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Yuefeng Environmental Protection Releases 2022 Semi-Annual Report
Yuefeng Environmental Protection released its semi-annual report for 2022. In 2022, Company H achieved revenue of HK$4.11 billion, up 52.5% year on year; realized net profit of HK$774 million, up 25.6% year on year; converted basic profit of HK$0.32 per share; and payout of HK$0.06 per share, up 24.0% year on year.
Brief review
Construction and operating revenue has both increased, and gross margin has declined due to revenue structure and the epidemic. The company is a leading comprehensive urban environmental and health service provider in China. It mainly provides waste incineration power generation, smart city environmental hygiene and related services. In 2022, Company achieved revenue of HK$4.11 billion, an increase of 52.5% over the previous year. The increase in total revenue was mainly due to revenue from electricity sales and waste disposal fees brought by newly put into operation and project construction revenue from new projects. Looking at the revenue structure by splitting the revenue structure, the company achieved construction contract revenue of HK$2.16 billion, up 78.2% year on year, mainly due to investment in new project construction; realized waste disposal revenue and electricity sales revenue were HK$557 and HK$1.21 billion, respectively, with year-on-year increases of 38.6% and 26.7% respectively. Mainly due to the company's increased processing capacity and increased garbage disposal volume and electricity sales revenue, achieving revenue of HK$99 million from environmental health and other services, up 44.5% year on year; mainly due to the company's expansion of light asset business.
The gross margin of the company in 2022H was 30.34%, down 5.61 percentage points from the previous year. The decline in gross margin was mainly due to changes in revenue structure compounded by the impact of the epidemic on the rise in raw material prices.
The gross margin of the company's electricity sales and garbage disposal business in 2022 was 45.9%, down 5.5 percentage points from the previous year; the gross margin of the construction contract business was 14.9%, down 1.6 percentage points from the previous year. In terms of revenue structure impact, the company achieved construction revenue of HK$2.16 billion, accounting for 52.5% of total revenue, an increase of 7.6 percentage points over the previous year; achieved revenue of 1.76 billion yuan from electricity sales and garbage disposal, accounting for 43%, down 7.4 percentage points from the previous year; a sharp increase in construction revenue with low gross margin lowered the company's overall gross margin level.
Processing capacity is growing steadily, and asset-light business is improving revenue quality
In the first half of 2022, the company harmlessly disposed of 6.8294 million tons of garbage, up 47.7% year on year; used green energy to generate 2,579 billion kilowatt-hours, up 41% year on year; total electricity sales volume was about 2.23 million megawatt-hours, up 42% year on year; power generation per ton of waste was about 378 kilowatt-hours, with an average ratio of electricity sales to power generation volume of 86.5%. The company's project benefits continued to be high, and productivity and operating efficiency were ideal.
As of June 30, 2022, the company has 37 signed waste incineration power generation projects, with a total daily urban domestic waste treatment capacity of 55,540 tons. Of these, the first phase of the Linfen waste incineration power generation project was put into operation in the first half of the year. At present, the company has put into operation 28 projects, with a daily urban domestic waste treatment capacity of 3,040 tons, and a steady inflow of operating cash flow. The company targets the national market and has market share in 13 provinces and cities. At the same time, it has further strengthened cooperation with Shangshi, acquired 30% of the shares of Sichuan Shangshi Environment, and participated in a solid waste treatment project in Sichuan Province with SISCO Group. 2022 H has obtained franchise rights for the Huidong waste incineration power generation project and the Quyang waste incineration power generation project respectively. The company's waste incineration treatment scale is expected to grow steadily. It is estimated that by the end of 2022, the company's garbage disposal capacity will reach 40,700 tons, an increase of 15.5% over the previous year; the capital expenditure is 3 billion yuan, a year-on-year decrease of 11.9%.
The company is actively expanding asset-light business, strengthening industrial chain integration of waste incineration and sanitation, and expanding other comprehensive smart city management services. On June 20, 2022, Yuefeng Environmental Protection won the bid for the urban sanitation market-based project in Quyang County, Baoding City, with a bid amount of 100 million yuan. The project is linked to the Quyang waste incineration power generation project. From front-end transportation services to back-end terminal processing, it produces superimposed benefits to guarantee the company's profit level. In terms of smart city management, 2022H's smart parking management business is steadily expanding. It manages about 18,000 parking spaces in regions such as Dongguan, Hebei, Anhui, Hunan, and Chongqing. The number of managed parking spaces has increased by more than 25% compared to the end of last year. The expansion of the asset-light business will help expand the industrial chain of the company's waste incineration power generation business, and at the same time create a second growth curve for the company under the premise that the incineration market will gradually become saturated in the future.
Subsidy repayment conditions are good, maintaining the company's “buy” rating
On July 15, the State Grid Corporation issued the “Notice of State Grid Corporation on the Disbursement of the First Renewable Energy Electricity Price Additional Subsidy Fund for the 2022 Annual Budget”. The Ministry of Finance expects to disburse the company's annual budget of 39.9 billion yuan in additional subsidy funds for renewable energy electricity prices, of which 3.352 billion yuan is biomass power generation. The problem of subsidy arrears is expected to improve. Combined with the increase in profit levels brought about by the increase in scale, the company's profitability and cash flow are expected to increase. Using waste incineration power plants as a base, the company has successfully developed environmental hygiene and related services, and strengthened the integration of waste incineration power generation and sanitation into the industrial chain, which can raise the profit level of related businesses. We are optimistic about the company's development prospects. We expect the company to achieve net profit of HK$1,454 million, HK$1,687 million, and HK$1,948 million from 2022-2024. The corresponding EPS is HK$0.6, HK$0.69, and HK$0.8 billion, respectively, to maintain the company's “buying”
ratings.
Risk analysis: risk of declining incineration power generation subsidies; risk of projects under construction falling short of expectations; risk of rising raw material prices due to the pandemic