Zhongtai International issued an updated report on China Water Affairs following its earnings release, adjusting the target price while maintaining a 'Buy' rating

[Zhongtai International] China Water Affairs (855 HK) Update Report: FY26 Earnings Miss Expectations, but Water Tariff Hikes Continue Progressing (Rating: Buy; Target Price: HK$5.04) (2026-06-30).pdf991.9K

Key Points:

1. Earnings below expectations, primarily dragged down by non-operating factors

FY26 attributable net profit declined by 8.2% year-over-year to HK$990 million, 11.3% below our forecast, mainly due to an impairment charge of HK$1.4 billion related to non-core property development activities and the company’s proactive scaling back of certain low-synergy direct drinking water business initiatives.

2. Core operating businesses show steady growth, supported by both volume and pricing

Revenue from water supply and wastewater treatment operations increased by 7.7% and 5.7% year-over-year, reaching HK$38.0 billion and HK$6.8 billion, respectively; water sales volume rose 3.5% year-over-year to 1.55 billion cubic meters. During the period, tariff adjustments were approved for 10 water supply projects, meeting the full-year guidance of 8–10 projects.

3. Capital expenditures continue to decline

Capital expenditures related to water infrastructure projects have decreased from HK$3.0 billion in FY25 to HK$2.0 billion in FY26, with the company guiding for a further reduction to HK$1.5 billion in FY27, clearly indicating a trend of capital expenditure contraction.

4. Downgrade earnings forecasts, adjust target price, maintain 'Overweight' rating

Based on the above factors, we have lowered our FY27–28 net profit attributable to shareholders forecasts by 8.2% and 10.0%, respectively (see Charts 3 and 4), reduced the target price from HK$6.52 to HK$5.04, and maintained an 'Overweight' rating.

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