The stock price correction in recent months is caused by excessive selling, reiterating the "buy" rating. After our recent communication with the company, we believe that the stock price correction in recent months is caused by high risk aversion and excessive selling. The fluctuation of the epidemic in the mainland and the crisis in Russia and Ukraine have not affected the normal operation of the company, and the fundamentals of its public utilities remain unchanged. The sharp fall in share prices provides a good opportunity for long-term investors. We maintain the earnings forecast and the target price of HK $11.50 based on discounted cash flow (DCF) analysis, which corresponds to 8.3 times the 2023 price-to-earnings ratio and 45.9% room for growth.
Repeat "buy".
With reference to 2020, when the epidemic is more serious, the demand of residents to support the growth of water supply business, we refer to 2020 when the epidemic is more serious. At that time, the company was able to maintain operational growth in the first half of the 2021 fiscal year (end: March 31), mostly from the water business, and water supply services and connection revenue increased by 8.4% and 20.1% respectively compared with the same period last year. We attribute it to the fact that under normal circumstances, residential users account for about half of the company's water supply. During the epidemic, residents increased water demand at home for a long time, offsetting the slowdown in demand from industrial and commercial users. We believe that under the recent fluctuations in the epidemic, the above-mentioned operational risks offset each other.
The company's plan to spin off its direct drinking water and water supply business is more noteworthy. On the other hand, the company's plan to spin off its direct drinking water and water supply business announced in December last year deserves more attention. The spun-off business will remain a subsidiary of the company, which is expected to hold about 82 per cent. The main benefits of spin-off listing are: (1) unleashing potential value; (2) clarifying the relationship between the spun-off business (direct drinking water and water supply) and the remaining business (environmental protection, urban drainage operation and other businesses) to allocate resources more effectively; and (3) to provide respective financing platforms for the above two businesses to reflect the related risks and credit ratings more accurately.
The issuance of bonds was completed in January this year, and there is no need for financing in the short term.
In January this year, the company successfully issued US $150 million of US $4.85% green preferred notes due in May 2026 for overseas investors. As of September 30, 2021, the company's short-term net debt was only HK $180 million. The company no longer needs financing in the short term and will not be affected by the fluctuation of the capital market.
Risk tips: (1) the water source is polluted, (2) the rate and progress of water price increase is lower than expected, and (3) exchange rate risk.