The decline in gross profit margin led to earnings expectations, but revenue beat expectations.
The company yesterday announced weaker-than-expected results for fiscal year 2022 (ending March 31). Shareholders' net profit rose 11.9% year-on-year to HK $1.89 billion (the same below), which was 6.4% lower than our forecast, as gross profit margin fell 3.6% to 38.3%, mainly due to: (1) higher energy prices and increased electricity expenditure for water supply plants; (2) losses in non-core business of storage terminals; and (3) reduced water consumption for industrial and commercial customers with higher water prices under epidemic prevention and control. (4) the real estate market is weak, and the proportion of income from high-profit tap water connection has dropped. However, the company's total revenue increased by 25.2% year-on-year, exceeding our forecast of 9.1%, mainly due to: (1) the accelerated development of direct drinking water business, and the related revenue increased by 379.4% year-on-year to 690 million yuan; (2) the petrochemical products terminal in Hangzhou, Zhejiang province was put into operation, and the non-core business income of the storage terminal increased by 572.6% to 650 million yuan.
The development of direct drinking water business far exceeded the forecast and strengthened the company's long-term growth logic. since the development of direct drinking water business in 2019 the company has significantly accelerated its development in the last fiscal year far exceeding our forecast. The number of new direct drinking water projects (including construction) increased from 232in 2021 to more than 1000 in 2022. Over the same period, the cumulative service population (including projects under construction) increased from about 1 million to about 3 million. We conservatively estimate that the revenue from the direct drinking water business in the 2023-24 fiscal year will increase by 65.9% and 45.0% to 1.15 billion yuan and 1.67 billion yuan respectively, accounting for 7.8% and 10.0% of the total revenue in the 2023-24 fiscal year, up from 5.4% in the 2022 fiscal year. We do not rule out the possibility that the revenue from the direct drinking water business is expected to be on a par with the tap water business in the next 10 years.
Adverse gross profit margin factors can be alleviated, increase profit forecast for fiscal year 2023-24 as the mainland optimizes epidemic prevention and control, we expect that some of the factors affecting the company's gross profit margin last year may be gradually alleviated, such as a reduction in water consumption by industrial and commercial customers and a decline in the share of tap water connection revenue. In addition, the operation of the petrochemical terminal is expected to be stable this fiscal year. After combining the above factors, including direct drinking water and non-core business income, we have raised our revenue forecast for the fiscal year 2023-24 by 15.3% and 18.4% respectively, but the gross profit margin is still lower than the level of fiscal year 2020. We only raised the shareholder net profit forecast for the fiscal year 2023-24 by 0.8% and 0.6%, respectively.
Raise the target price and reiterate the "buy" rating
Accordingly, we raised the target price for discounted cash flow (DCF) analysis from HK $11.50 to HK $12.00, corresponding to 8.6 times 2023 price-to-earnings ratio and 51.1% room for growth. Repeat "buy".
Risk tips: (1) the water source is polluted, (2) the rate and progress of water price increase is lower than expected, and (3) exchange rate risk.