---
title: "First loss combined with consecutive YoY declines in distributable income, Yinhua Shaoxing Water & Hydropower REIT adjusts \"quasi-fixed income\" expectations"
type: "Topics"
locale: "en"
url: "https://longbridge.com/en/topics/42842018.md"
description: "On July 20, the domestic first water conservancy infrastructure REITs—Yinhua Shaoxing Yuanshui Water Conservancy REIT‌ released its Q2 2026 periodic report. The two quarterly reports fully disclosed the operational fluctuations brought by the continuous drought in the first half of the year, among which‌ Q1 2026 was the first loss-making quarterly report since the product's listing‌, becoming a landmark warning case for the public infrastructure REITs industry. This continuous drought spanning from the end of 2025 to the first half of 2026 not only brought about a 阶段性 decline in returns for a single product..."
datetime: "2026-07-22T02:30:27.000Z"
locales:
  - [en](https://longbridge.com/en/topics/42842018.md)
  - [zh-CN](https://longbridge.com/zh-CN/topics/42842018.md)
  - [zh-HK](https://longbridge.com/zh-HK/topics/42842018.md)
author: "[睿思中国](https://longbridge.com/en/profiles/12624762.md)"
generator: "portal-rs"
---

# First loss combined with consecutive YoY declines in distributable income, Yinhua Shaoxing Water & Hydropower REIT adjusts "quasi-fixed income" expectations

On July 20, the first domestic water conservancy infrastructure REIT—**Yinhua Shaoxing Raw Water Water Conservancy REIT**—released its Q2 2026 periodic report. The two quarterly reports fully disclosed operational fluctuations caused by continuous drought in the first half of the year, with **Q1 2026 marking the first loss-making quarter since the product's listing**, a phenomenon that has become a landmark warning case for the public infrastructure REIT industry.

This prolonged drought spanning from late 2025 to the first half of 2026 not only brought phased declines in returns for individual products but also exposed systemic biases formed by the market's long-term reliance on pricing logic derived from fixed-income assets like highways and industrial parks. As the only publicly offered water conservancy target primarily dealing in raw water, most institutions during the issuance phase directly applied the market-oriented infrastructure DCF calculation framework, considering only annual water volume fluctuations without incorporating extreme scenarios of cross-year continuous high-level supply restrictions. This consecutive drought concentratedly exposed **blind spots in the tail risk of cash flow calculations**.

**A drought reveals the first loss-making quarterly report**

In Q4 2025, rainfall in the basin had already shifted into a dry cycle in advance. The rainfall for the period was only 122.5 mm, a 47.72% decrease compared to the same period last year, and inflow runoff decreased by 68.39% year-on-year. Reservoir storage levels continued to drop at the end of the year, laying hidden dangers for pressure on continuous water supply in the following year.

Hydrological conditions were generally balanced throughout 2025, with an annual raw water supply of 317 million cubic meters, exceeding the assessed baseline estimate of 308 million cubic meters. The annualized distribution rate remained stable in the 5% range. Even with 142 days of Class II water supply control within the year, the annual water supply volume still met standards, leading the market to form an inertial judgment: single-quarter dry shortages could be compensated by precipitation during the wet season within the year, and the annual return base would not undergo substantial 动摇 (shaking/disruption).

The ultra-long consecutive drought from late 2025 to the first half of 2026，叠加 (superimposed) with multi-level emergency supply restrictions, directly overturned the above calculation assumptions:

In Q1 2026, rainfall in the Xiaoshun River basin was only 204.8 mm, 30.67% less than the same period last year, and inflow runoff plummeted by 79.1% year-on-year. **During the 90-day operating cycle, Level I highest-grade raw water emergency response was activated for 86 days**. According to local water supply contingency plans, under Level I response, the water supply scale could be compressed to below 10% of the same period in normal years. The project's raw water supply volume for the period was only 20.6278 million cubic meters, with water supply revenue dropping 68.81% year-on-year, corresponding to a year-on-year reduction in water supply revenue of approximately 29.16 million yuan (calculated from the difference in water supply revenue between the two corresponding periods). **The fund's consolidated net profit recorded -10.2065 million yuan**; the distributable amount for the period was only 6.3368 million yuan, **a year-on-year decline of 76.71%**, **and no quarterly cash dividend was distributed**.

