Edison Investment Research Limited
London, UK, 23 July 2020
Edison issues outlook on China Water Affairs Group (855)
In FY20, despite a very challenging operating environment, China Water Affairs (CWA) delivered another year of growth for shareholders. Requirements for environmental expenditure in the Chinese water sector present opportunities for it to extend its track record of growing returns into FY21 and beyond. This opportunity does not appear to be reflected in CWA's current modest market rating of an FY21e P/E multiple of 5.6x.
Despite the persistence of COVID-19 and political related uncertainty in Hong Kong, following the better than anticipated FY20 results, we have nudged up our FY21 EPS forecasts for CWA from HK$1.06 to HK$1.08, implying a P/E of c 5.6x. The market appears to be taking a cautious view of CWA's growth prospects with a PEG ratio of 0.6x. Applying a PEG ratio of 1.0x (peer group: 1.1x) would indicate a valuation of HK$9.5/share. Our revised DCF model (EBIT growth FY20-25 12% CAGR and WACC 10%) indicates a valuation of HK$7.9/share.
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