20170720-广发证券_香港_-粤海投资-00270.HK-Cash_is_king__initiate_with_Accumulate_and_TP_of_HK_12.0_26页_1mb

报告摘要

Guangdong Investment (270 HK) Equity Research Summary

Core Content

Guangdong Investment (GDI) is a company with a strong focus on the water supply and PPP (Public-Private Partnership) projects in China, particularly in Guangdong and Hainan provinces. The report initiates a "Accumulate" rating with a target price of HK$12.00, implying a 16x/15x P/E multiple for 2018/2019 earnings. The stock currently trades at 14.6x/14.3x P/E, which is higher than the industry average, but the report argues that GDI's defensive business model and strong financial position justify the premium valuation.

Main Profit Contributor: Water Business

Approximately 62% of GDI's total revenue and 63% of its operating profit come from its water business.
The Dongshen water supply project is a major revenue driver, contributing 87% of GDI's water segment revenue, and 54% and 57% of the company's total revenue and pretax profit in 2016.
The project has a 3-year predetermined revenue model, with expected annual growth of 3% in 2018–2020.
The pretax margin is expected to rise from 55% in 2016 to 60% in 2020, driven by improved operating efficiency and cost control.
The water supply to Hong Kong is expected to decline by 4.4% YoY from 2016–2020 due to increasing scarcity in Guangdong, while supply to Shenzhen and Dongguan will increase by 27%.

Key Factors Supporting the Water Business

Pricing Power: GDI has the ability to increase water tariffs, as Hong Kong's water tariff growth is slower than in other cities, and the city's government is expected to accept higher purchase costs due to its high living standards.
Resilient Demand: Nearly 75% of Hong Kong's water supply comes from Dongjiang, and with a projected 40% increase in demand by 2030, the city is expected to maintain its reliance on this source.
Water Shortage Risk: The supply of Dongjiang water is expected to meet only ~85% of the demand in the southern Guangdong region by 2020, raising concerns about potential water shortages and the need for secure supply contracts.

PPP Projects: Strategic Growth Opportunities

GDI has secured HK$6.4bn in PPP projects, primarily involving A-grade highways and sewage treatment facilities in Hainan and Guangdong.
The Dongguan PPP project is highlighted as the flagship project, with partial operation starting in mid-2017 and expected to generate stable cash inflow.
The IRR for these projects is projected to reach 10%, 2% higher than the current level, and will gradually drive EPS growth as the entire HK$6.4bn investment is completed by 2020.
The report expects PPP projects and M&A to drive capacity expansion and improve the bottom line in the long run.

M&A Strategy and Water Supply Capacity Expansion

GDI has acquired 15 water projects through its subsidiary Water Group HK, with total water supply capacity of 2.44m tpd and sewage treatment capacity of 393k tpd.
These projects were mostly acquired at discounted prices from third parties or its parent company, with significant potential for synergy and scale benefits.
GDI also has 8 water projects under construction, with 210k tpd of capacity expected to be completed in 2017.
By 2018, the company's water supply capacity is expected to grow by 9% YoY, and sewage treatment capacity by ~30%, reaching 511,000 tpd.

Financial Highlights

FCF Yield: Current stock price implies an 8.8%–9.4% FCF yield, which is considered very attractive.
Dividend Yield: GDI's dividend yield is expected to rise from 4.1% to 4.8% over 2016–2020, supported by recurring FCF growth.
Dividend Payout Ratio: The dividend payout ratio is expected to improve by 7pp annually.
Net Cash Position: GDI has a strong net cash position of HK$1.17bn, supporting its M&A and expansion strategy.

Other Key Projects

Xingliu Expressway: Acquired in 2015, this A-grade highway contributes ~6% of GDI's total revenue and pretax profit.
The project has a pretax margin of 60%+ and is expected to see further traffic growth due to rising private vehicle ownership in Guangxi.
Guangdong Land Holdings Limited (GDL): Acquired a 73.82% stake in April 2017, with planned total site area of 66,526sqm and planned GFA of 432,051sqm in Shenzhen.
The Ruyingju Project in Guangzhou has 917 residential units and 651 parking spaces, with ~90.2% of the saleable area sold by the end of 2016.

Conclusion

GDI is well positioned to benefit from PPP projects and M&A opportunities, supported by its strong balance sheet, diversified business model, and strategic geographic exposure. The company's defensive water business and high dividend yield make it an attractive investment, especially in a low-growth environment. With a potential for margin expansion, capacity growth, and stable cash flows, GDI is expected to deliver consistent returns and value creation over the next few years.