Precipitation in the basin saw a slight recovery in Q2, but remained significantly below historical averages. Total rainfall for the season was 376.7 mm, 25.66% less year-on-year. Emergency controls were maintained throughout the 91-day cycle, including 26 days of Level I response and 65 days of Level II response. The water supply volume for the period was 53.6059 million cubic meters, with water supply revenue declining 19.26% year-on-year. The distributable amount rebounded to 18.6504 million yuan, **a year-on-year decrease of 28.42%**. The cumulative distributable amount for the first half of the year was 24.9872 million yuan. Cash dividends were distributed synchronously in Q2, with 0.05 yuan per share unit.

As of July 15, the water level of Tangpu Reservoir was 20.59 meters. Although higher than the 18-meter threshold for initiating Level I emergency response, it still lagged 2.41 meters behind the 23-meter threshold for complete removal of Level II response. There is significant uncertainty regarding precipitation and reservoir storage in the basin in Q3. The financial report explicitly warned: "Investors should not simply judge the fund's full-year distributable amount based on the proportion of time this period occupies in the full year." The manager simultaneously stated **that it will temporarily not provide definitive guidance for full-year performance**.

## **Triplicate administrative constraints on dispatch, pricing, and compensation lock in returns**

The market generally attributes this performance dive simply to extreme drought, but interpreting it solely from a meteorological perspective is insufficient to explain the significant fluctuation in returns. Behind the ultra-long supply restrictions lie multiple overlapping administrative constraints inherent to the project. Three types of rigid rules were not fully quantified during the issuance valuation stage.

‌**First, reservoir dispatch authority belongs to the local government, and the operating entity has no independent discharge permission.**‌ The overall ownership, flood control, and ecological public welfare functions of Tangpu Reservoir belong to the Shaoxing Municipal Government. The REIT holds only the 30-year operational right to charge for raw water. During drought periods, the Raw Water Emergency Command Center exercises absolute control over total discharge volumes. The priority guarantee for residents' living water use is permanently higher than industrial water supply and project returns. Fund managers and reservoir operating enterprises have no right to independently adjust discharge scales. Industry insiders in local water conservancy revealed that this asset divestiture only transferred water supply charging rights; the dispatch responsibilities concerning the lifeline of urban water supply were not simultaneously included in the asset package.

‌**Second, the pricing mechanism is administratively locked, with raw water executing government-fixed prices.**‌ The tax-inclusive price for Tangpu raw water is 0.86 yuan/cubic meter, and the tax-exclusive basis is 0.66 yuan/cubic meter. Prices undergo cost supervision audits once every five years, leaving no room for annual unit price fluctuations. This differs essentially from hydropower and highways: hydropower can hedge against declining generation capacity using market-based electricity prices, while highways can regulate traffic revenue through differentiated tolls. Livelihood raw water revenue is linearly linked entirely to water supply volume; there is no price buffer space when water volume shrinks. The project partners are Shaoxing Water Works Co., Ltd., Shangyu District Water Supply Co., Ltd., and Cixi City Tap Water Co., Ltd. All three parties strictly execute government-approved prices for water supply transactions, leaving no room for separate market-based bargaining.

‌**Third, the scope of fiscal compensation has obvious shortcomings, with no cross-level safety net arrangements.**‌ Local contingency plans only set district-level fiscal compensation clauses for compressing industrial water use. Revenue losses caused by reduced residential water consumption are not covered, and there are no provincial-level coordinated compensation policies. The cash flow calculation for issuance assessment did not include fiscal subsidies as normalized returns, treating them only as low-probability supplementary items, which cannot offset large-scale revenue drawdowns.

Under the superposition of triple constraints, **the project's annual return upper limit is pre-defined by administrative rules, not determined by operational management efficiency**; even if hydrological conditions return to long-term averages later, the risk of significant performance volatility in consecutive dry years will persist long-term.

## **Issuance calculations omitted extreme dry tail scenarios**

By reviewing fund supporting asset evaluation materials and the updated 2025 prospectus, and sorting out the common calculation logic in the primary inquiry market, it was found that there is a unified calculation blind spot between evaluation and institutional calculations. During the issuance stage evaluation and regulatory inquiry phases, **cross-quarter long-term Level I supply restrictions and quarterly losses were not included in mandatory calculation requirements**.

