Covered for the first time, a “gain” rating was given. We forecast the company's net profit attributable to FY2024-2026 to be HK$1,881, 19.73, and HK$2,062 billion, respectively, and the corresponding EPS of HK$1.15, 1.21, and HK$1.26.

China Water: The nation's leading integrated water operator. 1) China Water Group, one of the top ten urban water supply operators in China, is the only listed company in the Hong Kong stock market that focuses on water supply business. As of March 31, 2023, the company's total water supply design capacity was 14.4 million tons/day, and the length of the water supply network was about 148,000 kilometers, covering a population of over 30 million. 2) The company is a pioneer in the marketization of water supply in China. Its business goals are mainly third-tier and fourth-tier cities with rapid economic growth. Through the implementation of integrated urban and rural water supply and drainage, the company actively develops the piped direct drinking water supply business, and establishes a two-wheel drive business portfolio of “water supply+direct pipeline drinking water”. 3) The FY2023 company's operating cash flow is HKD 4.851 billion, and the compound annual growth rate of FY2014-2023 is 19%, and the cash flow is good. The dividend rate has remained at 29-30% in the last three years, and dividends are relatively stable.

The piped drinking water business is growing strongly. 1) The company began expanding its piped direct drinking water business in 2015. Currently, it operates more than 3,600 piped direct drinking water projects nationwide, serving about 4.5 million people. In 2022, according to the amount of water sold, the company ranked first among all domestic piped direct drinking water supply companies, with a market share of 7.3%. FY2023's direct drinking water business revenue increased 89% year over year to HK$1.31 billion, with a gross profit margin of 44.1%. 2) Along with the improvement in the living standards of Chinese residents and the increase in consumption capacity, combined with the promotion of superimposed policies, the opening of a market space of more than 10 billion dollars for direct drinking water from pipelines has accelerated. 3) Advanced water purification technology+rich government and customer resources+excellent brand and service capabilities have driven the strong growth of the company's direct drinking water business.

The water supply business operated steadily, and the increase in volume and price gradually materialized. 1) Yinlong Water, a wholly-owned subsidiary, is the company's water supply and direct drinking water business platform. In 2022, Yinlong Water ranked sixth among all water supply companies in China in terms of sales volume, with a market share of 0.7%. 2) In terms of water sales volume: Currently, the company's water supply production capacity is 8.3 million tons/day, 1.6 million tons/day under construction, and 4.2 million tons/day under construction, and there is room for capacity expansion and capacity utilization; in the long run, the company's water supply prices will also benefit from the new cycle of price increases in China's water supply prices, which will gradually rise. There is a clear trend of increasing the volume and price of the water supply business.

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.