Domestic & Int'l Municipal Water Stocks: Fundamentals & Industry Analysis
The fundamentals of municipal water utilities are often solid, with high certainty of future performance and strong counter-cyclical attributes.
This gives them a significant investment advantage during periods of economic downturn.
This article includes more than 30 global municipal water utility companies, mainly from the United States, the United Kingdom, France, Brazil, and other regions.
Below, let's look at the latest fundamentals and valuations of these stocks from a global perspective, as well as which A-share stocks are worth paying attention to!
(1) Global Water Utilities: Represented by France's Veolia and Suez, these two companies have a history of over a hundred years.
They have a global perspective with a trans-regional industrial layout, and their business includes not only municipal water utilities but also solid waste, energy, and more.
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Their revenue scale is very large, but unfortunately, their profits are thin, so their market value is not as high, only over a hundred billion.
Surprisingly, these two French companies entered China in the 1990s.
It wasn't until 2002-2015 that foreign capital gradually withdrew from the Chinese water market.
(2) Regional Water Utilities: Represented by American Water Works, Severn Trent, United Utilities, and SABESP, they are all regional enterprises.
Their revenue scale is comparable to that of a leading provincial water utility in China.
The market gives them a good valuation, and their profitability is also good, so their market value is significantly ahead of domestic companies.
Among them, American Water Works is the largest water utility company in the United States, with a market value of over 200 billion.
Even with such a large scale, its market share is less than 5%, indicating that the American water market is very fragmented.
About 80% of the water supply market in the United States is owned by local municipalities, half of which serve small communities of less than 500 people.
(3) Our Country's Water Utilities: There are more than 20 listed water utility companies in our country, most of which have a small market value.
Some larger companies include Chongqing Water, Capital Environment, and Beijing Enterprises Water, but their market values are less than 30 billion.
Although their market value is small, the vast majority of them have good profitability and growth.
The domestic water market also has a fragmented characteristic, with most provinces/cities/counties establishing their own water companies.
These listed companies are mostly transformed from former public institutions.
Many years ago, there was a wave of state-owned asset securitization, so there are more listed water utility companies.
The business composition of domestic water companies basically includes water supply and sewage treatment, and the gross profit margin of sewage treatment is higher than that of water supply.
In addition, water utility companies will also involve public utility fields such as gas energy and solid waste treatment.
(1) Industry Competitive Landscape: The municipal water utility industry usually has regional monopolistic characteristics.
First, it is franchised and strongly regulated by the government; second, the cost of building new water supply systems is very high, and there are pipeline restrictions, so there is regional exclusivity.
The domestic market competition pattern shows the characteristics of small enterprises that monopolize regional markets + leading enterprises that develop across regions.
State-owned enterprises and central enterprises with strong strength in developed areas, with the help of capital and technology advantages, invest and expand markets in other regions.
In terms of individual regional markets, water utility companies basically have no direct competitors and do not need to face national and global competitive pressures, which is much better than the power and energy markets, which are also public utilities.
(2) Water Utility Industry Development Characteristics: Water utilities belong to the weak cycle industry.
The overall trend of our country's water market is increasing, and the historical compound growth rate of more than 10% is no problem, with some fluctuations in the growth rate of specific years.
Subdivided, the demand for domestic water is relatively stable, while the demand for industrial water is greatly affected by the economy and policies.
However, the industry's internal growth rate is slow, and the trend of diversification is significant.
The improvement of industry concentration is one of the investment opportunities.
The internal growth rate of old businesses such as water supply and sewage is only about 10% on average, and external development is mostly in the direction of gas, solid waste, and other directions for mergers and acquisitions.
External development is generally asset injection or mergers and acquisitions, which are all one-time opportunities, and the subsequent growth still depends on the growth and profitability of the injected assets.
(1) Stable Industry Investment Returns: Although municipal water utility stocks have a large fixed asset renewal/investment in the early stage, the later operation and maintenance costs are low, so the net cash flow from operating activities of enterprises is generally good, and the net present value ratio is very high.
However, there is a big problem with domestic companies: fiscal payment delays, slow revenue collection, and a large scale of accounts receivable.
Because of this, the dividend rate of water utility stocks is generally high.
Although the dividend rate is slightly worse than the coal and other sectors, it has the advantages of high stability and sustainability.
Moreover, once water utility companies enter a mature and stable operation period, there will be no large capital expenditures, and the dividend payout ratio is expected to increase year by year.
