Key points of investment

Incident: The company announced financial results for the 2024 fiscal year, achieving total operating income of HK$12.859 billion, -9.4% YoY, excluding exchange rate impact of -4.1% YoY, net profit to mother of HK$1,534 billion, -17.4% YoY, and -12.6% YoY excluding exchange rate impact. The annual dividend was HK28 cents per share, maintaining a dividend payout ratio of 30%.

Excluding exchange rate effects, non-net profit was -4.0% year-on-year. Revenue from water supply and environmental protection installation and construction declined, and revenue from direct drinking water continued to grow rapidly. FY2024's net profit of HK$2.59 billion, -16.1% year over year, was mainly affected by fluctuations in the RMB exchange rate, reduced revenue from water supply and environmental installation, maintenance and construction engineering services, changes in the performance of uncontrolled associated companies and high US dollar borrowing costs; after deducting non-net profit of HK$2.80 billion, -9.3% YoY, excluding exchange rates, the impact was -4.0% YoY. Looking at the segment, 1) Urban water supply: achieved revenue of HK$8.276 billion, and segment profit of HK$2,490 billion, -12.2% year-on-year, mainly due to a reduction in installation and maintenance works and construction projects; 2) Pipeline direct drinking water: achieved revenue of HK$1,722 million, +31.4% YoY, excluding exchange rate impact +39.1% YoY, and segment profit of HK$592 million, +17.3% YoY. 3) Environmental protection: Achieved revenue of HK$1,072 million, -24.0% year-on-year, partial profit of HK$354 million, or -24.4%, mainly due to the gradual completion or final stage of construction of sewage treatment projects; 4) General contract construction: achieved revenue of HK$827 million, with segment profit of HK$611 million, and segmental profit of HK$611 million, -23.4% year-on-year; 5) Property: achieved revenue of HK$208 million, segment profit of HK$41 million, or -53.9% year-on-year.

The share of FY2024 direct drinking water revenue increased by 4.2pct to 13.4%, and direct drinking water operating revenue increased by 72.5%. FY2024, 1) Direct Drinking Water Operation: Achieved revenue of HK$293 million, +72.5% YoY, excluding exchange rate impact, 2) Direct Drinking Water Installation and Maintenance: Achieved Revenue of HK$133 million, +17.6% YoY; 3) Direct Drinking Water Construction: Achieved revenue of HK$1,275 million, +24.2% YoY.

The number of direct drinking water projects at FY2024 Company increased 77% to 7,700, and the pipeline direct drinking water population increased 96% to 10 million people. The company's direct drinking water business increased its revenue share from 1.4% in FY2021 to 13.4% in FY2024. The growth rate of FY2024H2 direct drinking water construction revenue is slowing down, mainly due to companies strengthening project screening and management of direct drinking water capital expenses.

FY2024 water supply also increased by 2.6%, and more than 20 projects initiated price adjustment procedures. FY2024, Company 1) Water supply operations: Revenue of HK$3,311 billion, -1.3% YoY, excluding the impact of RMB exchange rate fluctuations +4.5% YoY. ① The sales volume of water was 1.40 billion tons, +2.6% year-on-year. According to detailed project statistics, as of 2024/3/31, the total operation scale of tap water and raw water projects was 8.34 million tons/day, 1.69 million tons/day under construction, 4.05 million tons/day proposed, and (under construction+proposed) /operation was 69%. ② The average water price is HK$2.36 per ton. FY2024 achieved price adjustments for 2 water supply projects, the lowest in history. More than 20 projects have already initiated price adjustment procedures. 2) Water supply installation and maintenance: Affected by the real estate industry, revenue was HK$1,658 million, -13.6% YoY; 3) Water supply construction: Revenue of HK$3,928 billion, -5.7% YoY.

Projects such as Mobil have basically been completed, which is expected to drive an increase in environmental operating revenue. Due to the basic completion of projects such as Mobil in Daya Bay in Huizhou, FY2024 environmental construction revenue was -44.9% year-on-year to HK$655 million. It is expected that the commissioning of the Mobil project next year will drive a step-up in environmental operating revenue.

Profit forecast and investment rating: The water supply operation business is stable, and there is plenty of space for direct drinking water. Considering exchange rate fluctuations and the impact of the decline in connectivity and construction, we reduced the net profit forecast for FY2025-2026 from HK$2,086 billion to HK$1,626/HK$1,789 billion. The estimated net profit for FY2027 is HK$1,989 million, corresponding PE of 50/4.6/4.1 times, maintaining a “buy” rating.

Risk warning: Project commissioning, water price increases, and direct drinking water business promotion fall short of expectations.