The Zhitong Finance App learned that Huacheng Securities published a research report saying that by horizontally comparing domestic A/H water listed companies from the three dimensions of production capacity, water prices, and financial ratios, the bank has summed up three core investment ideas: 1) companies that focus on positive free cash flow, do not have large capital expenses in the future, and promise high dividends; 2) focus on companies with economically developed project locations and far from the previous price adjustment cycle; 3) Focus on companies with asset injection and external mergers and acquisitions logic.

In terms of individual stocks, the bank recommended Hongcheng Environment (600461.SH) and Pioneer Environmental Protection (600008.SH), and recommended focusing on Chongqing Water (), Xingrong Environment (000598.SZ), Qianjiang Water Resources (), Zhongyuan Environmental (000544.SZ), Beikong Water Group (00371), and China Water (00855). 601158.SH 600283.SH

The main views of Huacheng Securities are as follows:

Water companies are high quality assets with both stability and high dividends. If viewed from a single perspective, the dividend ratio and dividend ratio of water companies are in the middle of A-shares, but if the above thinking model is adopted, it is easy to fall into a high dividend trap, leading to investment losses, the stability and sustainability of dividends is also an important reference factor when making investment decisions. However, if the two are combined to meet 1) the static dividend rate for 2022 > 2.5%; 2) the average dividend payment rate for the past 5 years is greater than 40%, the only industries that have not fluctuated greatly and are all positive are the steel, coal, textile and apparel, household appliances, petrochemicals, and water industries.

The water industry has entered a mature period and has a dividend base. The water industry includes water supply, drainage, and sewage treatment, and profitability is mainly determined by volume and price. At present, China's water industry has entered a mature period. The urban water supply penetration rate is over 99%, and the urban sewage treatment rate is over 98%. In terms of fixed asset investment, China's fixed asset investment for water/drainage/sewage treatment accounts for 21%/57%/22%. The infrastructure is relatively complete. The length of the water supply network in 2021 increased more than 3 times compared to 2000, and the number of sewage treatment plants increased more than 8 times compared to 2000. At the corporate level, the capital expenses of listed water companies have been reduced, with a year-on-year decrease of 13% in 2022 compared to 2021.

Undervaluation+high dividends+improved cash flow, the A-share water target has potential for revaluation. In terms of valuation, as of October 30, 2023, the price-earnings ratio is 15.3x, which is at the 6.57% quorum of the price-earnings ratio since 2010; in terms of cash flow, water operators have entered a mature and stable operating period, the industry has no large capital expenditure, stable operating income, and the cash flow situation is good. Since 2010, the net current ratio of the sector has always been greater than 1; in terms of dividends, some high-quality A-share listed water companies have maintained high dividend rates. Hongcheng Environment/Chongqing Water/Shuchuang Environmental has reached 5.14%/4.86%/4.69% (2023.30 closing price) ). Chongqing Water and Hongcheng Environmental have both achieved a dividend ratio of over 60% in the past three years.

Compare A-shares with overseas water companies in terms of industry characteristics, management mechanisms, and business models. Currently, the valuation of water companies in overseas markets is higher than that of A-share water companies. The main reason for this is the gap in industry characteristics, management mechanisms, business models, and market perception. This article selected two representative international environmental companies - Veolia Environmental Protection Group and American Water Company, to try to explore the differences between domestic water companies and overseas water companies. We believe Veolia is representative of mature global water companies; however, the US water market is not highly privatized and market concentration is low. The US water industry has achieved both performance and stock price growth over ten years through price increases and efficient operation. The US Water Industry is representative of mature regional water companies. We believe that with price increases and efficient operation, combined with increased market recognition, the US water industry achieved a double attack by Davis in ten years. It is a benchmark enterprise in the water industry, and it is of reference significance for A-share water companies that are currently relatively undervalued.

Investment strategy: By horizontally comparing domestic A/H water listed companies from the three dimensions of production capacity, water prices, and financial ratios, we have summarized three core investment ideas: 1) companies that focus on the correction of free cash flow, have no large capital expenses in the future, and promise high dividends; 2) focus on companies with economically developed project locations and far from the previous price adjustment cycle; 3) focus on companies with asset injection and extended mergers and acquisitions logic. We recommend Hongcheng Environment and Pioneer Environmental Protection. We recommend focusing on Chongqing Water, Xingrong Environment, Qianjiang Water Resources, Zhongyuan Environmental Protection, Beikong Water Group, and China Water.

Risk warning: Water price adjustments fall short of expectations, increase in water supply costs, and collection of accounts receivable falls short of expectations.