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Water Sector Update - Water demand growth to accelerate starting in 2023

Sector Reports
08/08/2022

We lower our 2022 water demand growth forecasts for BWE & TDM but expect growth to accelerate in following years. We lower BWE’s 2022 water sales volume growth from 10% YoY to 8% YoY following a 3.5% YoY increase in H1 2022. Similarly, we lower TDM’s water sales volume growth from 11% YoY to 9% YoY following a 6.6% YoY increase in H1 2022. However, we maintain our expectation for BWE’s volume to increase 12%-17% p.a. in the next five years compared to its historical pre-COVID average growth of 17% p.a. We also expect TDM’s volume to increase 12%-18% p.a. in 2023F-2026F compared to its historical pre-COVID average of 31% p.a.

Our expectation is based on Binh Duong Province continuing to attract FDI along with the economic recovery after the heavy impact of COVID-19 over the previous two years. In 7M 2022, Binh Duong was Vietnam’s top province for FDI attraction with USD2.6bn (+2x YoY). In addition, industrial water demand in Binh Duong should improve thanks to the rapid expansion of industrial production with new sizeable industrial parks coming into operation in 2022-2025F, including Vietnam Singapore Industrial Park (VSIP III) in Bac Tan Uyen District (1,000 ha) and Cay Truong Industrial Park (1,000 ha) in Bau Bang District. In addition, the 70-km Ring Road No. 3 project (investment capital of ~USD3bn) connecting HCMC, Dong Nai, Long An and Binh Duong provinces has received investment approval from the National Congress. This project is expected to break ground in mid-2023 and be put into operation in 2026, which should support Binh Duong’s long-term water demand thanks to population growth & relocation, immigration and increased industrial activity. 

We cut our target price for BWE by 3% to VND58,500/share but maintain our BUY rating. Our lower TP is due to a 3% downward revision in our aggregate earnings forecast for 2022-2026F following lower-than-expected H1 2022 volume and a 50-bp increase in our risk-free rate assumption. BWE’s DCF-based valuation looks compelling at a 2022F P/E of 15.3x, implied PEG of 0.7, and EV/EBITDA of 8.1x — a 20% discount vs regional peers.

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