Multiple factors lead to a decline in performance
Beijing Water Control announced 1H22 results on August 30: revenue fell 22.1 per cent year-on-year to HK $10.6 billion, mainly due to a 56 per cent year-on-year decline in construction services revenue, while net profit fell 71.3 per cent to HK $700m, mainly due to an one-time non-cash loss of HK $1.09 billion caused by dilution of the company's stake in Shangao New Energy Group (1250 HK). As a result, we reduce the projected return net profit of 2022 shock 2023 to HK $4.84 billion in 2024 (previous value: HK $46.1), and we estimate that the EPS of 2022 and 2023 will be HK $0.39 and HK $0.48 in 2024. We give the company 12 times its 2022 target PE, which is higher than its five-year historical PE average, because we believe that the company's light asset transformation will help to further enhance its value. We have lowered the target price from HK $4.09 (based on 9 times 2022 PE) to HK $2.40. Maintain a "buy" rating.
High growth in sewage and reclaimed water treatment services
1H22, the company's sewage and reclaimed water treatment services business revenue increased 32% year-on-year to HK $4.942 billion, accounting for 46% of total revenue (up 19% year-on-year), while construction services business revenue fell 56% year-on-year to HK $3.052 billion, accounting for 29% of total revenue (down 22 percentage points). Although the gross profit margin of the sewage and reclaimed water treatment services business decreased by 0.6 percentage points (58.2%) compared with the same period last year, it was still much higher than the gross profit margin of the construction services business (18.5%), so the overall gross profit margin of the company increased by 6.4 percentage points year-on-year to 43.3%. Affected by COVID-19 's epidemic, 1H22's sales of water environment management consulting services and equipment fell 30 per cent year-on-year to HK $1.09 billion, but the company expects the business to grow by 25 per cent year-on-year in 2022, taking into account the consolidation of 3718 HK in the second half of the year.
Daily design capacity continues to grow
By the end of 1H22, the designed daily production capacity of Beijing Water Control Project has reached 4538 million tons per day, a net increase of 496516 tons per day over the end of 2021. The total daily design capacity in the first half of the year was 1467480 tons, of which the BOT/PPP/ commissioned operation project increased by 815000, 80000,572480 tons respectively. Due to various reasons such as the expiration of the project, the total daily design capacity involved in the group's withdrawal from the project in the first half of the year was 970964 tons.
Risk hint: the climbing progress of the project is not as fast as we expected, and the transformation of light assets is slower than we currently expect.