Beijing Enterprises Water Services (00371 HK, the “Company”)'s revenue in 2021 increased 9.9% year-on-year to $27.9 billion (HK$, same below).

Shareholders' net profit increased 0.3% year over year to 4.2 billion yuan. Performance was in line with expectations. Gross margin fell 0.9 percent year over year to 37.5%.

The management expenses ratio increased 1.3 percentage points to 11.3% year over year. The financial expenses ratio fell 0.3 percentage points year over year to 9.8%. In 2021, there was a net increase in design daily processing capacity of 2,761,226 tons. As of December 31, 2021, the total daily design processing capacity reached 44,885,962 tons.

We expect revenue from sewage and reclaimed water treatment services to achieve a compound annual growth rate of 15.6% from 2021-2024, while revenue from water supply services can achieve a compound annual growth rate of 9.8% from 2021-2024. We expect construction services revenue to grow at a CAGR of -4.6% between 2021-2024. We expect sales revenue from technical services and machinery to achieve a CAGR of 21.6% between 2021-2024. Total revenue will achieve a compound annual growth rate of 7.8% between 2021-2024.

Our earnings per share forecasts for 2022 for 2023 and 2024 are HK$0.438, HK$0.491 and HK$0.566, respectively. Even if the company's business growth slows down, the gradual improvement in profit quality and cash flow will result in a significant revaluation of the company.

We lowered our target price to HK$3.70, corresponding to 10.1/9.6/8.9 times the expected EV/EBITDA for 2022/2023/2024.

Maintain a “buy” rating.