The company's annual results in 2021 are in line with expectations. The operation scale of the project continues to expand, and the proportion of operating income increases by 7pcts; the transformation of light capitalization continues to advance, relying on science and technology to seek market-oriented high value-added new business. The continuous contraction of the company's water environment governance business in the early stage is about to see the bottom of the drag on the operation, while the operation business is growing steadily, the company's performance inflection point is about to appear, and the "buy" rating is maintained, with a target price of HK $4.20.
The performance increased slightly, in line with expectations. The company realized HK $27.88 billion in operating income for the whole year, up 9.9% from the same period last year, and realized a net profit of HK $4.196 billion, an increase of 0.3% over the same period last year. The basic EPS was HK $0.41, which was in line with expectations. In addition, the company intends to pay a final dividend of HK $0.067, totaling HK $0.157 per share for the full year.
The proportion of operating services has increased, and the quality of revenue has continued to improve. In 2021, the company's revenue quality continued to improve, and the share of operating income increased by 7pcts to 55% compared with the same period last year. The operation scale of water projects continues to expand, with a net increase of 2.76 million tons per day in design capacity for the whole year, and 4489 tons per day in hand, of which 66 percent has been put into operation. The price of sewage treatment in mainland China rose 0.11 yuan to 1.39 yuan per ton, and the price of water supply rose 0.06 yuan to 2.10 yuan per ton. The expansion of operations and rising unit prices boosted operating income by 25.1 per cent to HK $11.214 billion. Revenue from construction services fell 4.1 per cent year-on-year to HK $12.605 billion, of which revenue from integrated water environment management fell 28.8 per cent to HK $3.071 billion. The overall gross profit margin fell slightly 0.9pct to 37.5%, mainly due to the decline in gross profit margin of the construction business 5pcts.
During the period, the expense rate increased slightly, which was due to the increase in the proportion of the company's operating projects and the increase in operation and maintenance management costs. The debt ratio fell 1.8pcts to 65.4% compared with the same period last year, and the overall debt level is in good health.
We will firmly promote the transformation of light assets and create new market-oriented business through scientific and technological innovation. The company firmly promotes the transformation of light assets, takes the initiative to reduce investment in comprehensive water environment management projects, and adopts more light assets models such as EPCO and technical services. The income from the water environment business has continued to decline in the past five years, from HK $7.335 billion in 2017 to HK $3.071 billion in 2021. The cash flow of the company's operating activities has improved significantly in 2021, and it is expected that with the transformation of light assets and the increase in the proportion of operating business, the operating cash flow is expected to become regular in 2022. Because of its utility nature, the rate of return of the water industry is usually regulated by price. The company continues to strengthen internal independent research and development and external university cooperation, and actively explore high-tech and high-return market-oriented business.
The sales of water environment treatment technical services and equipment contributed HK $4.061 billion in revenue in 2021, an increase of 24.8% over the same period last year, and is expected to maintain double-digit growth in the future.
Risk factors: demand constraints or payment difficulties caused by macroeconomic fluctuations; the company's project implementation progress is lower than expected.
Investment suggestion: the company has steadily expanded its business and actively promoted the transformation of light assets and technological innovation business. we have raised our 2022-2023 net profit forecast to HK $54.92 billion 6.526 billion (the original forecast is HK $50.82 billion), and the net profit forecast for 2024 is HK $7.339 billion, with the current share price corresponding to PE being multiple of 6-5-4. The book value of the company is relatively stable, so the PB valuation method is adopted. With reference to the comparable company China Water 1.2x PB in 2022, although the company is the industry leader, we give a certain valuation discount to reflect that the proportion of the company's engineering profit is higher than that of the comparable company, and give the company 1.0x PB in 2022, corresponding to the target price of HK $4.20and maintain the "buy" rating.