1H20 results in line with market forecastGuangdong Investment (GDI) revenue rose 32% YoY to HK$9,486mn;net profit attributable to shareholders declined 12% YoY toHK$2,369mn, in line with the market forecast. An increase inproperty sales partially offset the decline in the department store,hotel, and toll-road businesses. GDI declared a HK$0.176 dividendper share, up 2% YoY despite the decline in net profit.
　　Hotel management and energy segment recovered in 2Q20 asdomestic travel resumed and coal price decreased. The hotelbusiness made a profit before tax (PBT) of HK$99mn in 2Q20(HK$34mn loss in 1Q20) and the energy segment increased threetimes to HK$135mn (vs. HK$33mn in 1Q20).
　　Highway and department stores remain weak in 2Q20 as fee wavingarranged by government. The 79 days toll-free period ended May 6and the impact extended into 2Q20 (1H20 toll-road daily volume andPBT decreased 44% and 78% YoY). Department store PBT deceased23% YoY as TJ Tianhe’s occupancy rate decreased to 91%.
　　Trends to watch
　　Fast growth in water and property development businesses partiallyoffset COVID-19 impact and may smooth full year result. PBT ofthese two segments increased 93% and 23 times YoY in 1H20,partially offsetting the decline in other business. We expect theexpanding water business (+28% water supply and +15% sewagecapacity YoY) and continuing property sales at Panyu Wanbo CBD andYuehai Land (1H20 PBT rises 35x YoY) to help smooth 2020 results.
　　Construction of Xijiang water supply project started; water supplyvolume could nearly double. On March 18, the Xijiang water supplyproject (transfers water from the Xijiang River to Shenzhen and HongKong) started. Guangdong Development Holding (parent company ofGDI) expects to complete it by 2024 and estimated the volume at1,708 mn mt/year. We expect the project to consolidate with GDIafter completion as required by the term “avoid businesscompetition” and to double the existing water supply volume.
　　Financials and valuation
　　We maintain our 2021 earnings forecast and lower our 2020 earningsforecast 3.6% from HK$5,653mn to HK$5,448mn to take intoaccount an IP fair value loss of HK$306mn in 1H20. The stock istrading at 15.4x 2020 and 14.2x 2021 P/E. We maintainOUTPERFORM and our TP of HK$17.40 (20.9x 2020 P/E and 19.3x2021 P/E), offering 35.7% upside. Risks: Renegotiation of Hong Kongwater supply contract may result in new terms.