Chongqing Water released its three-quarter report: Q3 achieved revenue of 1.84 billion yuan (yoy -12.45%, qoq +4.34%) and net profit of 0.313 billion yuan (yoy -57.17%, qoq +34.90%), lower than our expectations (0.512-0.658 billion yuan), mainly due to a year-on-year decline of 0.261 billion yuan in other Q3 revenue. Q1-Q3 2024 achieved revenue of 5.123 billion yuan (yoy -11.65%), net profit to mother of 0.729 billion yuan (yoy -49.49%), deducting non-net profit of 0.634 billion yuan (yoy -52.61%). The company's core assets are the sewage treatment and water supply business in Chongqing. The dividend payout ratio remained above 59% in 2010-2023. The water business operation is steady and the focus is on shareholder returns. Maintain a “buy” rating.

Sewage price adjustments reduced net profit by 0.542 billion yuan, and tax subsidies were abolished in the sixth phase 1) Revenue: In January-September, the company's revenue fell 0.676 billion yuan year-on-year, or 11.65%. The main reason was that revenue was temporarily confirmed by the fifth phase of 2.98 yuan/cubic meter in January-September 2023, and revenue was confirmed according to the sixth period of 2.35 yuan/cubic meter from January to September 2024. 2) Net profit: In January-September, the company's net profit decreased by 0.715 billion yuan year on year, or 49.28%. The reason was that net profit decreased by 0.542 billion yuan year on year due to sewage price adjustments; the fifth phase was the unit price without tax. From January to September 2023, the company received 0.254 billion yuan of sewage tax subsidy. The sixth phase was the unit price including tax, and the Chongqing Municipal Finance Bureau no longer subsidized the company's 2023 taxes.

Water sales/sewage treatment volume +1.48/ 3.22% year-on-year

From January to September, the company's water supply and drainage business remained stable, achieving 0.472 billion cubic meters of water sales, an increase of 1.48% over the same period of the previous year, achieved a sewage treatment settlement volume of 1.298 billion cubic meters, an increase of 3.22% over the same period of the previous year, and achieved 0.48 million tons of sludge treatment and disposal, an increase of 8.91% over the same period last year.

The profit forecast was lowered, and the target price was 5.74 yuan

Considering the unit price for the sixth phase of sewage including tax, we will not receive sewage tax subsidies starting in 2024, and lowering other revenue forecasts. We expect the company's net profit to mother of 0.844/0.899/0.94 billion yuan (previous value 1.081/1.194/1.293 billion yuan) in 2024-2026, and 3.59 billion yuan for BPS in 2025. Comparatively, the company's 2025 Wind agreed to have an average PB of 1.1 x. Considering that the company's dividend ratio has exceeded 59% since its listing in 2010, and continued to have high dividends, the company was given 1.6 times PB in 2025, with a target price of 5.74 yuan (previous value of 5.59 yuan).

Risk warning: Fluctuations in demand led to a decline in water sales volume and sewage treatment volume. Repayments fell short of expectations, and dividend amounts declined.