The integrated platform for water services in Zhengzhou has a dividend rate of about 50% in 2018-21. The majority shareholder of the company is the Zhengzhou Public Utility Group (holding 68.73%). Its main business focuses on the sewage treatment and heating business in Zhengzhou.

After the acquisition in March 2023, the company completed the integration of sewage production capacity in Zhengzhou, with a production capacity of 2,955,000 m3/day. 2023Q1-3 achieved revenue of 5.256 billion yuan and net profit of 836 million yuan (adjusted year-on-year +32.6%). The gross profit margin and net profit margin increased sharply to 32.8% and 15.9%, and the balance ratio at the end of Q3 reached 77%. The company's dividend rate in 2018-21 was around 50%. According to the 18-21 dividend level (0.25 yuan/share), the dividend rate corresponding to the latest closing price is 3.5%.

The majority shareholder's sewage assets are purchased in cash to guarantee subsequent growth. In March 2023, the company completed the acquisition of the Group's sewage assets with 4.4 billion yuan in cash (85 in operation+450,000 square meters under construction/daily production capacity), promising that the net profit for 2023-2025 will not be less than 369, 3.43, or 378 million yuan. Relying on the upgrading of 600,000 square meters/rimatougang and 1 million square meters/rixin district sewage plants, there is still room for improvement in the sewage settlement prices of the two plants at 0.88 and 0.79 yuan/square meter (the 2022 settlement prices are 1.96 and 1.63 yuan/square meter respectively).

Furthermore, the company has accelerated the layout of the sludge business and achieved revenue of 220 million yuan in the first half of 2023.

The majority shareholders hold environmental assets such as water supply/incineration, and there is plenty of room for potential integration. The company is in the new first-tier city of Zhengzhou: According to the People's Government of Henan Province, the total resident population of Zhengzhou in 2022 was 12.83 million, ranking 11th in the country; the residential sewage treatment price of 0.95 yuan/square meter was below the national level. The majority shareholder, Zhengzhou, has laid out the entire environmental protection industry chain. In addition to the sewage business, the group still holds 1.73 million square meters/day of water supply production capacity and 11,000 tons/day of waste incineration production capacity. The two businesses achieved revenue of 1,554 million yuan and 579 million yuan respectively in 2022. According to the bond prospectus, Zhengzhou Public Corporation will continue to acquire upstream and downstream environmental protection industry chains in the future to obtain investment income through spin-off listing, transfer of property rights, and injection into listed companies.

Profit forecasts and investment advice. Net profit of 9.3/11.1/1.17 billion yuan is expected to be realized in 2023-25, corresponding to the latest PE 7.5/6.3/6.0 times. The company has sewage assets in Zhengzhou, stable operations, strong dividend capacity, and the majority shareholders still have room for integration. For reference, comparable companies gave 10 times PE in 2024, corresponding to a reasonable value of 11.41 yuan/share, covering the “buy” rating for the first time.

Risk warning. Accounts receivable risk; water price adjustment risk; project under construction risk.