Key investment points:

Incident: On December 9, the company announced that it was proposed to declare a special dividend by physically allocating Guangdong Land shares.

It is proposed to divest the real estate business through a special dividend payment method. In the future, Guangdong Investment will no longer hold Guangdong Land and focus on the main water business. Prior to this proposed distribution, the company held 73.72% of Guangdong Land's shares. According to the announcement, the company will distribute a special dividend by distributing 1.262 billion Guangdong Land shares directly held by Guangdong Investment (accounting for about 73.72% of Guangdong Land's share capital). The specific distribution ratio is 0.193 Guangdong Land shares for each Guangdong Investment stock. Through this distribution, Guangdong Holdings, the majority shareholder, holds 58.26% of Guangdong Investment's shares unchanged. At the same time, Guangdong Investment will no longer hold shares in Guangdong Land, and Guangdong Land will become a brother company with the company.

After the divestment of Guangdong Land, the operating performance and overall value of Guangdong Investment is expected to improve markedly. According to the company's announcement, the company's net profit fell sharply by 34% year on year to HK$3.12 billion in 2023. The decline in profit was mainly affected by the impairment of real estate under Guangdong Land by HK$1.81 billion. Excluding real estate impairment, the company's main business profit reached HK$4.93 billion in 2023. With the completion of the divestment, the company's future performance will no longer be affected by fluctuations in the real estate business.

After the divestment of Guangdong Land, the company's debt ratio is expected to drop significantly. According to the company announcement, as of 24H1, Guangdong Investment's total assets were HK$139.8 billion, total liabilities were HK$80.6 billion, net assets were HK$59.3 billion, and the balance ratio was 58%; Guangdong Land's total assets were HK$46.9 billion, total liabilities were HK$40.7 billion, net assets HK$6.2 billion, and the balance ratio was 87%; in the future, with the divestment of Guangdong Land with higher liabilities, the company's debt ratio is expected to drop significantly.

After deducting Guangdong Land, the company's operating cash flow was steady, moderate and positive. According to the company's announcement, the company's operating cash flow in 2023 was HK$10.71 billion, of which Guangdong Land's net operating cash flow was HK$3.61 billion. After deducting Guangdong Land, the company's operating cash flow was HK$7.1 billion. 24H1's operating cash flow was HK$4.88 billion, of which Guangdong Land's net operating cash flow was HK$1.29 billion. After deducting Guangdong Land, the company's operating cash flow was HK$3.59 billion, which continued to improve steadily.

24H1's dividend rate is 65%, which is stable compared to 2023. According to the company announcement, the company adopted a new dividend policy in 2023, and the dividend rate was reduced from 84% in 2022 to 65% in 2023. In 2024, 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: We believe that the company's main water business is developing steadily, and that the core Dongjiang Water assets are of high quality. Along with the divestment of the real estate business, the company's performance and valuation are expected to improve markedly. Since the divestment plan still requires approval at the special shareholders' meeting (January 8, 2025), we now maintain the company's 2024-2026 profit forecast at HK$4.003/4.101/4.12 billion, and the current market value is 8.5/8.3/8.3 times the 2024-26 PE, maintaining a “buy” rating.

Risk warning: risk of failure to pass the special dividend payment plan, risk of renewal of the East Shenzhen project, exchange risk.