Incident: The company recently issued a number of voluntary announcements for winning projects. Since November, it has successively won bids for the rural sanitation and cleaning market-based project in Renhua County, Shaoguan City, Guangdong Province (annualized contract amount of 11.95 million yuan) and the urban butler service project in Bantian Street, Longgang District, Shenzhen, Guangdong Province (annualized contract amount 196 million yuan).
Sanitation project orders are picking up, but they are still below expectations. Continued attention is needed to pay attention to the sanitation project billing situation.
The company's sanitation project billing situation improved markedly in 2021/H2. Since October 2021, it has successively won bids for 5 sanitation projects (Maoming, Guizhou, Panzhou, Guangdong, Shaoguan, Guangdong, Shenzhen, etc.). As of December 17, 2021, the company's 2021 sanitation projects have signed a total annualized contract amount of about 400 million Hong Kong dollars; however, under the influence of many factors such as changes in some local governments in 2021, increased external competition, and prudence in selecting its own projects, it may be more difficult for the company to complete the target of adding an annualized contract amount of HK$1 billion as of December 17, 2021.
Looking ahead, we believe that the company's sanitation business segment still has broad development prospects: on the one hand, 18 departments jointly issued the “Waste-free City” Construction Work Plan for the “14th Five-Year Plan”, which included three indicators directly related to sanitation, such as “domestic waste removal volume”, “household waste classification coverage rate in urban residential areas”, and “domestic waste classification coverage in rural areas” in the “Waste-free City Construction System Index” (2021 edition), further enhancing the position of sanitation in “waste-free city” construction; on the other hand, the company linked sanitation to mushroom trucks in August 2021; on the other hand, the company linked sanitation to mushroom trucks in August 2021 A strategic cooperation agreement was signed to improve the company's future work quality and customer satisfaction through big data analysis, and actively promote the implementation of smart city service business.
The profitability of the hazardous waste business picked up in 2021, and we continue to monitor the commissioning of subsequent projects.
The gross margin of 2021H1's hazardous waste sector increased 0.3 pct to 40.1% year on year, and profitability gradually picked up after the pandemic. As of 2021H1, the company had put into operation 436,000 tons/year for the harmless business and 250,000 tons/year for the resource business, and also had 3 harmless projects under construction (total production capacity 85,000 tons/year). Looking ahead, hazardous waste disposal is an important part of the construction of waste-free cities. The company will steadily promote the smooth operation of projects under construction to ensure steady growth in performance. At the same time, the company will step up its exploration of resource-based projects and strive to create a situation where equal emphasis is placed on resource utilization and harmlessness in the future.
Maintaining the “buy” rating: According to the company's sanitation project purchase plan and hazardous waste project commissioning progress, we lowered the company's profit forecast for 21-23. The company's net profit for 21-23 is estimated to be HK$49/574/705 million (down 7%/12%/9%), respectively. The current stock price corresponding to PE in 21-23 is 4/3/3 times, respectively. Although there is some pressure on the company to take orders for short-term sanitation projects, in the long term, we are optimistic that the company's advantages in cost control, integrated layout, and government relationships will ensure that the scale of the company's sanitation projects increases. At the same time, the performance of the hazardous waste sector will maintain a steady growth trend as the project is gradually put into operation, taking into account three factors, including the growth of the company's performance, valuation still being undervalued, and future valuations that still have room for improvement, and that there is still room for improvement in future valuations.
Risk warning: Increased competition in the sanitation market has led to new orders and profitability falling short of expectations; commissioning and treatment prices of hazardous waste projects falling short of expectations; goodwill risks arising from mergers and acquisitions, etc.
