Core Viewpoint - North Control Water's performance in the first half of 2025 showed a decline in revenue and net profit, primarily due to unexpected impairment losses, but the company maintains a strong dividend policy and potential for cash flow improvement [1][3]. Financial Performance - In 1H25, North Control Water achieved revenue of 10.459 billion yuan, a year-on-year decrease of 7.5%, and a net profit attributable to shareholders of 0.897 billion yuan, down 20.1% year-on-year, which was below previous expectations [1]. - The company declared an interim dividend of 0.674 billion yuan, representing 80% of net profit (excluding perpetual bond distributions), with a corresponding dividend per share (DPS) of 7.35 Hong Kong cents, up 5% from 7.0 Hong Kong cents in 1H24 [1][3]. Business Segments - Water treatment service revenue increased by 2% year-on-year, while water governance construction service revenue decreased by 57% to 0.071 billion yuan [2]. - The revenue from sewage and reclaimed water treatment services grew by 3% to 4.52 billion yuan, with a gross margin increase of 1 percentage point to 60% due to a rise in average water prices [2]. - The supply service revenue remained stable at 1.45 billion yuan, but gross margins declined due to changes in customer structure and rising operational costs [2]. Capital Expenditure and Cash Flow - Capital expenditure in 1H25 decreased by 40% to 0.94 billion yuan, while free cash flow significantly improved to 1.75 billion yuan [3]. - The company’s cash flow showed a positive trend, with operating net cash inflow expected to be 1.94 billion yuan, compared to 0.25 billion yuan in 1H24 [3]. - The company’s design capacity reached 43.3 million tons per day, with new signed projects adding 120,000 tons per day, aligning with its light asset transformation strategy [3]. Profit Forecast and Valuation - The profit forecast for 2025-2027 has been slightly adjusted, with net profit estimates of 1.52 billion yuan for 2025, reflecting a decrease of 1.3% [3]. - The target price is set at 3.15 Hong Kong dollars, based on a target price-to-earnings (PE) ratio of 18.9 times for 2025, indicating a positive outlook for cash flow and profitability improvement [3].

Investment Rating - The report maintains a "Buy" rating for the company [6][4]. Core Views - The company reported a revenue of 10.459 billion RMB for 1H25, a year-on-year decrease of 7.5%, and a net profit attributable to the parent company of 0.897 billion RMB, down 20.1% year-on-year, primarily due to an unexpected impairment of 0.26 billion RMB [1][4]. - The interim dividend declared is 0.674 billion RMB, representing 80% of the net profit attributable to the parent company (excluding perpetual bond distributions), with a corresponding DPS of 7.35 HKD, reflecting a 5% increase from 1H24 [1][4]. - Capital expenditure decreased by 40% year-on-year to 0.94 billion RMB, while free cash flow significantly improved to 1.75 billion RMB [1][4]. Revenue and Profitability - The water treatment service revenue increased by 3% year-on-year to 4.52 billion RMB, with a gross margin improvement of 1 percentage point to 60% due to an increase in average water prices in China [2][3]. - The revenue from water governance construction services dropped by 57% year-on-year to 0.71 billion RMB, mainly due to the company's strategy of reducing investments in BOT projects [2][3]. Cash Flow and Capital Expenditure - The company’s cash flow continues to show improvement, with an expected net inflow of operating cash flow of 1.94 billion RMB for 1H25, compared to approximately 0.25 billion RMB in 1H24 [3][4]. - The company’s light asset transformation strategy is expected to further reduce capital expenditures, with a projected decrease in future capital spending [3][4]. Earnings Forecast and Valuation - The report slightly adjusts the company's net profit forecasts for 2025-2027, estimating 1.52 billion RMB for 2025, reflecting a decrease of 1.3% from previous estimates [4][10]. - The target price is set at 3.15 HKD, based on a target PE of 18.9x for 2025, indicating a potential upside from the current market price [4][6].