The company forecasts that 1H22 profits will drop by more than 40% compared with the same period last year.
The company issued a profit warning, saying that due to the impact of the domestic epidemic, the company's raw material costs rose sharply, the demand for hazardous and solid waste sectors was weak, the disposal unit price continued to decline, and the company's 1H22 performance decreased by no less than 40% compared with the same period last year. We cut the company's full-year profit forecast for 2022 by 37 per cent to HK $718 million, down 35 per cent from a year earlier.
Pay attention to the main points
The performance was affected by the epidemic and the short-term disturbance of the rise in raw material prices. We believe that the epidemic in the first half of 2022 led to a decline in solid waste and hazardous waste production at the company's project site, as well as a decrease in waste calorific value due to the impact of logistics, and a decline in the company's hazardous waste disposal capacity and revenue per ton. In addition, a large proportion of the company's operating costs are composed of additions. In the first half of 2022, the prices of diesel, lime, urea, activated carbon and other raw materials increased, resulting in a rise in the company's operating costs per ton, resulting in a decline in the company's performance. We predict that as the epidemic improves, the company's follow-up profitability is expected to recover.
Light assets transformation continues to advance, long-term optimistic about the company's project operation capacity. In recent years, the company has made strategic adjustments to reduce the scale of new biomass projects and pay more attention to the operation quality of the project. we believe that on the one hand, it will lead to a decline in construction income, but on the other hand, the slowdown in project investment and construction and the company's focus on operation will help to improve the overall gross profit margin of the company, ease the pressure on the capital side, and the cash flow is expected to continue to repair. At present, the company continues to promote the steam business with better cash flow quality, and the steam production capacity has exceeded 2 million tons by the end of 2021. We are optimistic that the steam business will further optimize the company's cash flow in the future.
Invigorating carbon assets is expected to enhance the value of biomass power generation sector. The first anniversary of the launch of the national carbon market in July 2022, the overall operation has been stable over the past year. The company has actively seized the opportunity of the carbon market and started the accounting of carbon assets in an all-round way. We believe that the company, as a leading enterprise in biomass power generation, has great potential to develop carbon reduction assets, and is optimistic that the company will broaden its income sources by invigorating carbon assets and participating in carbon trading in the future, so as to enhance the value of biomass power generation sector.
Profit forecast and valuation
Taking into account the decline in the company's hazardous waste disposal capacity and the rising cost of raw materials, we reduce the company's net profit of 37.4% of net profit in 2022 / 2023 to HK $718 million of 998 million, and the current share price corresponds to the company's price-to-earnings ratio of 5.0 pounds in 2023. We cut our target price by 38.9% to HK $2.2, which corresponds to a price-to-earnings ratio of 6.3 times earnings for 2023, which is 25.7% higher than the current share price.
Risk
The epidemic situation is repeated, the transformation of the company's light assets is less than expected, and the competition in the industry intensifies.