Tapping higher growth
We increase our valuation for China Water Affairs (CWA) to HK$6.5 per share after upgrading our earnings forecasts. We believe CWA, as the only listed equity play on Chinese tap water supply, offers investors exposure to a unique and attractive set of industry fundamentals. Strong shareholder returns driven by high-teens earnings growth are likely to continue as CWA grows capacity. Capital expenditure requirements will remain elevated as capacity growth continues. However, given CWA’s strong balance sheet and high operating cash returns, we believe it will be able to execute its growth plan without weakening its balance sheet.China Water Affairs Group Ltd, formerly China Silver Dragon Group Ltd, is an investment holding company principally engaged in city water supply operation and construction. The Company operates its business through three segments. The City Water Supply Operation and Construction segment engages in the provision of water supply operation and construction services. The Environmental Protection segment engages in the provision of sewage treatment and drainage operation and construction services, solid waste and hazardous waste business, environmental sanitation and water environment management. The Property Development and Investment segment engages in the development of properties for sale and investment in properties for long term rental.
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