1H FY24 shareholders' net profit fell 14.9% year on year
1H FY24 (April-September 2023) revenue rose 0.9% year on year to $6.85 billion (HK$6.85 billion, same below), but shareholders' net profit fell 14.9% year on year to $970 million, slightly below expectations, mainly due to: (1) RMB exchange rate fluctuations; (2) the recovery in tap water demand was slightly slower, and revenue from tap water management services fell 4.4% year on year to $1.62 billion; (3) poor sales data in the real estate market caused tap water connection revenue to fall 7.6% year on year to $92 billion; (4) US dollar and Hong Kong dollar loan interest rates led to a year-on-year increase in financial expenses An increase of 39.1% to 380 million yuan; (5) The performance and profit of shared companies fell 66.9% year on year.
Starting from 2H FY24, reflecting the benefits of economic recovery on tap water demand
A number of mainland economic statistics have improved in recent months. For example, total retail sales of social consumer goods in the first three quarters of 2023 increased by 6.8% year on year, up from 0.7% in the same period last year. This indicates an increase in the demand for tap water in society, especially in the industrial and commercial industries. Economic recovery has also given the government a lot of room to raise water prices. 1H FY24 received price increases for only one tap water project, less than eight and two in the same period of FY22 and FY23, respectively. We reaffirm our view that the benefits of economic recovery for tap water demand will only gradually become apparent from 2H FY24. It is estimated that FY24-26 tap water management service revenue will increase by 3.3%, 3.4%, and 5.4% year-on-year, respectively, to 3.46 billion, 3.58 billion yuan, and 3.78 billion yuan.
Pipeline drinking water business performed well
The 1HFY24 pipeline drinking water business performed well, with revenue up 160.6% year on year to 1.03 billion yuan, accounting for an increase of 9.2 percentage points to 15.0% in the company's total revenue. The number of projects (including under construction) increased by about 70% year-on-year to over 6,800. We expect direct drinking water revenue from the FY24-26 pipeline to increase by 72.5%, 40.7%, and 38.5% year-on-year respectively to 2.26 billion, 3.18 billion, and 4.4 billion yuan, accounting for 15.0%, 19.9%, and 25.9% of the company's total revenue.
Reiterate the “buy” rating
Based on the interim performance, we lowered the FY24-26 shareholders' net profit forecasts by 7.7%, 7.2%, and 5.7%, respectively, and reduced the target price from HK$7.60 to HK$7.00, corresponding to 6.0 times the FY24 target price-earnings ratio and 43.5% increase, thus reaffirming the “buy” rating.
Risk warning: (1) water sources are polluted; (2) the magnitude and progress of the increase in water prices is lower than expected; and (3) exchange rate risk.