(2) Large Profit Gap between Domestic and Foreign: The profitability of water utility companies in Europe is very poor, with a net profit margin generally below 5%.
If the operation efficiency is not high, it is not surprising to have losses.
The profitability in the United States and Brazil is much better, with an average net profit margin of more than 20%, which is similar to domestic enterprises.
A possible reason is that the water fee pricing logic in the United States is similar to ours.
The profitability and performance growth of domestic water utility companies are not bad.
First, the population density of the region is here, and the cost is greatly advantageous by sharing per capita; second, the domestic water fee is priced according to the logic of "cost + allowed return rate", which ensures the profitability of enterprises.
Therefore, water utilities are a good business in China!
Compared with developed countries, the water price in our country is relatively low, and the price in some areas has not been increased for many years, and there is a certain price increase opportunity in the future.
If so, the future performance expectations will be even better!
The valuation difference between domestic and foreign water utility companies is too large, which reflects the different cognition and risk preferences of investors in different capital markets.
(1) Foreign Capital Markets: The price-earnings ratio is basically more than 20 times, and the price-to-book ratio is mostly more than 2 times.
Take American Water Works as an example, the performance growth rate is less than 10%, and the return on equity is only 9.4%, but the price-earnings ratio is given to 30 times, and the price-to-book ratio is given to 2.8 times.
In the past few years, the valuation of American Water Works has continued to rise, and the stock price has risen for more than ten years, which is a famous long bull stock.
In the past two years, due to interest rate hikes, the stock price has fallen slightly.
(2) Hong Kong Stock Market Valuation: A few water utility companies listed in Hong Kong have not performed well in performance growth, but the profitability is solid, and the dividend rate is extremely high.
As a result, the valuation given by the Hong Kong market is extremely poor, with the price-earnings ratio mostly below 5 times, and some are only two or three times.
Hong Kong's distrust of domestic state-owned assets has reached the extreme, and other sectors are the same, but it's not so tragic.
(3) A-Share Valuation: In recent years, the PE of the water utility sector has been declining (performance has increased, but the stock price has not increased), and now the median price-earnings ratio is only about 14 times.
You know, seven or eight years ago, most were more than 30 times.
The price-earnings ratio can be roughly divided into three intervals: 7-10 times, 10-15 times, and more than 20 times.
Overall, the valuation center should be around 10 times, because the large market value leaders are concentrated nearby.
Relative to the stock fundamentals, this valuation is obviously too low.
Chongqing Water is considered a leader with a unique PE of more than 20 times, mainly due to a significant decline in performance.
Other stocks with smaller market values, because of the large fluctuations in performance, the price-earnings ratio is larger, which is normal and not representative.
If you look at water utility assets from a single indicator, they may not be at the forefront of state-owned assets.
However, looking at it from multiple angles, water utilities are definitely high-quality assets with very high balance.
They have safety, stability, sustainability, counter-cyclical nature, etc.
Against the background of declining interest rates, the intrinsic value of such assets is increasing, and the attractiveness is increasing!
Many municipal water utility stocks in A-shares have good fundamentals.
Overall, I personally like "Chongqing Water, Xingrong Environment, Hongcheng Environment" more.
(1) Chongqing Water 601158 is the largest market value of genuine water utility stocks in A-shares.
It is controlled by Chongqing state-owned assets, with the top two shareholders holding 88%, and the top ten shareholders holding 91%, with a high degree of equity concentration.
Revenue structure: in the first half of 2024, the sewage treatment sector accounted for 62%, with a gross profit margin of 31.8%.
The water supply sector accounted for 31%, with a gross profit margin of 26.6%.
There are also 4% of sludge treatment and other businesses, with a gross profit margin of 53%.
Chongqing City contributed 83% of the revenue, and other provinces such as Yunnan and Sichuan also have 5% of the revenue.
Performance: in 2023, revenue decreased by 6.7%, and profits decreased by 43%.
In the first half of 2024, revenue decreased by 11.2%, and profits decreased by 41%.
The gross profit margin is 28.8%, down 5.6 percentage points year-on-year; the net profit margin is 12.8%, down 6.6 percentage points.
The performance has changed significantly in the past two years because the government has no money, and the sewage treatment price has been greatly reduced, which is a major bearish.
The debt ratio is 51%, mainly long-term loans, with a financial cost rate of 2.8%, accounts receivable accounting for only 7.2% of annual revenue, and the cash flow is excellent.
