Profit is predicted to fall 33% year over year
We updated our expectations for Everbright's green environmental protection performance, considering: 1) the company's asset-light transformation progressed, the expansion of biomass projects slowed, and construction revenue fell; 2) prices fell due to increased competition in the hazardous waste industry, and the company's disposal revenue declined. Therefore, we lowered the company's full-year profit forecast for 2021 by 24.4% to HK$1.01 billion, down 33% from the previous year.
Key points of interest
The biomass business is expected to benefit from reducing carbon emissions and increasing project revenue. In July 2021, China's carbon trading market was officially launched. Biomass power generation has remarkable ability to reduce carbon in the CCER methodology. We believe that with the further improvement of carbon market-related systems, the company is expected to increase the profits of biomass projects through carbon trading such as CCER. The company is a leading enterprise in the field of biomass power generation. We are optimistic that the increase in CCER will bring flexibility to the company's performance and promote a revaluation of the biomass business.
As the asset-light transformation progresses, the quality of cash flow may continue to improve. In recent years, the company has made strategic adjustments and paid more attention to the quality of project operations. As a result, the scale of new biomass projects has been reduced, and construction revenue has declined. On the one hand, we believe that the slowdown in project investment and construction will help the company relieve pressure on the capital side and help the company continue to recover its cash flow; on the other hand, the company continues to promote steam business with better cash flow quality. By the end of 2021, steam production capacity had exceeded 2 million tons. We are optimistic that the steam business will further optimize the company's cash flow in the future.
The hazardous waste and environmental restoration business is expected to see improved performance. In the hazardous waste disposal sector, disposal prices have declined due to factors such as increased competition in the industry, so we think the company's performance may be under pressure, but the company's hazardous waste reserve production capacity is sufficient. As new projects are put into operation one after another and downstream demand recovers, we think the company's hazardous waste business may usher in a gradual improvement, and there is still plenty of room for growth in the long term. At the same time, the company is actively promoting environmental restoration business. Currently, it is operating more than ten environmental restoration projects in Jiangsu, Shandong and Jiangxi provinces. Recently, there have been many restoration sector policies such as “Opinions on Encouraging and Supporting Social Capital to Participate in Ecological Protection and Remediation” and “Notice on Carrying Out the Third National Soil Survey”. We believe that continued promotion of policies will help drive demand and investment growth in the soil remediation sector and bring new performance growth points to the company's environmental restoration business.
Valuation and advice
Considering the slowdown in the company's new biomass projects and the decline in hazardous waste disposal fees, we lowered the company's 202E/2022E net profit by 24.4%/16.3% to HK$10.0/1.15 billion, and introduced 2023E net profit of HK$1.17 billion. The current stock price corresponds to the company's price-earnings ratio of 4.8 times in 2022, and the target price was lowered by 12% to HK$3.6, corresponding to a price-earnings ratio of 6.4 times in 2022, with room for 34% increase from the current stock price.
risks
The asset-light transformation fell short of expectations, and competition in the industry intensified.