The rising cost of raw materials and fierce competition in the solid and hazardous waste disposal market led to the company's 2022H1 performance lower than expected.
The company adopts independent storage, cogeneration and other ways to deal with cost and price pressure, and the competition in the solid and dangerous waste market is expected to improve after the local epidemic weakens the impact of industrial resumption. The share of operating income continues to increase, and it is seeking to lay out new carbon-neutral businesses to lead the transformation and create new growth points. We downgrade our 2022-2024 EPS forecast to HKD0.41-0.47 for 2024, with the current share price corresponding to PE times 5-4-4, with a target price of HK $2.04, maintaining the company's "buy" rating.
1H2022 EPS 0.18 Hong Kong dollars, lower than expected. The company released its mid-2022 report that 1H2022 realized operating income of HK $4.22 billion, down 2% from a year earlier, and realized net profit of HK $372 million, down 47% from a year earlier, or HK $0.18 per share. The performance of H1 is lower than expected, mainly due to the sharp rise in biomass raw materials and fuel costs and fierce competition in the solid and hazardous waste disposal market.
The share of operating income continues to rise, rising costs and fierce competition have put pressure on performance. The successive commissioning of the project made the company's 1H2022 biomass and domestic waste disposal capacity increase by 14% and 3% to 4.266 million tons and 1.717 million tons respectively compared with the same period last year, driving the online electricity of the company's H1 to increase by 3% to 2.99 billion kWh, and the gas supply increased by 11% to 1.172 million tons. The company's H1 hazardous waste and solid waste disposal volume was 223000 tons, an increase of 94% over the same period last year, and the growth of disposal scale boosted the company's H1 operating business income by 10% to HK $3.32 billion.
H1's construction business fell to 5 from 12 in the same period last year, and construction revenue fell 36 per cent year-on-year to HK $710 million. In the first half of the year, the proportion of the company's operating service revenue increased by 9 pcts to 79% compared with the same period last year, and the quality of revenue continued to improve. Due to the sharp rise in biomass raw materials and fuel costs and fierce price competition in the solid waste market, the company's H1 gross profit margin decreased by 7.5pcts to 23.1% compared with the same period last year. In terms of period expenses, the company's management expense rate / financial expense rate increased slightly by 0.6 pct to 6.2% and 8.7% respectively. As of 1H2022, the company's asset-liability ratio was 65.0%, down 0.1 pct from the end of last year, and its financial position remained healthy.
Independent storage to achieve cost reduction and efficiency, around the dual-carbon accelerated business transformation layout of the new growth pole. In the face of the upward pressure on the price of biomass raw materials, the company establishes an independent collection, storage and transportation system and improves the regional scheduling mechanism, which not only ensures the supply of raw materials from the source, but also achieves the purpose of price control and efficiency. The company continues to promote the transformation of biomass comprehensive utilization business to comprehensive energy, vigorously expand the combined supply of cold, heat and power, and constantly expand the gas supply market. Photovoltaic, energy storage, hydrogen energy and other emerging carbon reduction and new energy business are also being actively studied and promoted. In a dual-carbon context, the company will invigorate its existing carbon assets and create new sources of income after the liberalization of the carbon market in the future. Hazardous waste and solid waste disposal business is transforming from harmless to resource. In the first half of this year, the company successfully landed 100000 tons of Huangshi and 100000 tons of waste tires in Xuzhou.
Risk factors: higher-than-expected adjustment of subsidy policy; substantial increase in fuel collection costs; decline in volume / price of industrial waste.
Investment suggestion: taking into account the high cost of biomass energy and fuel, and the fierce competition in the solid and hazardous waste disposal market, we downgrade our 2022-2024 EPS forecast to HK $0.34, 0.41 and 0.47 (the original forecast was HK $0.65, 0.71 and 0.76). The current share price corresponding to Pamp E is respectively times that of 5-4-4. With reference to the company's historical valuation, the company is given a five-fold target of PE in 2023, corresponding to a target price of HK $2.04, maintaining a "buy" rating.