Key points of investment
Event: The company announced its interim results for fiscal year 2024, achieving total operating income of HK$6.846 billion, an increase of 0.9%, a 6.8% increase, net profit of HK$826 million, a decrease of 14.9%, excluding exchange rate effects, a decrease of 9.9%, and an interim dividend of 13 HK cents per share, a decrease of 18.8%.
Net profit increased by 9.5% after excluding one-time and macro factors, and the direct drinking water business was the core growth engine. FY2024H1, the company's net profit was HK$1,378 million, -8.8% year-on-year, mainly affected by the decline in profits of affiliated companies, increased financial expenses and exchange rate fluctuations. Excluding the above factors, net profit was +9.5% year-on-year. The company's profit attributable to Kangda Environmental Protection was HK$26 million, down HK$41 million from the same period. By segment, 1) Urban water supply: achieved revenue of HK$4.210 billion, a decrease of 1.2%; segment profit of HK$1,205 million, a decrease of 14.7%, mainly due to a reduction in installation and maintenance projects during the performance period; 2) Pipeline drinking water: achieved revenue of HK$1,027 million, an increase of 160.6%, and segment profit of HK$335 million, an increase of 175.1%. 3) Environmental protection: Achieved revenue of HK$637 million, same increase of 19.9%, segment profit of HK$251 million, same increase of 35.1%, mainly expansion of sewage treatment infrastructure in national petrochemical zones during the performance period; 4) General contract construction: achieved revenue of $518 million, a decrease of 25.5%, segment profit of HK$360 million, a decrease of 19.1%; 5) Property: Achieved revenue of HK$86 million, segment profit of HK$0.15 million, a decrease of 72.7%, mainly due to a decline in property project sales.
The share of direct drinking water revenue increased to 15%, and construction revenue increased 205% year on year. FY2024H1, the company's direct drinking water business revenue is progressing rapidly. 1) Direct drinking water business: achieving revenue of HK$125 million, an increase of 42.8%; 2) Direct drinking water installation and maintenance: achieving operating income of HK$58 million, an increase of 26.5%; 3) Direct drinking water construction: achieving revenue of HK$832 million, a significant increase of 204.5%.
The number of direct drinking water projects of the FY2024H1 company increased by 70% to 6,800, and the population coverage of direct drinking water from pipelines increased by 100% to 8 million people. The company's direct drinking water business increased its revenue share from 1% in FY2020 to 15% in FY2024H1. Revenue from the construction of FY2024H1 drinking water is rising. Once completed and put into operation, operating revenue growth is expected to accelerate.
Water supply increased slightly over the same period last year, and several projects have entered a price adjustment cycle. FY2024H1, Company 1) Water supply operations: Revenue was HK$1,615 million, a decrease of 4.4%, excluding the impact of RMB exchange rate fluctuations and an increase of 1.2%.
① Water sales volume was 680 million tons, an increase of 1.2%. According to detailed project statistics, as of 2023/9/30, the total operation scale of the company's tap water and raw water projects is 8.49 million tons/day, 1.96 million tons/day under construction, 4.05 million tons/day, proposed construction, 4.05 million tons/day, (under construction+proposed) /operation is 68%, and there is plenty of room for future growth. ② The average water price was HK$2.37 per ton. FY2024H1 achieved price adjustment for one water supply project, and several projects entered the price adjustment cycle. 2) Water supply installation and maintenance: Influenced by the real estate industry, revenue was HK$923 million, a decrease of 7.5%; 3) Water supply construction: revenue of HK$2,084 million, an increase of 5.2%.
Profit forecast and investment rating: The scale of water supply taps is expanding steadily, the development of direct drinking water is accelerating, and the space is vast. Considering the impact of US dollar interest rate hikes, exchange rate fluctuations and declining profits of associated companies, we adjusted our net profit forecast for FY2024-2026 from HK$21.83/24.97/28.27 billion to HK$1,881/20.65/HK$2,886 billion, corresponding to PE 4.0/3.7/3.3, maintaining a “buy” rating.
Risk warning: Project commissioning, increase in water prices, and promotion of direct drinking water business fell short of expectations.