China Water Affairs (00855 HK, CWA, or the "Company") 1HFY22 revenue increased 26.1% YoY to HK$6.47 billion. Shareholders' net profit increased 23.3% YoY to HK$1.02 billion. Results were better than expectation, mainly due to higher-than-expected revenue growth in core tap water supply business and direct drinking water business.Gross margin decreased by 2.1 ppts YoY to 39.0%, mainly due to the government's preferential policies for "five insurances and one housing fund" during the same period last year.
We expect city water supply and construction operation revenue to grow at a CAGR of 12.8% in FY21-FY24, in which tap water supply services revenue to increase at a CAGR of 17.6%. Although direct drinking water operation scale is small now, it experienced exponential growth, and is likely to become the second largest operation segment of the Company within 5 years. In addition, we expect environmental protection revenue to grow at a CAGR of 7.1% in FY21-FY24.
Our EPS estimates are HK$1.269, HK$1.421 and HK$1.588 for FY22-FY24, respectively. Given nationwide presence of its projects and ownership of a large network of water supply pipelines, the Company is better positioned to benefit from long-term development and growth of the water industry in China compared with local water players. In addition, the fast growing direct drinking water business is likely to raise the Companys overall valuation. We revise up TP to HK$11.50, representing 6.5x/ 6.0x/ 5.5x FY22/ FY23/ FY24 EV/EBITDA. Reiterate "Buy".