The latest dividend rate is 4%, the dividend payout ratio is 75%, there has been no new financing since listing, and the TTM price-earnings ratio is 25 times.
(2) Capital Environment 600008 Beijing state-owned assets are the largest shareholders, holding 46%.
The top ten shareholders only hold 52%, and there are several natural person shareholders, with a general degree of equity concentration.
Revenue structure: in the first half of 2024, sewage treatment accounted for 35%, with a gross profit margin of 39%.
Solid waste treatment accounted for 23%, with a gross profit margin of 37%.
Water supply-related three businesses accounted for 30%, with different gross profit margins.
Water environment management is 5.3%, and air management is 4%.
The market covers the whole country: the North China region accounts for 27%, the East China region is 29%, the Central South region is 17%, the Southwest region is 20%, the Northeast region is 2%, the Northwest region is 1%, and the overseas market accounts for 2%.
Performance: in 2023, revenue decreased by 3.8%, and profits decreased by 49% (non-deduction increased by 45%), because there was a benefit of more than 2 billion yuan from the disposal of a New Zealand company in 2022.
In the first half of 2024, revenue increased by 3.4%, and profits increased by 21%.
The gross profit margin is 35.3%, up 0.24 percentage points year-on-year; the net profit margin is 13.5%, up 1.7 percentage points.The company's asset size has exceeded 100 billion, with a debt ratio of 65%, a financial expense rate of 8.5%, and accounts receivable accounting for 78% of annual revenue.
The latest dividend yield is 3.6%, and the dividends paid last year decreased.
The dividend payout ratio is 46%, and financing after going public has been very frequent (mainly used for capital replenishment and engineering projects), with a TTM P/E ratio of 11 times.
(3) Xingrong Environment (000598) went public through a reverse takeover in 2010, with the major shareholder Chengdu State-owned Assets holding 42%, and the top ten shareholders holding 65%.
Revenue structure: In the first half of 2024, tap water supply accounted for 36%, with a gross margin of 44%.
Wastewater treatment accounted for 43%, with this part of the income growing rapidly and a gross margin of 42%.
Environmental protection fields such as waste incineration and sludge disposal accounted for 19%, with a gross margin of 42%.
The Southwest region contributed 89% of the revenue.
Performance: In 2023, revenue increased by 6%, and profit increased by 14%.
In the first half of 2024, revenue increased by 15.2%, and profit increased by 9.6%.
The gross margin was 43.1%, an increase of 1.5 percentage points year-over-year; the net profit margin was 23.8%, a decrease of 1.2 percentage points.
Xingrong Environment's profitability quality is considered high in the industry.
The debt ratio is 59%, the financial expense rate is 4.4%, accounts receivable account for 62% of annual revenue, with slightly poor collection, but the net cash flow from operations is very impressive.
The latest dividend yield is 2.7%, with a significant increase in dividends, and a dividend payout ratio of only 28%.
Financing is not frequent, with a TTM P/E ratio of 10 times.
(4) Hongcheng Environment (600461) went public through a reverse takeover in 2008, with Jiangxi Nanchang State-owned Assets holding a combined 47%, and the top ten shareholders holding 60%.
Revenue structure: In the first half of 2024, new energy from gas accounted for 36%, with a gross margin of 12.3%.
Wastewater treatment accounted for 31%, with a gross margin of 42%.
Tap water accounted for 11.5%, with a gross margin of 47%.
Solid waste treatment accounted for 10%, with a gross margin of 39%.
Jiangxi Province contributed 91% of the revenue, Zhejiang 5.4%, and Liaoning 1.6%.
Performance: In 2023, revenue increased by 3.4%, and profit increased by 12.6%.
In the first half of 2024, revenue increased by 1.9%, and profit increased by 3.4%.
The gross margin was 32%, an increase of 0.3 percentage points year-over-year; the net profit margin was 17.2%, a decrease of 0.1 percentage points.
The historical performance growth curve is very beautiful, with many contributions from asset acquisitions.
The debt ratio is 60%, the financial expense rate is 2.6%, accounts receivable account for 28% of annual revenue, with slightly poor collection, but the net cash flow from operations is not a problem.
The latest dividend yield is 4.9%, with stable dividends, and a dividend payout ratio of 50%.
Financing after going public has been very frequent (for issuing shares to acquire assets), with a TTM P/E ratio of 10 times.