The impact of the health incident is gradually receding, and the water supply for industry and commerce is beginning to return to normal.

　　This article is sourced from the WeChat public account "Strategy Thinking", authored by Zhou Jianfeng, an analyst at Zhongtai International.

　　The impact of health events on the water supply business is gradually receding. Zhongtai International gives China Water Affairs (6.13, 0.18, 3.03%)(00855) a buy rating, with a target price of HKD 10.80.

　　The increase in residential water supply can offset the decline in industrial and commercial water supply.

　　Affected by health events, industrial and commercial activities in the mainland had previously slowed down. We estimate that the company's industrial and commercial water supply in the first quarter of 2020 also declined year-on-year; however, the residential water supply increased significantly year-on-year as most people stayed at home. Since residential water supply generally accounts for about 45% of the company's total water supply, we believe that the increase in residential water supply can ultimately offset the impact of the decline in industrial and commercial water supply on the company.

　　Industrial and commercial water supply is beginning 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 as different industries resume work and production, the company's industrial and commercial water supply will gradually return to normal starting in March.

　　The joint venture company Kangda Environmental (0.78, 0.01, 1.30%)(06136) announced ideal achievements for 2019.

　　China Water Affairs acquired a 29.52% stake in Kangda Environmental (not rated) in April last year and implemented a series of internal reforms to improve operational efficiency. Kangda Environmental announced ideal achievements for 2019 last Friday (27th), confirming the improvement results. Due to its focus on urban sewage treatment and withdrawal from other businesses, Kangda Environmental's revenue in 2019 decreased by 6.8% year-on-year to RMB 2.82 billion. However, due to increased operational efficiency, the net profit attributable to shareholders of Kangda Environmental increased by 24.2% year-on-year to RMB 380 million.

　　Reiterate the "buy" rating.

　　Considering (1) the impact of health events on the company is gradually receding; (2) Kangda Environmental's ideal achievements for 2019, along with some technical adjustments, we have raised the net profit attributable to shareholders for the fiscal years 2020-2022 (year-end: March 31) by 0.1%, 0.6%, and 3.4% respectively. We have also correspondingly raised the target price derived from discounted cash flow analysis (DCF) from HKD 10.50 to HKD 10.80, which corresponds to a price-to-earnings ratio of 9.2 times for the fiscal year 2021 and an upside potential of 87.2%. Reiterate the "buy" rating.

　　Risk warning: (1) Water sources are contaminated, (2) The increase in water prices is lower than expected, (3) Exchange rate risk.