Introduction to this report:

The decline in installation, maintenance and construction business affected the company's FY2024 performance, and the piped direct drinking water business grew rapidly.

Key points of investment:

Maintain an “Overweight” rating. According to financial data, we downgraded the company's FY2025-2026 and added FY's projected net profit for 2027 to HK$16.28 (original value 19.73), 17.12 (original value 20.62), and HK$1.804 billion respectively. The corresponding EPS was HK$1.00, 1.05, and HK$1.10, respectively. The rapid development of the company's direct pipeline drinking water business has driven performance growth and maintained an “gain” rating.

The decline in installation, maintenance and construction business affected the company's FY2024 performance. 1) FY2024 achieved revenue of HK$12.859 billion, down 9% year on year; attributable net profit of HK$1.534 billion, down 17% year on year. 2) The company's two-wheel drive strategy for water supply+piped direct drinking water continues to advance. The decline in profits is mainly due to the decline in installation, maintenance and construction projects in urban water supply and environmental protection services and the depreciation of the RMB. 3) In the urban water supply business, the company achieved revenue of HK$8.276 billion, down 5% year on year; the profit of the Ministry of Urban Water Supply was HK$2.49 billion, down 12% year on year, mainly due to a reduction in overall installation and maintenance projects and construction projects. 4) In the environmental protection business, the company achieved revenue of HK$1.072 billion, a year-on-year decrease of 24%; segment profit of HK$0.354 billion, a year-on-year decrease of 24%, mainly due to the gradual completion of sewage treatment construction projects or entering the final stage of construction projects, resulting in a year-on-year decrease in revenue contributed by the project.

5) In the general contract construction business, revenue was HK$0.827 billion, down 31% year on year; segment profit was HK$0.611 billion, down 23% year on year, mainly due to a decrease in external construction projects.

The piped drinking water business is growing rapidly. 1) FY2024's pipeline direct drinking water revenue increased 31% year over year to HK$1.722 billion; segment profit was HK$0.592 billion, up 17% year on year; the rapid development of the company's direct drinking water business contributed to an important increase in performance. 2) The company previously continued to push ahead with the listing of the spinoff of Yinlong Water Supply Group. On September 11, 2024, it was announced that the spin-off plan was suspended due to careful consideration of the Group's development strategy and recent capital market environment. The board of directors of the company believes that suspending the spin-off listing of Yinlong Water will not have an impact on the company's financial situation and operations.

Cash flow is abundant, and the dividend ratio is maintained at 30%. The net cash generated by the company's operating operations was HK$2.777 billion, and the cash flow was good. The total amount of dividends paid during FY2024 was HK28 cents per share. The dividend payment ratio was 30% consistent with previous years, leaving more funds to develop piped direct drinking water supply projects.

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.