Evaluation agencies delineated annual water supply calculation intervals based on years of continuous hydrological observation data. The core logic of the calculation assumed that abundant and dry precipitation within a year could offset each other, calculating cash flows only in units of complete natural years, **without covering extreme combined scenarios such as continuous cross-cycle drought from Q4 2025 to Q1 of the following year and long-term Level I supply restrictions**. Public evaluation materials did not include calculation scenarios similar to the significant revenue drawdown in Q1 2026, nor did they simulate cash flow combinations where significant water volume shrinkage overlapped with unchanged fixed rigid expenses like depreciation, amortization, and operational management fees, forming quarterly losses. Evaluation parameters did not fully quantify the direct suppression effect of government-mandated discharge on single-quarter revenue.

The offline subscription multiplier for the primary issuance exceeded 100 times, indicating extremely high market enthusiasm. Investment research teams of participating inquiry institutions simultaneously replicated the simplified logic of evaluations, making only minor downward adjustments to annual pessimistic water supply volumes. They generally judged continuous Level I supply restrictions for over 90 days as extremely low-tail events, failing to separately calculate deep single-quarter losses. At the initial listing stage, the market implied an annualized distribution center around 5%. Institutions uniformly benchmarked against market-oriented infrastructure assets like highways, industrial parks, and hydropower, **ignoring the core differences in dual administrative controls over dispatch and pricing for livelihood water supply**.

The core misconception in the market lies in benchmarking livelihood water supply projects against market-oriented infrastructure assets for pricing, ignoring the differences in return volatility brought about by dual administrative constraints on dispatch and pricing. Highways, industrial parks, and hydropower possess market-based bargaining and traffic regulation spaces. Tangpu Reservoir belongs to urban essential livelihood public goods. Investors hold municipal return certificates attached with multiple administrative pre-constraints. Under extreme drought cycles, the magnitude of performance volatility is significantly higher than that of market-oriented infrastructure categories.

**Similar water conservancy products need to reshape valuation anchors**

Comprehensively looking at the operational data from Q1 and Q2 of 2026, even though Q2 performance recovered 环比 (quarter-on-quarter), the project's profitability resilience remains weak: the gross margin for the period rebounded to 36.49%, but depreciation, amortization, and operational management fees are all fixed rigid expenses with very little room for compression. The year-on-year decline in interest in Q2 was not due to active cost reduction by the enterprise, but merely resulted from passive reduction in loan accruals due to the contraction of dividend scales. Outsourced fishery income doubled in the period, which was merely an adjustment in contract fulfillment progress; the total annual fishery income remained unchanged, unable to offset the gap in main water supply business revenue.

Project cash flows are highly concentrated in Shaoxing Water Works Co., Ltd., Shangyu District Water Supply Co., Ltd., and Cixi City Tap Water Co., Ltd. These three operating entities have no records of dishonesty or major tax-related adverse incidents, and their long-term water supply agreements are stably fulfilled. Water conservancy industry analysts pointed out that this national first water conservancy REIT is only suitable for ultra-long-cycle configuration, but investors must accept **the possibility of annual dividends falling significantly short of expectations and 阶段性 (phased) zero dividends**; if the original intention for entering the market was to chase stable returns similar to fixed-income products, there is inherently a misalignment in the underlying valuation logic.

The appearance of the first loss upon listing for this first water conservancy REIT also sounds a warning bell for the valuation system of livelihood water supply public REITs across the entire market. Past evaluations and institutional DCF models mostly only calculated average annual water volume, lacking complete stress tests for cross-quarter continuous drought and multi-level administrative supply restrictions. **Livelihood raw water assets cannot directly reuse the market-oriented infrastructure valuation framework**. Subsequent evaluation and institutional investment research modeling for water conservancy infrastructure REITs need to fully embed local tiered water supply emergency plans, quantify the impact of Level I and II supply restrictions on single-quarter revenue and profits, add special stress tests for extreme consecutive droughts, and set valuation discounts for strong public welfare municipal assets to repair the common shortcomings in market calculations.

*Data Source and Disclaimer: All data, operational rules, and financial indicators cited herein are taken from the quarterly reports, prospectuses, and publicly disclosed announcements of Yinhua Shaoxing Raw Water Water Conservancy REIT for various periods. This article serves only as an objective in-depth analysis of the industry and does not constitute any investment advice.*

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> **Disclaimer: This article is for reference only and does not constitute any investment advice.**