Guangdong Investment is a high-quality enterprise under the Guangdong Provincial Government. Itcurrently operates 4 business segments and has a 30-year concession for Dongshen Water SupplyProject. The return on major assets is high and dividends are continuously increasing with risingearnings, realizing double boost of earnings and valuation. We believe that the company's stablereturn on assets and continuously optimized financial conditions will ensure the company to achievea continuously increasing annual dividends. and both earnings and valuation lifts are still twoimportant factors driving the company's share price up. We initiate coverage of GuangdongInvestment, with an “outperform” rating, and the SOTP valuation gives a target price of HKD 18.55.
　　The company has a 30-year concession for the Dongshen Water Supply Project and a “Package DealLump Sum” payment model for Hong Kong water supply. The Guangdong Provincial Government andthe Hong Kong Government regularly agree on the total annual water tariff for the next three yearsevery three years. The Dongshen project is the company's largest source of profit, accounting formore than 60%, and its steady growth is expected to continue at least until 2030. In addition, thecompany actively develops raw water supply, tap water supply and sewage treatment projects inChinese mainland. Most of the projects also have a reasonable rate of return, driving the company'swater resources sector to continue to grow.
　　In the property sector, the company promotes earnings growth through high-quality stock projectsand new projects. In 2020, in addition to the stable rental income brought by the shopping malls andoffice buildings operated by itself, it can also record more property sales income. The company alsomaintains a stable and steady development strategy in the property sector, mainly through theoperation and development of high-quality stock projects and a moderate amount of new projects .
　　The company’s assets on other business segments are mature and with high quality, and the overalloperation is relatively stable. Among them, Xingliu Expressway has brought stable performancecontribution to the company. Two thermal power plants benefit from the decline in coal price andare expected to achieve profitability improvement. The department store operation segment stillrelies on a mature department store to contribute major performance, and the overall business isstill subject to competitive pressures. Among the five hotels operated by the hotel sector, threehotels in the Mainland are relatively stable, but the two hotels in Hong Kong were affected by socialevents beginning in mid-2019, and their earnings declined significantly.
　　Potential risks: Tariff of water to Hong Kong is lower than expected in the future; new projectsconstruction is slower than expected; and property policies are tightened sharply.