Performance review
The 2021 results are generally in line with our expectations
The company announced 2021 results: revenue of HK$27.88 billion, up 10% year on year; net profit of HK$4.196 billion, up 0.31% year on year, in line with our expectations. Corresponds to a profit of HK41.42 HK cents per share. Revenue from the sewage and reclaimed water business increased but gross margin declined due to rising raw chemical costs and the government's cancellation of cost subsidies after the pandemic.
Steady growth in various businesses: Business performance diversified by sector in 2021, 1) Sewage and reclaimed water business revenue increased 30% year over year to HK$8.15 billion, mainly due to a 9% year-on-year increase in average sewage treatment prices to $1.39 yuan/ton, and sewage treatment volume increased 16% year over year to 5.266 billion tons; 2) Water supply business revenue increased 14% year over year to HK$3,069 million, mainly due to a year-on-year increase in water supply service prices of 2.9% to 2.10 yuan/ton, and a 5.3% year-on-year increase in water supply service volume to 2.15 billion HK$2.15 billion; 3) Comprehensive construction of the construction category Revenue from the governance project and BOT water plant construction business decreased 4% year-on-year to HK$13.1 billion, mainly due to the company's implementation of an asset-light strategy and a conservative investment policy for comprehensive management projects; 4) Revenue from the technology and equipment sales business increased 25% year-on-year to HK$4.60 billion.
Profitability declined slightly: In 2021, the company's gross margin fell 0.9 ppt to 37.5%, mainly due to a 3ppt to 49% drop in gross margin in the technology and equipment sales business. By sector, 1) In the sewage treatment business, domestic gross margin decreased by 2ppt to 58%, mainly due to the confirmation of some projects in 2020 and the increase in raw material costs this year. Overseas gross margin decreased by 1ppt to 23%; 2) In the water supply business, domestic gross margin remained flat at 48%, and overseas gross margin decreased by 2ppt to 34%; 3) In construction revenue, the comprehensive environmental management business stabilized at 26%, and the gross margin of the BOT water construction business decreased by 5ppt to 18%. Due to the current decline in market gross margin, the gross margin of the new BOT water project was relatively low; 4) The gross margin of the technology and equipment sales business fell 3ppt to 49%, mainly due to a decline in the share of technical services with higher gross margins.
Development trends
Continuously improve project operation efficiency and broadly expand new business growth points. At present, the company's total water design scale is about 44.89 million tons/day, the water operation scale is about 29.77 million tons/day, and the total amount of water contracted is 3.96 million tons/day. The company starts with full-process emission reduction, new technology research and development, renewable energy operation and multi-industry collaboration. We believe it will help further improve operational efficiency. At the same time, the company is vigorously expanding new businesses such as sludge, pipe networks, sewage recycling, and urban “water stewards”, which is expected to open up new growth points in performance.
Profit forecasting and valuation
Maintain net profit of HK$4.860 billion in 2022 and introduce net profit of HK$5.30 billion in 2023. The current stock price corresponds to a price-earnings ratio of 5.7 times/5.2 times 2022/2023. We maintain an outperforming industry rating and maintain a target price of HK$4.00, corresponding to 8.3 times the 2022 price-earnings ratio and 7.7 times the 2023 price-earnings ratio. There is 46% room for improvement from the current stock price.
risks
The start of the project fell short of expectations, and there is a risk of exchange rate fluctuations.