In the first half of the year, the company achieved revenue of HK $2.111 billion and a net profit of HK $249 million, slightly lower than expected.
H1 sanitation service orders are lower than expected, but considering the company's leading position in the industry and strong shareholder background, it is expected that follow-up orders can still be obtained; the company is continuing to expand new business with the help of shareholder background, and unmanned equipment accelerates the layout of smart cities. Considering that the company's H1 sanitation orders were slightly lower than expected, we appropriately lowered our 2021 2023 net profit forecast to HK $5.04 million, equivalent to an EPS forecast of HK $0.14, 0.16, and maintained the company's "buy" rating, with a target price of HK $2.10.
The performance of H1 was slightly lower than expected. The company achieved revenue of 2.111 billion yuan in the first half of the year, an increase of 36.5% over the same period last year, and a net profit of 249 million yuan, an increase of 14.1% over the same period last year, equivalent to EPS0.69 Hong Kong dollars. The performance was slightly lower than expected, mainly due to the fact that the company's new orders were lower than expected and the competition in the hazardous waste market intensified the decline in the disposal unit price.
H1 sanitation orders are lower than expected, and hazardous waste profits are expected to bottom out and pick up. The company's revenue from environmental health services was HK $1.637 billion, an increase of 29.3% over the same period last year. Some of the tracking projects encountered government change and other factors, so that only two new sanitation operation projects were added in the first half of the year. At present, there are a total of 113projects in operation, with a total contract area of about 194 million square meters. Gross profit margin fell 4.4pct to 27.4 per cent year-on-year, mainly due to the gradual elimination of the impact of the epidemic and a decline in government value-added tax and social security deductions; income from harmless disposal of hazardous wastes was HK $2.215 billion, up 95.4 per cent from the same period last year. Fierce competition in the market led to a decrease in the average unit price of hazardous waste disposal by 28.2% year on year to 2077 Hong Kong dollars / tonne, resulting in a 3.1pct decline in gross profit margin to 43.1% year on year. Recycling income was HK $120 million, up 49.3 per cent year-on-year, and gross profit margin was 34.6 per cent, an increase of 3.8pct over the same period last year, mainly due to the high prosperity of the commodity market during the period, and the average disposal unit price for recycling rose 42.6 per cent year-on-year to 4014 Hong Kong dollars / ton. At present, a total of 8 hazardous waste projects are in operation, with a total design capacity of 3510 million tons per year, and there are three planned construction projects in the future, which are expected to achieve benefits in the second half of the year. During the H1 period, the overall expense rate was stable, and the net debt ratio rose rapidly to 10.3% from 0.9% at the end of 2020, mainly due to the company's continued expansion of business and an increase in bank borrowing.
The company's H1 net cash flow from operating activities totaled HK $357 million, a slight decline due to a reduction in income tax deductions for some hazardous projects.
The long-term competitiveness of sanitation is intact, and unmanned equipment accelerates the layout of smart cities. Although the newly signed order of H1 sanitation is weak, the company's leading position + strong resource network + aggressive management team makes the company's long-term competitiveness in the sanitation market intact. In the future, with the help of shareholder background, the company will participate in more bidding procedures to obtain more high-quality new projects, and expand related business areas such as recycling, classification, greenway maintenance, recycling and so on. The company and mushroom car joint work, with the help of AI big data analysis and timely rectification business, enhance operation quality and customer satisfaction; accelerate the layout of unmanned equipment, reduce labor costs, will lay a solid foundation for future market development.
Risk factors: project expansion is not as expected; the government's ability to pay has declined; labor costs have risen sharply; competition has intensified and commodity prices have fluctuated sharply.
Investment advice: due to the slower-than-expected growth of sanitation orders in the first half of the year, we have lowered our net profit forecast for 2021 to HK $594 million for 2023 (the original forecast for 2021-22 was HK $561 million for 2021-22), which translates to a forecast of HK $0.14 for PE and HK $0.16 for PE. We give the company 15 times its target PE for 2021, corresponding to a target price of HK $2.10, maintaining a "buy" rating.