According to the "Development Plan for Urban sewage treatment and Resource Utilization" jointly issued by the Development and Reform Commission and the Ministry of Housing and Construction on June 6, 2021, the centralized collection rate of urban domestic sewage in China will strive to reach more than 70% by 2025; the sewage treatment capacity of cities and counties basically meets the needs of economic and social development, the sewage treatment rate of county towns reaches more than 95%, and sewage treatment in areas with sensitive water environment basically meets the A discharge standard. The utilization rate of reclaimed water in water-deficient cities at prefecture level and above has reached more than 25%. During the 14th five-year Plan period, 80,000 km of sewerage network will be added and renovated; the sewage treatment capacity will be increased by 20 million cubic meters per day; the production capacity of reclaimed water will be built, renovated and expanded to no less than 15 million cubic meters per day; and the scale of harmless disposal facilities for newly added sludge (wet sludge with 80% moisture content) is not less than 20,000 tons per day. The National Development and Reform Commission and the Ministry of Housing and Construction further issued the measures for the Management of Urban Water supply prices on August 3, 2021, clearly linking the price of urban water supply to the yield of national 10-year bonds for the first time, so as to make the formation mechanism of water supply price more market-oriented. We believe that while new sewage and water supply projects are still increasing, and sewage treatment and water supply prices are still rising steadily, it will be good for leading enterprises such as Beijing Water Control (00371 HK), the largest comprehensive water treatment group in China, in the long term.

The revenue of Beijing Water Control (00371 HK) in 2021 increased by 9.9% year on year to 27.9 billion yuan (HK $, the same below), and the net profit of shareholders increased by 0.3% to 4.2 billion yuan. Net income per share fell 0.4 per cent year-on-year to 0.414 yuan. Overall performance is in line with expectations. During the period, revenue from operating services maintained steady growth, including revenue from sewage and reclaimed water treatment services increased by 30.2% to 8.1 billion yuan over the same period last year, and revenue from water supply services increased by 13.5% to 3.1 billion yuan over the same period last year. Revenue from construction services fell 4.1 per cent year-on-year to 12.6 billion yuan, of which revenue from comprehensive treatment projects fell 28.8 per cent to 3.1 billion yuan, mainly because the company reduced its commitment to new water environment treatment projects; revenue from construction BOT projects increased 7.9 per cent to 9.5 billion yuan. The company's revenue from technology and consulting services increased by 24.8% year-on-year to 4.1 billion yuan, mainly driven by strong market demand. The overall gross profit margin fell 0.9 percentage points year-on-year to 37.5%, mainly due to a year-on-year decline in gross profit margins for construction services and technical and consulting services. The total daily design capacity increased by 2761226 tons in 2021, 0.9% more than the net increase in 2020. As of December 31, 2021, the total design capacity is 44885962 tons per day. Although Beijing Water Control (00371 HK) is already the largest sewage treatment company in China, its market share is only about 6 per cent in 2021. The company plans to increase its market share to 10% and 15% respectively by 2025 and 2030, and we still see a lot of room for growth.

At present, the valuation of the company is close to an all-time low, and it is expected that after the expansion of the light asset model, the operating cash flow will gradually improve and the debt ratio will also be reduced. We believe that the company will receive a significant valuation after the gradual improvement in the quality of earnings and the continued increase in operating cash flow. We maintain the company's target price of HK $3.70 and its "buy" investment rating. Investment risks include 1) the release of new capacity is slower than expected, 2) the average price increase of water treatment is lower than expected, and 3) the devaluation of RMB will cause exchange losses.