We attended BWE’s analyst meeting on August 6. Overall, we see slight downside risk to our earnings forecast, due to a potentially slightly lower water tariff, pending more developments and review.

Water segment: BWE’s management anticipates a water tariff hike of at least 3% p.a. for the 2025-2028 period to be approved by the end of 2024, compared to our forecast of a 5% increase starting mid-2025. Even though BWE is currently still requesting for a 5% increase p.a. for the 2025-2028F period, the company is more confident to get a 3% increase p.a. due to challenges in proving costs increasing with provincial authorities. BWE’s Chairman - Mr. Nguyen Van Thien, explained that Binh Duong has a proven history to allow for an annual marginal increase in the water tariff over the course of five years, which is what BWE is proposing, not a one-time increase. The company is also proud to have successfully secured a 25% water tariff increase for Can Tho Water Company in 2023.

Water volume is recovering, driven by industrial clients. BWE reported strong sales volume growth in H1 2024 of 9.4% and attributed it to 8.6% growth in the residential & others sector and 10.3% in the industrial sector. This shows evidence for recovery signs in the industrial activities specifically. Overall, it would help bolster BWE’s sales volume growth. Mr. Thien believes that this water tariff increase, coupled with at least 5% YoY expected sales volume growth, would help BWE’s profits sustainably grow by at least 10% p.a. moving forward. We note that BWE is always conservative in setting volume and profit guidance. H1 2024 volume growth, as well as recent guidance of water capacity in Binh Duong Province’s master plan, support our forecast for 10-11% volume growth p.a. over 2025-2028.

BWE’s water loss ratio for 1H2024 was 5.024%, its all-time lowest rate. Management expects it to further reduce by 100 bps by 2030 which should support long-term profit. Mr. Thien provided details that BWE’s branches in the cities of Thu Dau Mot and Di An are generating water loss ratios of 7.5%/7%, respectively. The capacity from these branches accounts for 46% of BWE’s total capacity, which are offset by the much lower water loss ratios of BWE’s other smaller branches such as the Tan Hiep (3.8%), Bau Bang (3%), Dau Tieng (<2%), and Tan Uyen (3.5%) water plants. BWE sees potential to improve the water loss ratio in Thu Dau Mot and Di An in the future to make the average water loss ratio to reduce to 4%. 

Waste treatment segment capacity expansion and higher tariff progress. In Q4, BWE plans to continue expanding its waste-to-energy plant by an additional 12MW to 17MW; while the residential waste tariff hike is expected to be approved in H2 2024. We are forecasting a 20% increase in the residential waste treatment tariff, starting in Q4 of this year. We note that BWE’s incinerator capacity of 2,520 tonnes/day and electricity generation of 5MW was put into commercial use in January 2024. This capacity expansion, together with the expected increase in the waste treatment tariff, are the drivers for BWE’s waste treatment NPAT. The Chairman did admit that they had not put enough attention over the last two years in this segment, while prioritizing M&A activities, which cost the company a loss of some industrial customers and partly resulted in low profit from this segment (contributing a minimal 1% to 2023’s consolidated NPAT). However, he is confident that the profit of this segment will recover with solutions in personnel compensation and higher tariff. Internally, BWE targets NPAT of this segment to double in 2024 to VND66bn vs VND34bn in 2023. 

Biwase Long An, BWE’s 94%-owned subsidiary, reported H1 2024 NPAT below our forecast. However, long-term NPAT is expected to align with projections due to new capacity and loan restructuring. BWE Long An generated ~VND7bn NPAT in H1 2024, completing 25% of our full-year forecast of VND27bn (4% of BWE’s 2024 NPAT, thus, marginal downside risk to our NPAT projection for BWE). Currently, the subsidiary’s profit is limited due to (1) some cash costs to re-set up operations & personnel after M&A (2) high interest expenses. However, BWE recently restructured a ~VND550bn loan for this subsidiary with a new interest rate of ~6.5% vs previous rates of 10-11%, which is expected to improve profit in H2 and in future years. In addition, doubling capacity is on track to come online in H2 2025, roughly in line with our forecast. Biwase Long An is expected to earn substantial profit after three-five years when volume increases 15-20% p.a., roughly in line with our expectations as we forecast the contribution from this subsidiary to increase from 4% in 2024 to 9% in 2028.

BWE still targets the Long Thanh Highway water project in the long term due to substantial water demand in Dong Nai Province. Management explains that its associate - Dong Nai Water (UPCoM: DNW) recently built a pipeline to supply water for Long Thanh International Airport. This Long Thanh Highway project (600,000 cbm/day, 80% of BWE’s current capacity) is still valid as it targets to supply water to four urban areas and 10,000 ha industrial parks surrounding the airport. In addition, its associate – Gia Tan Water JSC – serves as a tool to accumulate clients in the short term.

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