Incident: The company released quarterly unaudited financial data. In the first three quarters of 2024, the company's revenue was HK$18.142 billion, +10.4% year over year; profit attributable to company owners was approximately HK$3.593 billion, or -6.1% year over year, and the performance slightly exceeded expectations.

Water performance was steady, and comprehensive profit before tax increased by 0.3%, but net profit to mother fell 6.1% year on year due to adjustments to the fair value of investment properties. According to the announcement, the company's comprehensive profit before tax increased by 0.3% to HK$6.167 billion in the first three quarters, mainly due to steady growth in the water resources business (the company's profit before tax for East Shenzhen water supply reached HK$3.461 billion, +3.8% year over year; profit before other water tax was HK$1.644 billion, +0.3% year over year). However, the net loss adjusted for the fair value of the company's investment properties in the first three quarters (+0.487 billion HK$0.487 billion for the same period in 2023) was the main reason for the year-on-year decline in profit.

The performance of the real estate sector was stable, with no depreciation in the first three quarters. At the end of 2023, the company's real estate inventory depreciated to 1.81 billion yuan, which had a major impact on current profits. The company's real estate inventory did not depreciate in the first three quarters of this year. At the same time, it has signed a contract of 0.212 million square meters (0.209 million square meters in the same period last year), reflecting that the company's real estate resilience performance was better than expected.

The company's real estate inventory impairment is expected to decrease this year. As of the end of 2023, the company's real estate inventory book assets were approximately HK$32.8 billion. As of the first three quarters of 2024, the properties to be sold were HK$30 billion, including HK$10.494 billion in advance. The decline in the company's real estate inventory, compounded by the implementation of macroeconomic policies, we expect the company's real estate inventory impairment to decrease year-on-year this year.

Operating cash flow continues to improve. After deducting Guangdong Land, 24H1's operating cash flow was HK$3.584 billion (23H1 was HK$2.286 billion), while Guangdong Land's operating cash flow was HK$1.292 billion (23H1 was HK$2.068 billion).

24H1's dividend rate is 65%, which is stable compared to 2023. In 2023, the company rebalanced shareholder returns and business development and adopted a new dividend policy. The dividend rate was reduced from 84% in 2022 to 65% in 2023. At the same time as the 2024 mid-year report disclosed, the company announced that it plans to pay an interim dividend of HK23.97 HK cents, with an interim cash dividend ratio of 65%, the same as in 2023.

Investment analysis opinion: Considering the steady performance of the main water business, and at the same time, the company's real estate sector did not depreciate in the first three quarters of this year, and combined with the gradual implementation of macroeconomic policies, we expect the impairment pressure on real estate inventory to decrease this year. We raised the company's profit forecast for 2024-2026 to HK$4.003/4.101/4.12 billion (HK$3.692/3.737/3.512 billion before the increase). The current market value corresponds to 2024-26 PE 8.3/8.1/8.0 times. Referring to the average 12x valuation of comparable companies with stable profits and high dividends, and considering that the company's small real estate business still has a certain risk of fluctuation, the company was given a 2024 10x valuation, with a target market value of 41 billion. Compared with the current market value, there is room for an increase of 24% compared to the current market value, and raised to a “buy” rating.

Risk warning: poor real estate sales progress and real estate impairment risk, Dongshen project renewal risk, exchange risk.