Financial and Economic Intelligence APP learned that Zhongtai International released research reports stating that China Water (00855) adjusted its development strategy in response to the announcement in September to suspend the listing plan for the separation of tap water and pipeline direct drinking water business, shifting from rapid new project additions to strengthening existing operation management to reduce capital expenditures. In addition, the ongoing tap water price adjustment process is expected to gradually reflect the results of water price increases, and the company is expected to have more room for increasing dividend payout ratios in the future. The target price is HKD 6.10, corresponding to a 29.1% upside potential, maintaining a "buy" rating.

Key views of Zhongtai International are as follows:

Adjusting the strategy after suspending the spin-off listing, focusing on strengthening operation management.

Before the quiet period, the bank conducted research and learned that the company adjusted its development strategy in response to the announcement in September to suspend the listing plan for the separation of tap water and pipeline direct drinking water business, shifting from rapid new project additions to strengthening existing operation management to reduce capital expenditures. This strategy adjustment will mainly lead to a decrease in the non-cash flow construction income contribution of the tap water and pipeline direct drinking water businesses. It is expected that the proportion of construction income to total income of the company will fall from 45.5% in FY24 to 42.0%, 41.2%, and 39.8% in FY25-27.

Continuous tap water price adjustment process.

On the other hand, the tap water price adjustment process continues. In FY24, the company had four projects that received price increases, including two tap water projects in Hubei Hanchuan and Hunan Huaihua, with a combined capacity of 0.065 million tons/day in operation. The company previously stated that more than 20 tap water projects have initiated price adjustment applications pending government review, accounting for one-third of the company's total tap water project capacity. The bank noted that since June, some regions have already issued price adjustment solicitations or held hearings, such as Leiyang County in Jiangxi and Shishou City in Hubei. As the price adjustment process generally takes about a year, it is expected to gradually reflect the results of water price increases starting from FY26.

Increase the dividend payout ratio adjustment space.

The bank expects a reduction in cash outflow from investment activities of the company during FY25-27. In addition, domestic and foreign interest rates are declining, making it easier for the company to obtain favorable new financing costs. For example, in August, the company issued a 3-year RMB 0.5 billion panda bond with a coupon rate of 3%. These factors will give the company more room to increase the dividend payout ratio in the future.

Maintain a 'Buy' rating.

Considering the above factors, the bank reduced the shareholder net profit forecast for FY25-26 by 16.6% and 23.3%, and added the FY27 forecast. Rolling forward to a 7.5x FY26 target PE ratio relative to the last updated market risk decline. The target price is 6.10 Hong Kong dollars, corresponding to a 29.1% upside. Depending on the implementation of water price adjustments and dividend payout ratios, the possibility of raising valuation in the future is not ruled out. Maintain a "buy" rating.

Risk warning: (1) Contamination of water sources, (2) Lower-than-expected increase in water prices, and (3) Exchange rate risk.