Insights

1 Stock to Buy and Hold During Uncertain Times

In the last 12 months, the world has seen extraordinary geopolitical, economic, and health risks. Which sector and stock may best weather these many risks? – Defensive stocks Hong Kong protests

What a crazy 12 months we’ve had with rising Sino-US tensions, social unrest in Hong Kong, the Covid-19 pandemic, and a global recession forecasted.

With all this dire news, many companies have issued profit warnings, but are there any businesses that are immune?

While all businesses will be impacted, there is one sector that is comparatively stable during tough times.

The utilities sector and particularly water supply operators can be resilient. Even in a crisis, people may not reduce their water usage.

The water supply stock I like most is Guangdong Investment Ltd (SEHK: 270), also known as GDI, and this is why.

Regular cash flows

Two-thirds of GDI’s total revenue comes from water resources, of which an incredible half comes just from Hong Kong. The company’s Hong Kong water revenue has more than doubled over the last 15 years.

Source: GDI Q1 2020 presentation

Hong Kong’s water rates are negotiated with the next price increase due in 2021. As GDI supplies 80% of Hong Kong’s water, they are practically a monopoly and in a powerful bargaining position.

What makes GDI a safe stock?

GDI has a strong balance sheet, a huge cash pile, and low debt.  With a debt-to-equity ratio of just 21.41%, it could repay debt of HK$8.4 billion (US$1.08 billion) with its HK$13.3 billion of cash. Last year, it earned more interest from deposits than it paid for its loans.

China’s continual urbanisation will require both urban-rural water integration and supply drainage integration, and GDI is in pole position to fund such new projects.

At the end of 2019, GDI had 28 water projects across China, with 17 new water projects under construction.

Apart from the Hong Kong water supply, GDI has other water resources with 4.4 million tonnes daily water capacity and 1.3 million tonnes daily wastewater processing capacity.

An additional 2.8 million tonnes daily water and wastewater processing capacity are under construction. Its strong balance sheet and new projects will drive future revenue growth.

GDI continues to grow dividends, with a 15.7% compounded annual growth rate (CAGR) since 2011. And although its payout ratio has increased to 74.9%, which may put pressure on future dividends, there are a few things to consider.

Guangdong Investment dividends

Source: GDI Q1 2020 presentation

Income from GDI’s core water supply business is predictable. Its has large cash holdings as mentioned earlier and sizable operating cash flow of HK$8.1 billion (Full-year 2019) should maintain the dividend payment, which last year was HK$3.8 billion.

Sounds too good to be true?

Well, while total revenue was little changed in the first quarter of 2020, there was a drop in profits of HK$211 million (or 17.6%).

GDI is mainly a water supply and treatment business, but it has diversified activities in Property & Department Stores, Hotel Operations & Management, and Infrastructures.

As you can see below, these account for around a third of GDI’s revenue.

Source: GDI Q1 2020 presentation

Impacted by Covid-19, Department Stores saw reduced footfall, with lower occupancy and average room rates affecting its hotel business.

The toll road business, part of the Infrastructures segment, had to waive toll fees due to China’s Ministry of Transport policy to control the epidemic.

However, with China starting to recover from the Covid-19 pandemic, and GDP growing 3.2% in Q2 2020, GDI’s other segments should rebound along with the economy.

It is important to note that the toll road and hotel businesses were performing admirably before the pandemic.

Foolish conclusion

So there you have it, while not strictly immune, GDI can still thrive during political tensions, economic recession, or the Covid-19 pandemic due to the stable nature of its water resources business.

And although Covid-19 has hurt GDI’s department store, hotel, and infrastructure segments, they account for a small part of its overall operations.

Just think about it. No matter where you live in the world, did the trade war, Covid-19, or any of the other geopolitical or economic issues make you use less water?

For most people, the answer is no, as water is a necessity. As such, GDI might be a great stock to buy and hold in a volatile world.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Robert Chan owns shares in Guangdong Investment Ltd.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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