Equity Research | Environmental Jul 20, 2017 Guangdong Investment (270 HK) Accumulate (initiation) Cash is king; initiate with Accumulate and TP of HK$12.0 Target price: HK$12.00 Juilice Zhou Defensive water business Around 62% of GDI’s total revenue and approximately 63% SFC CE No. BGR107 of its operating profit are generated from its water business. The Dongshen water supply
[email protected] project, which supplies raw Dongjiang water to Hong Kong, Shenzhen and Dongguan, +852 3719 1111 contributed approximately 87% of GDI’s water segment revenue as well as 54% and 57% of company’s total revenue and pretax profit in 2016. We expect Dongshen project’s business model with three-year predetermined revenues to continue, with project revenue GF Securities (Hong Kong) Brokerage Limited to grow 3% per annum during 2018-2020 as the company has the pricing power to achieve 29-30/F, Li Po Chun Chambers a material tariff hike. In addition, we expect the project’s pretax margin to increase further 189 Des Voeux Road Central by 2pp to 60% in 2020, boosted by improved operating efficiency and better cost control, Hong Kong to contribute ~57% of company’s total pretax profit. We think GDI is well positioned to capture opportunities arising from the accelerating introduction of PPP projects in China, given its: 1) strong net cash position and FCF, 2) track record of integrated experience in water, tap water and sewage treatment, as well as road construction and operation, and 3) favorable SOE background. So far, the company has secured PPP projects worth a total of HK$6.4bn, mainly involving the construction and operation of A-grade highways and sewage treatment facilities in Hainan and Guangdong province.