Maintain “buying” as transformation progresses
Beikong Water announced its 2021 results on March 30: revenue increased 9.9% year-on-year to HK$27.9 billion, mainly due to the increased contribution of the water treatment service business to revenue; Guimu's net profit increased 0.3% year-on-year to HK$4.2 billion, lower than our forecast of HK$4.85 billion. As a result, we lowered our net profit forecast for 2022/2023/2024 to HK$46/52/6 billion (pre-forecast value for 2022/2023: HK$50/5.8 billion), and the corresponding EPS was HK$0.45/0.52/0.59. We gave the company a target PE of 9x 2022, which is 8x higher than its five-year historical PE average, because we believe that the company's operating cash flow in 2022 is expected to be corrected. The target price is HK$4.09 (previous value: HK$5.39). Maintain a “buy” rating.
Water treatment services business drives performance growth in 2021
In 2021, the company's water treatment service business revenue/net profit of the company increased 25.1%/22.7% year on year to HK$11.2 billion/4.8 billion HK$4.8 billion (the split of net profit of the division of the business did not take into account about HK$4.1 billion and other items that could not be distributed to operating segments), accounting for 40%/57% of total revenue/return to the mother's net profit in 2021 (5/7 pp year-on-year increase), driving the company's overall revenue in 2021 to 9.9%/0.3% year-on-year. The company's consulting and equipment sales business also performed well in 2021. Revenue increased 24.8% year over year, but gross margin fell by 3pp to 49%, so net profit attributable to the mother increased by only 6.8% to HK$1.2 billion.
The determination for asset-light transformation is firm
Along with the rapid development of operating business and the decline in construction business, the company's non-construction business contributed as much as 71% to the overall net profit of the parent in 2021, and the asset-light transformation effect was remarkable. At the company's 2021 performance meeting, management directed the company's daily design capacity (DDC) to increase from 44.89 million tons/day in 2021 to nearly 70 million tons/day in 2025. The new DDC will operate mainly on an asset-light basis. Furthermore, the company expects its operating cash flow to be corrected in 2022 or 2023.
The 2021 dividend rate was as high as 5.7%
The company's DPS in 2021 was HK$0.157, and the corresponding dividend rate was as high as 5.7%. As more and more new companies enter the market, competition in the sewage treatment industry will intensify. We believe that in the long run, asset-light transformation is the right path. We gave the company 9x target PE for 2022, and the corresponding target price was HK$4.09. Maintain a “buy” rating.
Risk warning: The progress of the project has fallen short of our expectations, and the asset-light transformation has been slower than our current expectations.