Summary of the Conference Call for Yuehai Investment Company Overview - **Industry**: Water Supply Industry - **Core Business**: Supply of water to Hong Kong, contributing nearly 90% of profits [1][3][4] Key Points and Arguments Financial Performance - **Revenue Growth**: The average annual increase in water supply prices to Hong Kong over the past decade is approximately 2.2%, significantly higher than many domestic cities [1][3] - **Valuation**: Current valuation is around 9 times earnings with a dividend yield of about 7%, while the price-to-book (PB) ratio is below 1. The company is considered undervalued compared to overseas market valuations of 25-30 times [1][5] - **Dividend Policy**: Historically maintains a high dividend payout ratio of 65%, with expected dividends in 2025 likely to exceed 7% [1][6] Operational Focus - **Core Business Focus**: After divesting from Yuehai Land, the company will concentrate more on its water supply business, which is expected to enhance profitability [1][6] - **Debt Management**: The net financial debt to net asset value ratio is projected to decrease from 77% in 2023 to 31% in 2024, indicating improved financial health [1][9] Cash Flow and Capital Expenditure - **Free Cash Flow**: Expected to rise significantly to 7.3 billion HKD in 2024, a 29% year-on-year increase, with capital expenditures decreasing substantially [1][10] - **Cash Flow Stability**: The company has maintained a stable cash flow from its core operations, providing a solid foundation for high dividends [1][10] Market Position and Competitive Advantage - **Market Dynamics**: The water supply sector is characterized by stable performance due to the counter-cyclical nature of water demand and pricing reforms that link prices to costs [2][3] - **Core Asset Contribution**: The Dongjiang Water Project is a key asset, contributing significantly to overall profits, with a stable average water supply price of 6.11 HKD per ton in 2023 [3][11] Future Outlook - **Profit Recovery**: The company anticipates a recovery in net profit to over 4 billion HKD in 2025, primarily driven by its water resource business [1][7] - **Long-term Growth**: Expected net profits for 2025 to 2027 are projected at 4.274 billion, 4.357 billion, and 4.453 billion HKD respectively, indicating a strong recovery and stable growth trajectory [22] Investment Value - **Dividend Yield and Valuation Potential**: The company’s high dividend yield and undervaluation relative to its assets suggest significant investment potential, especially if market conditions favor high-dividend assets [5][25] - **Market Positioning**: The company is well-positioned to benefit from ongoing market reforms in water pricing, which could enhance profitability and cash flow [17][24] Additional Important Insights - **Debt Structure Improvement**: The company is gradually reducing its reliance on floating-rate loans and increasing its proportion of RMB loans to mitigate currency risk [1][9] - **Regulatory Environment**: The company has a favorable position regarding the renewal of its water supply contracts, which is expected to be negotiated with the provincial government [14] This comprehensive analysis highlights Yuehai Investment's strong market position, financial stability, and potential for future growth, making it a compelling investment opportunity in the water supply sector.

Investment Rating - The report maintains a "Buy" rating for the company [5] Core Views - The performance of Yuehai Investment in 2024 was negatively impacted by Yuehai Land, which recorded an impairment of HKD 1.034 billion, although the dividend payout met expectations [2][5] - The company reported a net cash inflow from continuing operations of HKD 9.15 billion, indicating strong cash flow [2][5] - The company plans to divest Yuehai Land through a special dividend distribution, which is expected to enhance focus on its water assets [5] Financial Summary - Revenue for 2024 is projected at HKD 18.505 billion, a decrease of 24% from 2023 [4] - Net profit for 2024 is expected to be HKD 3.142 billion, a slight increase of 0.64% compared to the previous year [4] - The company’s PE ratio is projected to be 13.96 for 2024, with a PB ratio of 1.05 [4] Operational Insights - Water supply revenue from Hong Kong is expected to increase by 3% to HKD 5.136 billion, while revenue from Shenzhen and Dongguan is projected to decrease by 11% to HKD 1.224 billion due to exchange rate impacts [5] - The company’s net cash inflow from continuing operations, excluding Yuehai Land, is projected to be HKD 9.15 billion [5] - The company’s capital expenditure for 2024 is expected to be HKD 1.857 billion, significantly reduced from HKD 7.696 billion in 2023 [5]