The medium-term performance of China's water industry is better than market expectations. China Water recently announced better-than-expected results for the first half of fiscal year 2021 Compact 22 (ending March 31). Revenue rose 26.1 per cent year-on-year to HK $6.47 billion, the fastest pace in three years, with gross profit rising 19.7 per cent year-on-year to HK $2.53 billion and net profit up 23.4 per cent year-on-year to HK $1.02 billion. EPS rose 23 per cent year-on-year to HK $0.64, with an interim dividend of HK16 cents, or about 25 per cent.
During the period, the company's business developed rapidly and investment accelerated. The core main water supply business has further developed, and the pipeline direct drinking water business has expanded rapidly. The income of the water supply sector (including direct drinking water) has rapidly increased by 21.4% to HK $5.15 billion, contributing 79.5% of the company's revenue, and the operating profit of the water supply sector has increased by 18.5% to HK $1.93 billion, accounting for 87.6% of the company's operating profit.
Water supply sector as the core main business of the company, the rapid growth of performance promotes the overall performance of the company.
The rapid development of pipeline direct drinking water business has become a new engine for the company's performance growth. The company actively distributes the potential pipeline direct drinking water business. After years of technical reserve, the company's pipeline direct drinking water business has fully covered hospitals, schools, government agencies and residential areas. By September 30, 2021, piped direct drinking water business has covered more than 100 cities, more than 1200 projects, covering a population of 1.5 million. During the period, the direct drinking water business developed rapidly, with more than 402 new projects and 500000 new users in the first half of the year, and the direct drinking water business income reached 240 million Hong Kong dollars, an increase of 362.1% over the same period last year.
After the performance period, the company successively announced strategic cooperation agreements on direct drinking water in Guizhou, Henan, Chongqing, Hunan and other provinces to accelerate regional expansion of business. In the future, the company will focus on the development of direct drinking water business and increase resource investment, with the goal of rapidly promoting the direct drinking water business in cities covered by the company's current tap water supply business in the next five years. At present, the water supply business has connected more than 6.7 million users, potentially covering a population of 30 million. We expect direct drinking water to grow rapidly and become a new engine for the company's profit growth in the future.
The growth rate of traditional tap water supply business has accelerated. By the end of September, the capacity of the company's traditional tap water supply business has reached 13.32 million tons / day, of which 7.32 million tons / day has been put into operation, 1.85 million tons / day under construction and 4.15 million tons / day of the proposed project. During the period, revenue from traditional water supply business (excluding direct drinking water) increased by 16.3% over the same period last year to HK $4.81 billion, of which income from water supply operation increased rapidly by 22.3% to HK $1.64 billion. During the period, 80,000 tons / day of new projects were put into operation, and eight projects completed an increase in water prices. In August this year, the National Development and Reform Commission and the Ministry of Housing jointly issued the "measures for the Management of Urban Water supply prices" and the "measures for Supervision and examination of Urban Water supply pricing costs", which officially came into effect on October 1 this year. The new policy has clear provisions on the period and mechanism for the increase of tap water prices, which is expected to be good for the company's tap water supply projects in the future. We believe that tap water supply, as the company's traditional core business, will maintain stable development in the future.
Maintain buy rating: we forecast FY2022-FY2024 's net profit of HK $1.98 billion, HK $2.32 billion and HK $2.67 billion, respectively, and CAGR of 16%. The EPS of the company is HK $1.23,1.42,1.64 respectively. The company's current share price corresponds to FY2022's forecast of PE7.4 times. We believe that the main business of water supply in China is water supply, which has the attribute of public utilities, and the introduction of the new policy is good for the development of water supply enterprises, and the direct drinking water business will also help the company grow. We maintain a "buy" rating with a target price of HK $10.65, which is equivalent to 7.50 times FY2023's forecast price-to-earnings ratio.
Risk hints: the growth rate of pipeline direct drinking water business is slower than expected; the profit margin of pipeline direct drinking water business is lower than expected; the merger and acquisition speed of water supply projects is slower than expected; the progress of water price adjustment is slower than expected.