2022H1's performance was lower than expected. The company's sanitation service revenue grew steadily in the first half of the year, but its profit margin was under pressure due to rising energy and labor costs; the disposal volume of hazardous waste disposal business decreased significantly due to the local epidemic situation and the unit fixed cost increased significantly. The company's traditional main business is developing steadily, and in the long run, the amount of hazardous waste disposal is expected to pick up after the impact of the epidemic is weakened, and the unit price of harmless disposal is also showing a good trend. Referring to the company's 9 times PE valuation center in the past year, the company was given a 9 times target PE in 2022, corresponding to a target price of HK $1. 0, maintaining a "buy" rating.

H1 performance is lower than expected. The company achieved revenue of 2.39 billion yuan in the first half of the year, an increase of 13.5% over the same period last year, and a net profit of 160 million yuan, down 35.4% from the same period last year, equivalent to HK $0.04 in EPS. The performance was lower than expected, mainly because the amount of hazardous waste disposal decreased due to the local epidemic, and the unit fixed operating cost increased; at the same time, the profit margin of sanitation business also decreased due to high energy prices and rising labor costs.

The revenue of sanitation services is growing but profits are under pressure, and the volume of hazardous waste disposal has declined to dilute profit margins. The company's 22H1 revenue increased steadily from 13.5% to 2.39 billion yuan compared with the same period last year, and environmental health services, which accounted for a large proportion of revenue, increased by 17.5% year-on-year with the increase of new successful operation projects, but the amount of hazardous waste disposal affected by local epidemic decreased by 20.3% compared with the same period last year, and revenue decreased by 11.4%. The company's gross profit margin fell 8.9pcts to 20.5% in the first half of the year compared with the same period last year, mainly due to the decrease in the amount of hazardous waste disposal, the rise in unit fixed operating costs and the sharp rise in the price of hazardous waste raw materials, which led to a decline in gross profit margin for hazardous waste disposal (23.1pcts), as well as a decline in gross profit margin for environmental health services (5.7pcts) due to increased labor costs and rising energy prices. During the H1 period, the overall expense rate was stable, and the sales / administrative / financial expense rate changed-0.3/-0.1/+0.1pcts. The company's net cash flow from operating activities in the first half of the year was HK $272 million, down 23.8% from the same period last year, due to a decrease in profits during the period.

The traditional main industry has developed steadily, and the volume and price of hazardous waste disposal is expected to rise. As of 22H1, the company has signed a total of 134 sanitation operation projects, of which H1 has won 10 new sanitation operation projects, with an annual contract value of about HK $630 million, with the traditional main business promoting steadily. Due to the local epidemic situation affecting the production and transportation of waste and hazardous waste in upstream industrial enterprises, the amount of hazardous waste disposal decreased significantly in the first half of the year. With the gradual normalization of epidemic control, the amount of hazardous waste disposal and gross profit margin of the company are expected to rise. According to the company's report, the amount of hazardous waste disposed of in July has increased by 7.7% compared with the monthly average in the first half of the year. The unit price of harmless disposal of H1 company rose slightly by 3.2%. With the recovery of upstream industrial and commercial activities, the price of hazardous waste disposal is expected to improve steadily in the future.

Risk factors: the company's construction and operation projects are not as expected; local outbreaks affect industrial waste production; and fuel prices remain high.

Investment advice: the gross profit margin of the company's sanitation services business is under pressure, while the disposal volume and gross profit margin of the hazardous waste disposal business affected by local outbreaks have declined, so we downgrade our 2022 2023 forecast EPS to HK $0.11 EPS 0.12 (the original forecast is HK $0.16 EPS 0.20), and add a forecast of HK $0.13 for 2024, with the current share price corresponding to PE being multiple of 6-6-5. Referring to the company's 9 times PE valuation center in the past year, the company was given a 9 times target PE in 2022, corresponding to a target price of HK $1. 0, maintaining a "buy" rating.