Soochow Securities reiterated its "Buy" rating on CHINA WATER (00855), highlighting the company's robust growth in core water supply operations, minimal receivables risk, declining capital expenditures, and strengthening free cash flow, which enhances its dividend capacity. Key insights from the report include:

**Resilient Core Operations and Cost Efficiency** CHINA WATER reported interim results for FY2026, with total operating revenue reaching HKD 5.183 billion and net profit attributable to shareholders at HKD 571 million. The company improved cost efficiency, reducing sales and administrative expenses by 9.0% YoY to HKD 437 million and financial expenses by 17.6% YoY to HKD 352 million. Its debt-to-asset ratio also declined by 2.5 percentage points to 64.3% at the end of FY26H1.

**Segment Performance Breakdown (FY26H1)** 1. **Urban Water Supply**: Revenue of HKD 3.271 billion and segment profit of HKD 941 million, impacted by reduced installation, maintenance, and construction projects. 2. **Direct Pipeline Drinking Water**: Revenue of HKD 263 million and segment profit of HKD 75 million. 3. **Environmental Protection**: Revenue rose 8.7% YoY to HKD 832 million, with segment profit up 29.7% YoY to HKD 367 million, driven by increased income from the Dayawan Meifu project in Huizhou (operating revenue: HKD 91 million, +11.9% YoY). 4. **EPC Construction**: Revenue of HKD 398 million and segment profit of HKD 158 million. 5. **Property**: Revenue of HKD 170 million and segment profit of HKD 5 million.

**Water Supply Growth and Tariff Adjustments** - **Water Supply Operations**: Revenue grew 4.5% YoY (5.6% in RMB terms) to HKD 1.801 billion, with water sales volume up 5.0% to 760 million tons. As of September 30, 2025, operational capacity for tap and raw water projects totaled 9.28 million tons/day (+7.8% YoY), with 850,000 tons/day under construction and 4.03 million tons/day planned. - **Tariff Hikes**: Average water price stood at HKD 2.37/ton. Eight projects completed tariff adjustments in FY26H1, with over 20 more initiating the process, expected to boost margins.

**Direct Drinking Water Segment Optimization** Revenue breakdown: 1. Operations: HKD 185 million. 2. Installation/Maintenance: HKD 7 million. 3. Construction: HKD 53 million. 4. Equipment Sales: HKD 19 million (+34.1% YoY). 5. Bottled Water: HKD 4 million (+145.4% YoY).

**Declining Capital Expenditures and Stable Dividends** FY26H1 capital expenditures fell 31.8% YoY to HKD 1.243 billion. The interim dividend remained steady at 13 HK cents per share, with a trailing dividend yield of 4.8%.

**Risks**: Potential delays in project execution, slower-than-expected tariff hikes, or higher capital expenditures. *(Valuation date: November 28, 2025)*