Dongjiang Environmental Protection (00895 HK)'s revenue for the first three quarters of 2021 increased 14.8% year-on-year to 2,642 billion yuan (RMB, same below).

Shareholders' net profit fell 29.3% year over year to $162 million. The performance was worse than expected. The company's overall gross margin fell 3.5 percent year over year to 28.4%.

From 2020 to 2023, we expect total revenue to increase at a compound annual growth rate of 22.2%, with industrial resource utilization revenue and industrial waste treatment and disposal revenue increasing at 18.7% and 0.6% respectively. The newly acquired Xiongfeng Environmental Protection will be an important revenue contributor. Furthermore, we expect the overall gross margin to drop from 26.6% in 2021 to 22.5% in 2023.

Our earnings per share forecast for 2021 to 2023 is $0.265, $0.283, and $0.312, respectively. Although the company has strong reserve production capacity and will gradually release it, increased market competition will continue to put pressure on revenue growth and gross margin.

We lowered our target price to HK$4.30, which is equivalent to 13.5/12.6/ 11.4 times the anticipated price-earnings ratio for 2021/2022/2023. Maintain “collection” ratings.