Revenue of China Water (00855 HK, the "company") rose 26.1% to HK $6.47 billion in the first half of fiscal year 2022 compared with the same period last year. Net profit for shareholders rose 23.3 per cent year-on-year to HK $1.02 billion. The better-than-expected performance was mainly due to better-than-expected revenue growth in the core tap water business and direct drinking water business. Gross profit margin fell 2.1 percentage points year-on-year to 39.0%, mainly due to the government's preferential policy for "social insurance and house fund" in the same period last year.

We expect the income of urban water supply and construction operations to grow at a compound annual growth rate of 12.8% in the fiscal year 2021-2024, of which revenue from tap water supply services will grow at a compound annual growth rate of 17.6%. Even though the operation of direct drinking water is relatively small at present, it is growing very fast and has the opportunity to become the second largest business of the company within five years. In addition, we expect environmental business revenue to grow at a compound annual growth rate of 7.1% in the 2021-2024 fiscal year.

Our earnings per share forecasts for fiscal year 2022-2024 are HK $1.269, HK $1.421 and HK $1.588, respectively. In view of the fact that its project covers the whole country and has a large water supply network, the company has obvious advantages over local waterworks in the process of benefiting from the long-term development and growth of China's water industry. In addition, its fast-growing direct drinking water business may increase the company's overall valuation. We raise our target price to HK $11.50, which corresponds to 6.5 Universe 6.0 5.5 times the 2022 / 2023 / 2024 fiscal year EV/EBITDA. Reiterate the "buy" rating.

China Water (00855 HK) shareholders' net profit in the first half of fiscal year 2022 increased by 23.3% to 1.02 billion yuan compared with the same period last year. The performance was better than expected. The revenue of China Water (00855 HK, the "company") in the first half of fiscal year 2022 increased by 26.1% year on year to 6.47 billion yuan (HK $, the same below). The net profit of shareholders increased by 23.3% to 1.02 billion yuan over the same period last year. The better-than-expected performance was mainly due to higher-than-expected revenue growth in the water supply business and direct drinking water business in core cities. Gross profit margin fell 2.1 percentage points year-on-year to 39.0%, mainly due to the government's preferential policies for "social insurance and house fund" in the same period last year, resulting in a decline in profit margins this year. The sales expense rate was unchanged at 2.0% compared with the same period last year, the administrative expense rate fell 0.6 percentage points to 6.7% year-on-year, and the financial expense rate fell 0.7 percentage points to 3.1% year-on-year. In addition, while the company still has a lot of capital expenditure, it still dares to raise its dividend per share by 6.7% to 0.16 yuan, reflecting the company's confidence in the state of cash flow.

We expect the income from urban water supply and construction operations to grow at a compound annual growth rate of 12.8% in the 2021-2024 fiscal year. In the first half of the 2022 fiscal year, income from urban water supply operation and construction increased by 21.4% over the same period last year to HK $5.146 billion, of which income from water supply operation services increased by 22.3% to HK $1.642 billion. The substantial increase is mainly due to the increase in the amount of water sold and the acquisition of more construction and connection projects due to the continued integration of urban and rural water supply. The increase in revenue was mainly due to increased contributions from the direct drinking water business and new water projects, which were more organic growth compared to new acquisitions. During the period, the company added 500000 tons / day water supply capacity, including 50000 tons / day from Leizhou Xitou Water Plant, 100000 tons / day from Jingzhou Jinan Waterworks, 150000 tons / day from Shenzhen large Industrial Zone Waterworks Phase II project, and 200000 tons / day from Ji'an Jinyuan Waterworks. We expect urban water supply revenue to grow at a compound annual growth rate of 17.6 per cent in the 2021-2024 fiscal year, while construction service income and water supply connection income are expected to grow at a compound annual growth rate of-10 per cent and 13 per cent in the 2021-2024 fiscal year. The expected decrease in income from construction services is due to the reallocation of resources to the direct drinking water business.

In addition, the company is actively expanding its direct drinking water business. The business contributed about HK $238 million in revenue in the first half of fiscal year 2022, up from about HK $52 million in fiscal year 2020, or an increase of more than 350% over the same period last year, of which revenue from operating services reached HK $38 million, an increase of 279.4% over the same period last year, indicating extremely rapid growth. There is a high degree of cooperation between the direct drinking water business and the existing tap water supply business, because they share the same pipes and the same support staff. the average price of direct drinking water per ton (200 yuan / ton-400 yuan / ton) is much higher than that of tap water. The company cooperates with Toray, a veteran water purification company with more than 20 years of experience in the field of water purification technology. At the same time, the company has acquired Nanjing water cup, which has served more than 1000 schools and more than 10 million people, and has more than 100 patented technology. to provide customers with a wide variety of and high-purity products. Although the business is still small, we expect that when the direct drinking water business matures, it will contribute considerable profits to the company and may become the second largest business segment within five years. Overall, we expect revenue from inter-city water supply and construction operations to grow at a compound annual growth rate of 12.8 per cent in the 2021-2024 fiscal year.

We expect environmental business revenue to grow at a compound annual growth rate of 7.1% in the 2021-2024 fiscal year. The revenue of environmental protection business in the first half of 2022 increased by 19.2% to HK $596 million compared with the same period last year, mainly due to the continuous development of the integration of water supply and drainage led the company to obtain more construction projects. Revenue from sewage treatment and drainage services returned to positive growth, up 10.1% year-on-year, while it fell 1.5% in fiscal year 2021, mainly due to the company's success in integrating Kangda International's sewage business. We expect that in view of the steady increase in treatment fees and the release of new capacity, revenue from sewage treatment and drainage services will grow at a compound annual growth rate of 13.0% in the 2021-2024 fiscal year. On the other hand, revenue from sewage treatment and water environmental treatment construction services is expected to grow at a compound annual growth rate of 6.6% in the 2021-2024 fiscal year. Consistent with the overall development of the company's water business. Overall, we expect environmental business revenue to grow at a compound annual growth rate of 7.1% in the 2021-2024 fiscal year.