicates increased shareholder investment in China Water, including significant stakes acquired by Great Wall Life and Taikang Life, as well as ORIX Corporation increasing its shareholding to 20.28% [2]. - Despite the current market focus on technology sectors driven by AI, there is a noticeable shift towards high-dividend utility sectors, with China Water benefiting from this trend [2]. Financial Performance - In the fiscal year 2025, China Water's total revenue decreased by 9.4% to HKD 11.656 billion, primarily due to a decline in urban water supply service revenue. However, adjusted EBITDA increased by 1.8% to HKD 5.257 billion, indicating slight growth in real profitability [3]. - The company's gross margin improved by 0.7 percentage points to 37.8%, with profit margins in urban water supply, direct drinking water, and environmental sectors increasing by 3.2, 2.7, and 3.4 percentage points, respectively [3]. - Capital expenditures decreased by HKD 1.9 billion to HKD 3.4 billion, leading to positive free cash flow for the first time, which supports a high dividend payout ratio that increased by 12 percentage points to 42% [4]. Future Outlook - For fiscal year 2026, China Water is expected to see steady growth, with 97.7 million tons per day of capacity under construction projected to come online, enhancing water sales [4]. - Accelerated water price adjustments are anticipated, with 8 to 10 projects expected to receive approval for price increases in fiscal year 2026, following recent successful adjustments [5]. - Analysts predict a rapid recovery in net profit for fiscal year 2026, with estimates from various brokerages indicating a potential increase of 27.64% to HKD 1.372 billion [5]. Investment Potential - Given the positive fundamental outlook and ongoing high dividend strategy, China Water is positioned to offer excess returns as southbound capital increasingly targets high-dividend assets [6]. - Analysts maintain a "buy" rating for China Water, projecting a target price of HKD 7.8, representing nearly a 30% upside from the closing price of HKD 6.21 on August 29 [6].

Core Viewpoint - After four months of consolidation, China Water (00855) is expected to enter a new market phase due to strong market conditions and its own operational improvements [1][2]. Market Conditions - The Hong Kong stock market has shown strong performance since April, with the Hang Seng Index rising over 33% in less than five months, reaching a peak of 25,918 points on August 25, the highest in nearly four years [1]. - The strong market performance is attributed to three main drivers: valuation recovery, policy benefits, and significant inflows of southbound capital, which have exceeded HKD 970 billion year-to-date [1]. - Southbound capital is particularly favoring high-dividend assets, with a notable focus on sectors like banking, energy, and utilities [1][2]. Company Developments - China Water has seen increased shareholder activity, with notable investments from Great Wall Life Insurance and TaiKang Life, as well as an increase in shares held by ORIX Corporation to 20.28% [2]. - Despite the recent market focus on technology sectors driven by AI, there is a noticeable shift towards utility sectors, with public utilities seeing a net inflow of HKD 10.23 million in recent days [2]. Financial Performance - For the fiscal year 2025, China Water's total revenue decreased by 9.4% to HKD 11.656 billion, primarily due to a decline in urban water supply service revenue [3]. - Adjusted EBITDA increased by 1.8% to HKD 5.257 billion, indicating a slight growth in real profitability [3]. - The company improved its gross margin by 0.7 percentage points to 37.8%, with profit margins in urban water supply, pipeline drinking water, and environmental sectors also showing improvements [3]. Cash Flow and Dividends - Capital expenditures decreased by HKD 1.9 billion to HKD 3.4 billion, leading to a positive free cash flow for the first time [4]. - The dividend payout ratio increased by 12 percentage points to 42%, reflecting the company's commitment to returning value to shareholders [4]. Future Outlook - China Water has 97.7 million tons per day of capacity under construction, expected to be operational by fiscal year 2026, which will enhance water sales [4]. - The acceleration of water price adjustment projects is anticipated to provide new momentum for the company's urban water supply business, with several projects already approved for price increases [5]. - Analysts predict a rapid recovery in net profit for fiscal year 2026, with estimates suggesting a growth of over 27% to HKD 1.372 billion [5]. Investment Potential - Given the positive outlook and high dividend yield, China Water is positioned to benefit from the increasing allocation of southbound capital towards high-dividend assets [6]. - Analysts maintain a "buy" rating for China Water, projecting a target price of HKD 7.8, indicating a potential upside of nearly 30% from the closing price of HKD 6.21 on August 29 [6].