Main points of investment

Scarcity of national water supply faucets, good cash flow to achieve endogenous growth. The national water supply faucet, as of 2021-9-30, covers 100 cities with a population of 30 million, with water assets of 1209 million tons per day, of which the water supply scale of 1106 million tons per day ranks third in A-share H-share water companies. Pure water supply target, FY2021 water supply revenue / division profit accounted for 83% 91%. The water supply TOO model has a sustainable operation and good cash flow. The operating net cash flow of FY2021 is HK $2.654 billion. The capital expenditure is mainly used for the water supply concession. The expenditure of FY2017-2021 is HK $1.535 billion per fiscal year, and the cash flow better matches the capital expenditure. In 2021, the development of the company's pipe network direct drinking water business accelerated to meet the marginal changes. as of 2021-9-30, there were more than 1200 projects in hand, and direct drinking water became the new main business. The company announced that it intends to spin off the direct drinking water and water supply business to be listed independently on the Stock Exchange, and the strategic development is more concentrated.

The margin of safety-the steady growth of water quantity-the certainty of market-oriented return of water price is enhanced. 1) Water quantity: the water consumption increases steadily, and the marketization of water supply continues to expand. In fiscal year 2021, the water supply was 1.463 billion tons, with an increase of 9.92%. CAGR for 2017-2021 water supply was 11.7%. By the end of September 2021, the company's water supply has been put into operation of 9.21 million tons per day, under construction + proposed construction of 5.99 million tons per day, (under construction + proposed) / has reached 65% locked in stable growth. 2) Water price: with the implementation of the new policy of water price, the market-oriented certainty of return is enhanced. FY2021 comprehensive water price 1.93 Hong Kong dollars / ton, with an increase of 7%. The CAGR of water price in 2017-2021 is 3%. The rolling price increase of the project provides steady growth. With the introduction of the new policy on water price, the market interest rate bound to the project revenue side is more market-oriented; the cost-side supervision and audit is more operational, and the excellent operation capacity obtains excess returns; the triennial price supervision defines the market expectation of water price adjustment.

Growth-the direct drinking water market exceeds 400 billion yuan, with a further increase of about 20% in 2021-2035. The three major advantages achieve the core competitiveness to reinvent China's water industry. Policy support, water security, consumption upgrading driven by direct drinking water to welcome new development. We expect the market space for direct drinking water to be 405.9 billion yuan in 2035 and about 20% of CAGR in 2021-2035. Pipe network direct drinking water economy is outstanding, the feasibility is strong, the effluent quality is guaranteed, and the advantage of business model is obvious. Brands, channels and products are the key to the competition of direct drinking water. Company 1) Brand: pull channel expansion and promote products to be accepted by consumers. In the past 20 years, the company has served a population of more than 30 million, acquired water cup brands of the Chinese Academy of Sciences, a leading company in direct drinking water technology, and water supply & direct drinking water brands empower each other to build brands; 2) channels: promote brand expansion and maximize product utility. With the national distribution of water supply assets, direct drinking water has obvious advantages as the first channel for the natural extension of the water supply industry chain, and it has signed cooperation agreements with many places to actively promote direct drinking water. 3) products: the most powerful support, back-feeding channels and brands. Chinese Academy of Sciences water cup and Japan Toray membrane water purification technology leading, domestic and foreign advanced technology to build solid water supply product quality. The revenue of FY2021's direct drinking water business increased by 55% to HK $141 million, with an increase of HK $239 million, with an increase of 362%. The trend of good development accelerated. Assuming that in the FY2021 water supply of the company, the residents' drinking water is realized through direct drinking water, the potential revenue scale of the direct drinking water business can exceed HK $8 billion, and the space for endogenous growth of the water supply business is nearly 200%. Direct drinking business to reinvent Chinese water affairs.

Profit forecast and investment rating: the company focuses on water supply, stable scale expansion & water price increase to determine a reasonable return. The direct drinking water market has a broad space, and the company actively develops and explores the direct drinking water market from the aspects of brands, channels and products. We estimate that the company's net profit for 2022-2024 is HK $2.335 billion, with an EPS of HK $1.25 and 1.44 per share, and the current PE is 7.0x/6.0x/5.3x, with a "buy" rating for the first time.

Risk tips: project operation, water price increase, direct drinking water promotion is not as expected