Introduction to this report:

The company's capital expenditure was significantly reduced, and BOT construction revenue declined sharply year over year, causing the 2024 interim results to fluctuate.

Operations have remained steady, and the volume of the water treatment business has increased and prices have risen. High percentage dividends, stable dividends.

Key points of investment:

Maintain an “Overweight” rating. We maintain our forecast net profit for 2024-2026 at RMB 1.966, 2.04, and RMB 2.15 billion, respectively, and the corresponding EPS of 0.20, 0.20, and 0.21 yuan, respectively. We reaffirm that the company is the leader in the water treatment industry with the largest production capacity in the country, and the sewage and water supply business is growing steadily; capital expenditure has entered a downward cycle, improved cash flow, stable high dividends, and obvious characteristics of high dividends, and is expected to usher in a revaluation.

The 2024 interim results were in line with expectations, and construction revenue declined substantially. The company announced its 2024 interim results announcement. 2024H1 achieved revenue of 11.309 billion yuan, a year-on-year decrease of 6%; attributable net profit of 1.122 billion yuan, a year-on-year decrease of 18%. The decline in revenue was mainly due to a 49% year-on-year decline in revenue from construction services to 1.642 billion yuan; revenue from urban sewage and water supply services increased steadily.

The operation is steady, and the water treatment business volume has increased and prices have risen. 1) By the end of the first half of 2024, the company's total design capacity for water treatment was 44 million tons/day, including sewage, water supply, reclaimed water, and seawater production capacity was 2484, 14.34, 4.52, and 0.3 million tons/day, respectively. Among them, the production capacity of sewage, water supply, reclaimed water, and seawater desalination was 1968, 11.2, 2.42 and 0.3 million tons/day, respectively. 2) Sewage:

Sewage treatment volume increased 5% year on year; actual average water treatment contract price was 1.51 yuan/ton, a slight increase from the average price of 1.49 yuan/ton in 2023; gross margin of sewage treatment improved by 2 pct to 59% year on year, mainly due to lower raw material costs and electricity costs. 3) Water supply: The water supply volume increased 4% year on year; the actual average contract price of water supply was 2.16 yuan/ton, a slight increase from the average price of 2.15 yuan/ton in 2023; the gross margin of water supply fell 4 pct to 43% year on year, mainly due to the increase in water pipe construction and renovation. 4) BOT construction: In the first half of 2024, the company's water plants were mainly located in Qingdao, Changsha, Guangxi, Kunming, Beijing, etc. The company focused on asset-light projects and reduced investment in the construction of BOT water projects. BOT construction revenue fell 57% year-on-year to 1.258 billion yuan.

A high percentage of dividends, stable dividends, and a significant decline in capital expenditure. 1) 2024H1's capital expenditure was 1.573 billion yuan, a significant decrease from 3.618 billion yuan in the same period last year. 2) The company plans to pay an interim dividend of HK$0.07 per share, the same as the same period last year, corresponding to a cash dividend rate of 60%.

The company's high dividend expectations are stable. Currently, the dividend rate is TTM 7.04%, and the characteristics of high dividends are outstanding.

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.