London, UK, 13 September 2017

Edison issues outlook on China Water Affairs Group (855)

China Water Affairs (CWA) delivered a CAGR of 24.7% in top-line growth and a CAGR of 23.4% in EBITDA in FY12-17. We expect its growth story to continue with volume/price increases in the Chinese market and the opportunity to acquire underperforming assets from local governments. We forecast revenue to increase 25% in FY18 and 20% in FY19 (vs consensus of 19% and 14%, respectively), on the back of a 50% increase in capex in FY17 under service concession contracts. Its net debt of HK$6.2bn and net debt to equity ratio of 70% are at a historical high. The management of capex spending and the pace of acquisitions will be a delicate balancing act against the level of leverage. We reduce our fair value by 6% from HK$7.12/share to HK$6.71/share based on sum-of-parts EV/EBITDA valuation as we lower our revenue forecasts for FY18 and FY19 by 6% and 7%, respectively (given CWA's reported FY17 sales were 9% below our previous estimates).

We derive our fair value with a sum-of-parts EV/EBITDA valuation and lower our fair value by 6% from HK$7.12/share to HK$6.71/share (primarily as a result of our 6% and 7% downward revision of FY18e and FY19e revenue forecasts, respectively). Our net debt calculations are based on management's guidance regarding the likely recovery of HK$860m loan to China City Infrastructure Group in FY18e and combined capex and acquisitions at c HK$2bn over the next three years.

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