Introduction to this report:
The company is the leader in the water treatment industry with the largest production capacity in the country, and the water treatment business is growing steadily. Capital expenditure has entered a downward cycle, cash flow has improved, dividends are stable, and the characteristics of high dividends are obvious, which is expected to usher in a revaluation.
Summary:
Covered for the first time, a “gain” rating was given. We forecast that the net profit attributable to the company for 2023-2025 will be HK$22.25, 23.98, and HK$2,563 billion, respectively, and the corresponding EPS of HK$0.22, 0.24, and 0.26, respectively. The company is the leader in the water treatment industry with the largest production capacity in the country. The sewage and water supply business is growing steadily; capital expenditure has entered a downward cycle, cash flow has improved, dividends are stable, and the characteristics of high dividends are obvious.
It is expected to usher in a revaluation, coverage for the first time, and an “increase” rating.
Beikong Water: National integrated water environment service provider. Beikong Water is a water platform owned by Beijing Holdings, the flagship enterprise of the Beijing Municipal Government. It has a total design capacity of 24.5 million tons/day for in-hand sewage treatment and reclaimed water treatment projects, ranking first in the country; the total design capacity of in-hand water supply projects is 14.86 million tons/day (including sea level), ranking among the highest in the country. The company's performance has been growing steadily over the years, and its profitability is stable. In terms of assets, the company insists on operating projects. Water treatment assets are of high quality, and the current growth rate of assets and debt is slowing down.
China's water treatment market space is still broad, and the upward trend in water prices is clear. As the biggest leader in the industry, the company's water treatment business is growing steadily. 1) China's water treatment industry has experienced rapid development for many years and is now in a mature stage. However, the problem of unbalanced development of urban sewage collection and treatment still exists, and shortcomings and weaknesses are still prominent. We estimate that during the “14th Five-Year Plan” period, China's water treatment market still has a broad market space of over 200 billion dollars, mainly in the segments of sewage treatment, reclaimed water treatment, sewage networks, and sludge disposal. 2) In terms of water prices: The rise in standard upgrading and treatment costs will drive up sewage treatment costs; water supply prices will also enter a new cycle of price increases, so overall, the upward trend in water prices in China is clear. 3) For the company, on the one hand, sewage and water supply production capacity is still expanding, and the gradual increase in capacity utilization is driving the increase in water volume; on the other hand, as a national water service leader, the company's sewage treatment fees and water supply prices will continue to benefit from the gradual upward trend in industry trends, driving steady growth in water treatment performance.
Capital expenditure has entered a downward cycle, the quality of reports is solid, and the characteristics of high dividends are obvious. 1) The company's capital expenditure has also been gradually reduced, and the future trend of improving free cash flow is clear. 2) The company's subsidiary's water treatment assets are of high quality, and the balance sheet quality is solid. 3) The company has maintained a steady dividend level in recent years. Assuming that the total dividend in 2023 reaches the 2022 level, the expected dividend rate is 8.32%, and the characteristics of a high dividend rate are obvious.
Risk warning: The operation of the commissioning project falls short of expectations, the commissioning progress of the project in progress falls short of expectations, the expansion of new projects falls short of expectations, the adjustment of water prices falls short of expectations, dividends fall short of expectations, etc.