The performance was lower than expected, but the stock price was oversold and the valuation was attractive.
China Conch Venture reported lower-than-expected results (Huatai forecast 8.08 billion) and net profit fell 2.1 per cent to 7.5 billion yuan, mainly due to energy consumption control, epidemic control and cooling of the real estate market. The specific effects include: 1) the weakening demand for 2H21 cement, resulting in lower-than-expected joint venture revenue; 2) industrial production disturbance, leading to a slowdown in the growth of industrial hazardous waste disposal and a decline in prices. Considering the government's firm stand on stabilizing growth and taking more rational measures to reduce energy consumption, we expect the above challenges to be short-term factors. In view of the fact that the company has spun off its industrial solid waste and hazardous waste business, we have lowered our 2022lb 2023 net profit forecast by 19% and 18%, and reduced the target price based on the SOTP valuation method by 29% to HK $35.3. We believe that the divestiture has led to an overfall in the share price and that the current valuation is attractive (corresponding to 5 times the 2022 forecast PE). Repeat "buy".
Industrial solid waste and hazardous waste: set sail after stripping, sustained and steady growth benefited from strong production capacity growth, the company's hazardous waste disposal capacity increased by 53% to 663000 tons compared with the same period last year. As the processing price fell 13.5% to 1636 yuan / ton, but the cost was flat (568 yuan / ton), the gross profit margin fell 4.8 percentage points to 65.3%. Although production growth and processing prices are affected by adverse market factors, given the company's strong competitiveness in the industry, we expect to maintain strong capacity growth will be more strategic. We believe that the divestiture of industrial solid waste and hazardous waste business will bring a new start to the development of China Conch Venture.
Garbage disposal: revenue growth slows and profit quality improves
The revenue from waste disposal business reached 5.7 billion yuan, an increase of 19.4% over the same period last year, and the growth rate has slowed down from previous years. Despite the slowdown, we have seen an improvement in the quality of earnings, with operating revenue (up 73.9% to 1.3 billion yuan) growing much faster than construction revenue (9.8% year-on-year to 4.5 billion yuan). The power generation per ton of garbage was 365 kilowatt hours, an increase of 5.5% over the same period last year, and the business performance continued to improve.
New Energy Materials: committed to creating a New growth engine
China Conch Venture plans to invest in two key lithium battery components production projects, including an annual production of 50,000 tons of cathode materials (with a long-term goal of 500000 tons) and an annual production of 40,000 tons of negative materials (with a long-term goal of 200000 tons). We expect the company to unswervingly nurture the new energy materials business into a new growth engine.
While there are still challenges for new business to succeed, we believe that management's strong professional background in manufacturing will be a key supporting factor.
Risk hint: electricity price subsidies are in place later than we expected.
