This article is from the WeChat public account "Strategic Thinking", and the author is Zhou Jianfeng, an analyst at Zhongtai International.

The impact of the sanitation incident on the water supply business gradually receded. Zhongtai International gave China Water (6.13, 0.18, 3.03%) (00855) a buy rating and a target price of HK$10.80.

The increase in domestic water supply can offset the impact of the decline in industrial and commercial water supply

Affected by the health incident, the industrial and commercial activities in the Mainland have slowed down earlier. We estimate that the company's industrial and commercial water supply in the first quarter of 2020 will also drop year-on-year; however, the domestic water supply for residents has risen significantly year-on-year due to the majority of people staying at home. Based on the fact that residents' domestic water supply generally accounts for about 45% of the company's total tap water supply, we believe that the ultimate increase in residents' domestic water supply can offset the impact of the decline in industrial and commercial water supply on the company.

Industrial and commercial water supply began to return to normal

In the past, the company's industrial and commercial water supply quickly returned to normal levels after the Spring Festival holiday. We believe that with the resumption of work and production in different industries, the company's industrial and commercial water supply began to gradually return to normal in March.

The associate company Kangda Environmental Protection (0.78, 0.01, 1.30%) (06136) announced ideal 2019 results

After China Water acquired a 29.52% stake in Kangda Environmental Protection (unrated) in April last year, it carried out a series of internal reforms to improve operational efficiency. Kangda Environmental announced its ideal 2019 performance last Friday (27th), confirming the effectiveness of the improvement. Due to its focus on urban sewage treatment and fading out of other businesses, Kangda Environmental's 2019 revenue fell 6.8% year-on-year to RMB 2.82 billion. Due to improved operating efficiency and improved profit margins, Kangda Environmental's 2019 shareholder net profit increased by 24.2% year-on-year to RMB 380 million.

reiterated "Buy" rating

Taking into account (1) the impact of health incidents on the company is gradually receding; (2) Kangda Environmental Protection's ideal 2019 performance, plus some technical changes, we have adjusted upwards for the fiscal year 2020-2022 (year end: March 31) ) Shareholders’ net profit is 0.1%, 0.6%, 3.4%. We have accordingly increased the target price calculated by the discounted cash flow analysis (DCF) from HK$10.50 to HK$10.80, which corresponds to 9.2 times the 2021 fiscal year P/E ratio and 87.2% upside potential. Reiterate "Buy" rating.

Risk warning: (1) Water source is polluted, (2) Water price increase and progress are lower than expected, (3) Exchange rate risk.