Two-wheel drive core profit growth; maintain "buy"
China Conch Venture announced 1H21 results on August 30: net profit rose 0.2 per cent year-on-year to 3.48 billion yuan. Excluding revenue from associates (down 6 per cent from a year earlier), core net profit reached 730 million yuan, up 30.8 per cent from a year earlier. Industrial solid waste and waste disposal continue to be the two pillars of the company's core profits, with net profit contributions of 267 million yuan (up 121% from the same period last year) and 394 million yuan (up 13.5% from the same period last year), respectively. We expect that the company's continued efforts to develop its hazardous waste disposal business, superimposed by a variety of disposal technologies (sludge and fly ash disposal), will continue to drive capacity growth, resulting in better profit prospects. We believe that the continued improvement in the contribution of revenue from the waste disposal business also supports the quality and sustainability of the company's earnings. Maintain the "buy" and target price of HK $52.00, based on the SOTP valuation method. The annual forecast EPS of 21-22-23 is 4.65kg, 4.85kg, 5.04RMB.
The strong growth in the volume of industrial solid waste disposal constitutes a net profit contribution to profit growth supporting industrial solid waste and hazardous waste business. The net profit contribution rose 67 per cent year-on-year to 267 million yuan, driven by a strong year-on-year increase of 121 per cent to 944000 tons, but was partly offset by a weak gross profit margin caused by a 16 per cent year-on-year decline in ASP (1H2162% ma 1H2067 per cent). Specifically, revenue from industrial solid waste disposal rose 142 per cent year-on-year to 204 million yuan, driven by a 130 per cent year-on-year increase in disposal volume and a 5 per cent year-on-year increase in ASP. 1H21 gross margin edged down 2 percentage points year-on-year to 55.7 per cent. The volume of hazardous waste business disposal increased by 106 per cent year-on-year, while gross profit margin fell slightly by 5 percentage points, resulting in a 60 per cent year-on-year increase in gross profit. 1H21 has signed a 1.2 million tons / year industrial solid waste and hazardous waste project, which increases the signed production capacity to 9.67 million tons / year, and is expected to achieve the target of 1000 million tons / year in 2023 as scheduled.
Further improvement of waste disposal efficiency
The net profit contribution of the waste disposal business was 394 million yuan, an increase of 13.5% over the same period last year, accounting for 53.7% of the company's total core profit. Solid earnings growth was mainly driven by a 27 per cent year-on-year increase in revenue, but was partly offset by a slight 1.7 per cent year-on-year decline in 1H21 gross profit margin to 24.8 per cent. The operating efficiency continues to improve, and the grate furnace generates 302 kilowatt hours per ton of waste, an increase of 13% over the same period last year. The company has signed a garbage disposal capacity of 1.2million tons / year in 1H21, so that its total signed capacity has reached 1317 tons / year. The company's goal is to have a signed production capacity of 1800 million tons / year for waste disposal by 2023.
Risk tips: 1) the climbing progress of the environmental protection project is not as good as we expected; 2) the fluctuation of cement price corresponds to the impact of the profits of the associated company.