China Water (00855 HK, the “Company”) increased 25.2% year-on-year revenue to HK$12.95 billion in fiscal year 2022. Shareholders' net profit increased 11.9% year-on-year to HK$1,884 million. The performance was generally in line with expectations. Gross margin fell 3.6 percentage points year over year to 38.3%, mainly due to rising electricity costs and an increase in the share of revenue from other businesses with lower gross margins.

We expect revenue from urban water supply and construction operations to grow at a compound annual growth rate of 8.0% between fiscal years 2022-2025. We expect revenue from water supply operation services to maintain steady growth, while revenue from direct drinking water management services will continue to grow rapidly, but revenue from water supply construction services will fall. Furthermore, we expect environmental business revenue to grow at a compound annual growth rate of 4.9% during the 2022-2025 fiscal year.

Our earnings per share forecasts for fiscal years 2023-2025 are HK$1.276, HK$1.431 and HK$1.637 respectively. Given that its project scope covers the whole country and has a huge water supply network, the company has obvious advantages over local water plants in the process of benefiting from the long-term development and growth of China's water industry. We maintain our target price of HK$11.50, corresponding to 6.5 times the 2023/2024/2025 EV/EBITDA of 6.5 times 6.1/5.5 times. Reiterate the “buy” rating.