China International Capital Corporation (CICC): Maintains a "buy" rating on China Water (00855), with a target price of HK$6.10.

China International released a research report stating that CHINA WATER (00855) adjusted its development strategy in response to the announcement in September to suspend the listing plan for the spin-off of the tap water and pipeline direct drinking water business. The company shifted from rapid project expansion to strengthening existing operations management in order to reduce capital expenditure. The continuous adjustment of tap water prices is expected to gradually reflect the results of price increases, and the company has more room to increase dividend payout ratios in the future. The target price is HK$6.10, representing a 29.1% upside potential, and the "buy" rating is maintained. Key points from China International: Adjusting strategy after suspending listing, focusing on strengthening operations management Prior to the quiet period, the bank conducted research and found that the company adjusted its development strategy following the announcement in September to suspend the listing plan for the tap water and pipeline direct drinking water business. The shift from rapid project expansion to strengthening existing operations management will mainly lead to a decrease in non-cash flow construction income contribution from the tap water and pipeline direct drinking water businesses. It is expected that the proportion of construction income to total income for the company will decrease 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 the tap water projects in Hubei Hanchuan and Hunan Huaihua with a total commissioned capacity of 65,000 tons/day. The company previously stated that over 20 tap water projects have initiated price adjustment applications awaiting government review, accounting for about one-third of the company's total tap water project capacity. The bank noted that some regions have issued price adjustment consultation notices or held hearings since June, such as Qianshan County in Jiangxi and Shishou City in Hubei. Since the price adjustment process generally takes about a year, the results of the water price increases are expected to gradually reflect starting from FY26. Room for increasing dividend payout ratio The bank expects a reduction in cash outflows from investment activities for the company in FY25-27 period. In addition, domestic and foreign interest rates are in a downward trend, making it easier for the company to obtain favorable new financing costs. For example, in August, the company issued a 3-year Panda bond worth 500 million yuan with a coupon rate of 3%. These factors will give the company more room to increase the dividend payout ratio in the future. Maintain "buy" rating Taking into account the factors mentioned above, the bank lowered the forecast for shareholders' net profit by 16.6% and 23.3% for FY25-26 respectively, and added FY27 forecast. Considering the market risk decline since the last update, the target price is rolled over to a 7.5 times FY26 target Price-to-Earnings ratio. The target price is HK$6.10, representing a 29.1% upside potential. Depending on the implementation of tap water price adjustments and dividend payout ratios, there may be a possibility of future valuation adjustments. The "buy" rating is maintained. Risk warnings: (1) Water sources are contaminated, (2) Water price increases are lower than expected, (3) Exchange rate risk.